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SupplyChainPerformanceMeasures.docxRunning head: SUPPLY CHAIN PERFORMANCE MEASURES 1
SUPPLY CHAIN PERFORMANCE MEASURES 6
Supply Chain Performance Measures
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Supply Chain Performance Measures
Introduction
Modern day's business environment is very complicated and tough, especially due to the intense competition that is tremendously rising by the fact that more brands, goods, and services are being introduced at a global level. Coyle calls globalization as one of the major forces to shape economies and supply chains (Coyle, 2017). With Additionally, consumers are also becoming more aware in regard to existence, production, and consumption of products and services. Therefore, the battle seems to shift from individual company performance to a supply chain performance as one of the critical requirement for managers to survive competition (Gunasekaran, Patel & Tirtiroglu, 2001). Basically, supply chain performance is the extended activities in supply chain aimed at meeting the end-customer needs and desires which includes the availability of products and services, timely delivery, as well as all other necessary components of inventories and delivery capacities. Supply chain performance is inclusive of most boundaries of an organization ranging from raw materials, processing, finished goods and the distribution of these goods and services through a variety of channels to the end users. Given its nature and the dynamicity of the business environment, the supply chain performance needs continuous improvement, and in order to accomplish this, there is the need to have measures in place that purposefully support and promote global supply chain improvements.
Definition and Objectives of Supply Chain Performance Measurement
According to Neely et al. (2002), supply chain performance measurement is a dynamically balanced system which supports processes in decision-making by critically gathering, elaborating and also analyzing all kinds of supply chain-related information. This definition has further been elaborated by other interested academic authors who assert that performance measurement system is regarded as balanced largely because they incorporate different organizational perspectives and measures that provide a holistic viewpoint of the organization. On the other hand, the dynamicity nature of the system is associated to how the measures review the priorities and measures of an organization instead of just focusing on the internal and external environment of the business. In a simple definition, supply chain performance measures are the metrics employed to quantify the effectiveness and efficiency of an organizational action. From the definition, it can be deduced that the primary objective of supply chain performance measures is to enhance and facilitate effectiveness and efficiency of supply chain management by incorporating frameworks and (Panjehfouladgaran, Yusuf, Hong & Homayouni, 2010) models that aid management to measure, analyze and improve efficiency in business operations through improved decision-making processes.
Reasons for Supply Chain Performance Measures
Some of the industry note that the success of most businesses is closely associated with the performance of its supply chain. Hence, for a business to succeed, there is the need to ensure the supply chain performance is successful. Also, the business environment is under constant evolution implying, the environment decades ago is not the same as the modern business environment and will certainly be the same business environment in future. There is, therefore, the need to monitor and evaluate supply chain performance using effective measures for purposes of aligning it to the needs of the business and the entire environment (Gunasekaran, Patel & McGaughey, 2004). The following are the reasons for supply chain performance in an organization:
I. Supply Chain Management Improvement – supply chain performance measures are essential consideration for the whole supply chain management improvement. Companies are required to continuously learn and effectively innovate to guarantee their existence in the competitive business environment (Gunasekaran, Patel & McGaughey, 2004). Therefore, companies need to continuously improve their processes by redesigning their products and services through continuous measurement and evaluation.
II. Financial Benefits – profitability is achieved by ensuring sales are as high as possible with costs being kept at the least attainable levels. Performance measures, especially the financial-centered measurements help an organization lower its costs significantly to attain higher profit margin. Financial performance of the supply chain activities, or rather benefits, are highly dependent on the supply chain performance measurements.
III. Information Flow – to ease and make information flow from suppliers to the end customers, there is the need to improve the processes and systems in supply chain management. The performance measurement plays an important role towards the improvement of the process which enhances information flow between different stakeholders of the organization.
IV. Motivate Organizational actions – organizations have vast actions and activities aimed at actualizing their goals and objectives. Performance measurement act as motivation for some of these actions such as partnerships, sourcing, sales and marketing, production and so on. (Gunasekaran, Patel & McGaughey, 2004)
V. The basis for decision-making – the continuous and constant improvement of the supply chain performance through adaptive measures/metrics provide the basis for organizational profit-centered decision-making process.
Growth of Supply Chain Performance Measurement
|
Period |
Features of an organization |
Characteristics of SCPM |
|
Before 1980s |
Large systematic organizations |
· Cost accounting orientation · Retroactive approach · Measurement dominated by profitability and transaction costs |
|
1980-1990 |
Global business organizations |
· Cost accounting orientation · Retroactive approach · More enhanced to incorporate value adding perspectives |
|
1990-2000 |
Business process automation |
· A mixture of financial and non-financial orientations · Mixture of proactive and retroactive approach · Results utilized to manage the whole entity · Enhanced to incorporate quality, processes, and customer focus |
|
2000 - |
Borderless business activities and e-commerce |
· Balanced and also integrated orientation · Proactive approach · Results used to facilitate business responsiveness · Enhanced to provide a balanced view of the organization |
Supply Chain Performance Measurement Categories
Supply chain performance measures are broadly categorized into two groups – qualitative and quantitative measures. The quantitative measures such as the lead time, resource utilization, flexibility, etc. assess the performance and compares or tracks product or service performance. On the other hand, the qualitative approach focuses on aspects such as product quality and customer satisfaction.
