Supply Chain Performance – Measurement, Improvement and Sustainability.
Part – 1
It is the performance of the supply chain that actually determines the winner, since measuring the performance facilitates a greater understanding of the Supply Chain.
Preamble: -The Global and local company Supply chains are becoming more complex day by day. These complexities arise out of uncertainties arising out unforeseen situations, and the number of alternatives which a Supply Chain person has at its disposal to handle these situations. Besides the Supply Chain person needs to meet the timelines, price and quality requirements, while handling such uncertainties& hence his performance needs to be monitored, measured and improved as a part of overall Supply Chain performance improvement initiative. As is said what is measured can only get improved. An improved Supply Chain performance is a must for the corporates to do well in the market.
This article will address the following aspects, regarding the Supply Chain performance-measurement, improvement and sustainability.
- 1. What is Supply Chain performance.( Part-1)
- 2. Why the Supply Chain performance measurement is required (Part-1)
- 3. When the Supply Chain performance is measured.(Part-1)
- 4. How the Supply Chain performance is measured-metrics?(Part-2)
- 5. How the Supply Chain performance can be improved?(Part-2)
- 6. How the Supply Chain performance can be sustained?(Part-2)
1. What is Supply Chain performance
Definition :-
The Supply Chain performance is referred to the extended supply chain activities in meeting end-customer requirements including product availability, on-time delivery, the associated inventory and the capacity management inherent in the supply chain to deliver the performance in a responsive manner.
Performance measurement is defined as “ a metric to quantify the efficiency and effectiveness of operations”. Supply chain Performance Measures (SCPM) serve as an indicator of how well Supply Chain system is functioning.
2. Why the Supply Chain performance measurement is required?
Why measurement:-
All the companies need to measure the performance of their Supply Chains, by deploying certain metrics to organize and manage better. To judiciously deploy the critical resources, based on the areas identified for performance improvement, and the urgency of improvement, measurement of performance is required.The corporates are spending millions of dollars on creating, and sustaining supply chains. Hence it becomes pertinent for them to constantly monitor their supply chains.
The biggest challenges organizations are facing are to systematically order the metrics, integrate the quantitative and qualitative metrics and to link supply chain strategy with performance measurements.
All the companies must go for the measurement of Supply Chain performance irrespective of industry, scale of business and individual nature of business. It positively influences the behaviour of the Supply Chain player to improve the overall performance. It also improves the understanding of the Supply Chain. It is required for continuous improvement.
The improvement may be required in a hierarchical manner at the Strategic level, Tactical level or Operational level, which can be further divided into external and internal.
Deciding the ambit of improvement:-
The supply chain activities which are subject to improvement include internal as well as external supply chains. The internal supply chain includes activities or functions within the company carried out while providing product or services to the customer.
The Companies are required to carry out internal integrations (integration means carrying out the activities across the departments) before carrying out external integration meaning involving external parties (suppliers, customers, CHA, freight forwarders, subcontractors, service providers).
| Suppliers | <<< Self >>> | Customers |
|---|
The internal integration and optimization is to be prioritized first before the rationalization is extended to external organization.
Benefits of effective supply chain are lower inventories, lower cost, higher productivity, greater agility, shorter lead times, higher profits and greater customer loyalty.
The hierarchical approach allows us to adopt a unified approach for aggregating performance metrics across the company. Besides it also allows large and small functions to maintain their own metrics and simultaneously be a part of the overall measurement system.
Since improvement is required in the internal as well as the external supply chains the performance needs to be improved for the internal as well as external supply chains.
(Image Source :- How to measure Supply Chain performance by Tan Miller.)
3. How the Supply Chain performance is measured?
In order to structure the performance management of the Supply Chain it is necessary to classify the metrics used to measure the performance. The Supply Chain performance is measured on the following measures/metrics.
There are many types of measures – Qualitative (Soft) and Quantitative (Hard) or cost or non cost, qualitative and quantitative, business perspective or financial perspective, strategic , tactical and operational perspective. Whatever metrics is selected needs to be integrated into 1 cohesive performance measurement system.
As per Ms Benita M Beamon there are 3 types of performance measures as necessary component of Supply Chain performance measurement system- Resource (R), Out Put (O) , and Flexibility (F).
- a. Resource measures (generally costs).
- b. Output measures (generally customer responsiveness) and .
- c. Flexibility measures (Ability to respond to a changing environment).
Each of these three types of performance measures has different goals and purpose. Resource measures include: inventory levels, personnel requirements, equipment utilization, energy usage, and cost. Output measures include: customer responsiveness, quality, and the quantity of final product produced. Flexibility measure a system’s ability to accommodate volume and schedule fluctuations from suppliers, manufacturers, and customers (Beamon, 1999).
Various types of measures classification in Non-financial and Financial, Hard and Soft, Strategic, Tactical and operational etc.
| Measures | Non-Financial / Financial | Hard/ Soft | Strategic/ Tactical / Operational | Benita-PMS |
|---|---|---|---|---|
| Customer Service levels | Non-Financial | Hard | Operational | Output |
| Inventory levels | Non-Financial | Hard | Tactical | Resources |
| Resource Utilization | Non-Financial | Hard | Operational | Resource |
| Item Fill rate | Non-Financial | Hard | Operational | Output |
| On time delivery | Non-Financial | Hard | Operational | Output |
| Customer complaints | Non-Financial | Hard | Operational | Output |
| Manufacturing lead time | Non-Financial | Hard | Operational | Output |
| Customer response time | Non-Financial | Hard | Operational | Output |
| Volume changes | Non-Financial | Hard | Operational | Flexibility |
| Delivery changes | Non-Financial | Hard | Operational | Flexibility |
| Product mix changes | Non-Financial | Hard | Tactical | Flexibility |
| New product changes | Non-Financial | Hard | Strategic | Flexibility |
| Quality | Non-Financial | Soft | Operational | Output |
| Market Share | Non-Financial | Soft | Operational | Output |
| Customer Satisfaction | Non-Financial | Soft | Operational | Strategic |
| Human Resources | Non-Financial | Soft | Operational | Resources |
| Innovation and learning | Non-Financial | Soft | Operational | Resources |
| Total Cost | Financial | Hard | Tactical | Output |
| Distribution cost | Financial | Hard | Operational | Flexibility |
| Manufacturing Cost | Financial | Hard | Operational | Flexibility |
| Cost of raw materials | Financial | Hard | Operational | Flexibility |
| Cost of lost sales (attributable to non-availability of stock) | Financial | Hard | Operational | Flexibility |
| Inventory holding cost ( Pull system is better over a push system, to keep the inventories lower for a particular level of service) | Financial | Hard | Operational | Flexibility |
| Transportation cost | Financial | Hard | Operational | Flexibility |
| Cost of expired perishable goods | Financial | Hard | Operational | Resource |
| Penalties for incorrectly filled or late orders delivered to customers. | Financial | Hard | Operational | Resource |
| Credits for incorrectly filled or late deliveries from suppliers. | Financial | Hard | Operational | Resource |
| Cost of goods returned by customers. | Financial | Hard | Operational | Resource |
| Credits for goods returned to suppliers. | Financial | Hard | Operational | Resource |
| Working capital measurement. (As a percentage of revenues). | Financial | Hard | Operational | Resource |
| Sales | Financial | Hard | Operational | Output |
| Profit | Financial | Hard | Operational | Output |
Another important Supply Chain performance metrics type (Source:- AHP Based Performance Measurement system of Supply Chain- by Ms Ramaa A, Dr. T.M. Rangaswamy, Dr.K.N. Subramanya)
| Criteria | Sub criteria (Level 1) | Sub criteria (Level 2) | Performance Measurements |
|---|---|---|---|
| Cost | Distribution | High cost Low cost Medium cost Very high cost Very low cost | Transportation and handling cost |
| Manufacturing | Labour, rework & maintenance cost, purchased material, equipment charges and suppliers margin. | ||
| Inventory | The work in process and finished good inventories | ||
| Warehouse | Associated with allocation from one tier to another | ||
| Incentives | Incentives and taxes | ||
| Intangible | Quality costs, product adaptation or performance costs and coordination. | ||
| Over Head | Total current landed cost | ||
| Sensitivity to long term cost | Productivity and wages charges, exchange rate charges, product design and core competence. | ||
| Resource utilization | Labour, machine, capacity and energy | <30%, 30-50%, 50-70%, 70-90%, 90-100% | Investigate the % of excess or lack ofthat particular resource within a period |
| Time | Lead time | Too long, Long, medium, short, very short | The time required once the product began production, until the time it is completely processed. |
| Customer response | High, Low, medium | The amount of time between an order and its corresponding delivery | |
| Cycle time | Too long, long, short, reasonably short | The time required to begin one complete process. | |
| Fill rate | High, Reasonably- high, low | The proportion of orders that can be filled immediately. | |
| Flexibility | Labour | Very high, high, low, very low | The number of tasks a worker can perform |
| Machine | The efficiency (time and cost) by using more flexible machine to traditional switching over machine. | ||
| Material handling | The number of existing paths between processing centers, and the variety of material which can be transported along these paths without incurring high or large changes in performance outcome. | ||
| Operation | The number of products which have alternative sequencing plans without incurring high costs or large changes in performance outcome. | ||
| Modifications | The number and variety of product modification which are accomplished without high transition penalties or large changes in performance outcome. | ||
| Modifications | The number and variety of product modification which are accomplished without high transition penalties or large changes in performance outcome. | ||
| Volume | The extent of change and degree of fluctuation in aggregate output level which the system can accommodate without incurring high costs or large changes in performance outcome. | ||
| Mix | The number and variety of product modification which are accomplished without high transition penalties or large changes in performance outcome. | ||
| Delivery | The number and variety of product modification which are accomplished without high transition penalties or large changes in performance outcome. | ||
| Quality | Complain | Too many, many, reasonable, quite low | The number of customer complaints registered for a particular time period |
| Defects | Very less, less, reasonably less, more, too many | The number of defects produced from the entire process during a time period. | |
| Waste elimination | Few, medium, more | The use of various techniques such as 5S to eliminate wastes. |
Supply Chain Strategy and performance metrics :-
The companies adopt various supply chain strategies depending upon the position of the company in terms ofwhether the companies products arelow function products and high innovative and whether the Supply Chain process is evolving or low and stable.
Performance measurement fundamental proces ( Neely 2004) includes :-
- a. Measurement system design – selecting right measures, minimum & only essential measures to concentrate on vital aspects.
- b. Implementation- Access to the right data & resolving cultural issues and addressing people’s fear.
- c. Managing through measurement – Managing through measurement requires a cultural shift.
- d. Refreshing the measurement system to keep pace with requirements.
The need to measure the correct metrics of perfromance within an organization is vital due to the fact that it may affect the decision process.
What type of supply chain performance measure/metrics should be prioritized in different types of supply chain is the question that needs to be answered.
SCPMS (Supply Chain Performance Measurement System)
The performance measurement is a process of quantifying the efficiency and effectiveness of action. The performance measurement consists of the Performance measurement system which is a set of metrics used to quantify the efficiency and effectiveness of action. The Performance measurement system consist of the performance measure which is the metrics used to quantify the efficiency and effectiveness of action.
Desirable characteristics of SCPMS include the following:
- a. Inclusiveness (measurement of all pertinent aspects)
- b. Universality (allow for comparison under various operating conditions).
- c. Measurability (data required are measurable) and
- d. Consistency (measures consistent with organization goals)
(Kazemkhanlou et al., 2014, 274)
The other desirable features are:-
- 1. The measures must be simple and easy to use.
- 2. They must have a clear purpose.
- 3. They must provide fast feedback.
- 4. They must relate to performance improvement, not just monitoring.
- 5. They must reinforce the firm’s strategy.
- 6. They must relate to both long-term and short-term objectives of the organization.
- 7. They must match the firm’s organization culture.
- 8. They must not conflict with one another.
- 9. They must be integrated both horizontally and vertically in the corporate structure.
- 10. They must be consistent with the firm’s existing recognition and reward system.
- 11. They must focus on what is important to customers.
- 12. They must focus on what the competition is doing.
- 13. They must lead to identification and elimination of waste.
- 14. They must help accelerating organizational learning.
- 15. They must evaluate groups not individuals for performance to schedule.
- 16. They must establish specific numeric standards for most goals.
- 17. They must reflect relevant on non-financial information based on key success factors of each business.
- 18. They must make a link to reward systems
- 19. The financial and non-financial measures must be aligned and fit within a strategic framework.
- 20. Minimum deviations should exist between the organizational goals and measurement goals
(Kazemkhanlou et al., 2014, 274)
4. When the Supply Chain performance is measured.
It is said anything which can be measured can be monitored and anything which can be monitored can only get improved. Hence Supply chain performance can be regularly measured and the frequency can be quarterly, semi-annually or annually. Measurement leads to :-
- a. Check – check the position of the supply chain function to know where its and where it is going.
- b. Communicate – communicate the position to the internal and external participants.
- c. Confirm – priorities (by measuring we can identify how far we are from goal)
- d. Compel – progress (use measurement as a means of motivation and communicating priorities and as a basis of reward).
Conclusion of Part-1 :-
In this part we have discussed what is the meaning of Supply Chain Performance measurement. Why it is important today. The definition of Supply Chain performance. Why the Supply Chain performance measurement is required. How to decide the scope of Supply Chain performance improvement. What are the various likely metrics. A laundry list of likely possible measures was also discussed. The Supply Chain performance measurement system was defined. In the next part, Part-2, we will discuss how the performance measurement can be carried out. How to institutionalize the performance measurement system, and how it can be sustained on a continual basis.Finally how the performance measurement system can bring the overall improvement in the Supply Chain working besides how it bring the overall improvement in the organization.
References :-
1. https://www.thebalancesmb.com/benchmarking-in-the-supply-chain-2221201
2. https://www.gsb.stanford.edu/faculty-research/publications/supply-chain-performance-measures
4. https://www.mhlnews.com/global-supply-chain/article/22054726/how-to-measure-supply-chain-performance
5. https://cerasis.com/measuring-supply-chain-performance/
6. https://www.supplyon.com/en/blog/supply-chain-performance-management-2/
8. (https://www.gsb.stanford.edu/faculty-research/publications/supply-chain-performance-measures)