A. Quantitative Category
The quantitative category is further sub-classified into financial and non-financial measures. The difference between the two is that one of the measures is primarily centered towards all the monetary transactions of the firm with the other method focusing on assessment methods that are not based on finances.
· Financial Measures
Financial measures gauge a variety of operational and fixed costs that are associated with supply chain management (Beamon, 1999). The significance of this approach to measurement is to enhance profitability by keeping and maintaining supply chain costs as low as possible. There are several costs involved in supply chain performance such as inventories, transportation, facilities, technology, operations, labor, and materials. The following components are taken into account when measuring the financial aspects of supply chain performance:
i. Revenue from costs of goods of sold
ii. Costs on raw materials
iii. Transportation costs
iv. Inventory-related costs
v. Cost of goods returned
vi. Activity-based costs
In summary, it can be concluded that indices in financial performance can be grouped together with the use of modules such as cost in inventory, activity-based, transportation and inter-company financial transactions.
· Non-Financial Measures
Non-financial measures are made up of customer service level, cycle time level, resource utilization, flexibility, flexibility as well as quality. The main dimensions of the metrics, however, include cycle time, customer service level, inventory level, and resource utilization as discussed below:
i. Cycle Time – sometimes referred as the lead time and in simple terms, it is the end-to-end delay in business processes (Beamon, 1999). The lead time can be measured to assess whether a business is efficiently operating or needs improvements. The main types of lead time include the supply chain and order to delivery lead times. The order-to-delivery lead time is the time it takes between a customer placing an order for a product and the actual delivery of the same product. On the other hand, supply chain lead time is how long it takes for raw materials to be converted into finished usable products and services. Knowing how to reduce the lead time especially from the suppliers to the end user is an important consideration in surviving the time-bound competition.
ii. Customer Service Level – this matrix is concerned with the satisfaction level of customers. The main components of the customer level measure are ordered fill rate, backorder level, stockout rate, and the probability of on-time delivery. According to the elements of the metrics, the main objective is to improve customer service level by maximizing the order fill rate, minimizing the backorder and the stockout levels. (Beamon, 1999)
iii. Inventory Levels – there are four different inventory types that can be evaluated with the aim of improving supply chain namely raw materials, finished goods, work-in-progress and spare parts. Notably, each inventory type is held by an organization for different reasons and therefore, it is important to maintain optimal levels of these inventories by gauging the actual inventory levels in accordance with evidential usage of the inventories by the organization for system efficiency.
iv. Resource Utilization – given the nature of the supply chain, organizations used vast types of resources on a daily basis for their activities such as storage, manufacturing, logistics, financial and human resources. Resources need to ultimately used with efficiency in order to maximize profitability, customer satisfaction, reduce lead times, and optimize the inventory levels.
B. Qualitative Category
Quality is also a basis of measurement of effectiveness and efficiency of supply chain performance, but the evaluating the qualitative aspect of the subject matter comes with its share of complications largely because the quality is not a numerical or statistical representation. The use of qualitative measures mainly focuses on the products, processes, services, and performances of different components of an organization (Kazemkhanlou & Ahadi, 2014). The qualitative category is further divided into flexibility, quality, visibility, innovativeness, and trust. Some of the aspects measured using qualitative measures include customer response, lead time, customer satisfaction, and accuracy among others. It is not mainly used because it is perceived not to be as reliable as quantitative approaches which included numbers and statistics.
Conclusion
Performance measurement is a critical step in designing and evaluating a system. As discussed, supply chain management needs continuous improvement for purposes of enhancing the attainment of objectives of a company. Improvement of the supply chain performance can be achieved through incorporation of tools such as the quantitative and qualitative measures. This is a necessary requirement given the role supply chain performance plays in the business management. Notably, supply chain management has undergone evolution since its emergence in organizational management, and it is constantly changing for the better depending on the needs and nature of the business environment.
References
Beamon, B. M. (1999). Measuring supply chain performance. International journal of operations & production management, 19(3), 275-292.
Gunasekaran, A., Patel, C., & Tirtiroglu, E. (2001). Performance measures and metrics in a supply chain environment. International journal of operations & production Management, 21(1/2), 71-87.
Gunasekaran, A., Patel, C., & McGaughey, R. E. (2004). A framework for supply chain performance measurement. International journal of production economics, 87(3), 333-347.
Kazemkhanlou, H., & Ahadi, H. R. (2014, January). Study of Performance Measurement Practices in Supply Chain Management. In Proceedings of the 2014 International Conference on Industrial Engineering and Operations Management Bali, Indonesia (pp. 273-285).
Panjehfouladgaran, H., Yusuff, R., Hong, T. S., & Homayouni, S. M. (2010). Qualitative performance measurement of supply chain management using a fuzzy logic controller. In Proceedings of the 11th Asia Pacific Industrial Engineering and Management System Conference.
