True Measures of Supply Chain Performance
By Larry Lapide -- Supply Chain Management Review, 7/1/2000
Look at recipes for effecting business change in an organization and you will find an ingredient called ongoing performance measurement. Management gurus have long argued that a key to continuous improvement is to measure, measure, and measure again. And this has led to a variety of maxims like "You can't manage what you don't measure" and "Anything measured improves."
Yet although the concept of performance measurement is widely accepted, it is not widely adopted. This is especially evident when we look at the supply chain.
Consider that over the last decade companies have expended significant financial and human resources to reengineer their supply chains. Through business process change and technology, they've sought to implement the principles of integrated supply chain management. Yet few have developed the requisite measurement systems that track the benefits received and provide the guidance for continuous improvement. This column is intended to provide practical advice to companies seeking to develop such a performance-measurement system.
Take a Strategic, Balanced ApproachCompanies historically have tracked performance based largely on financial accounting principles—many of which date back thousands of years to the ancient Egyptians and Phoenicians. Financial accounting measures, while important in assessing an enterprise's financial health, are insufficient to measure supply chain performance for the following reasons:
- The measures tend to be historically oriented, lacking a forward-looking perspective.
- They do not relate to strategic performance.
- The measures are not directly tied to operational effectiveness/efficiency.
A balanced scorecard approach to performance measurement addresses these deficiencies. This approach espouses the use of information systems to track a limited number of balanced metrics that are closely aligned with strategic objectives. Now widely accepted, the balanced scorecard concept initially was developed by Robert S. Kaplan and David P. Norton and discussed in the article "The Balanced Scorecard—Measures That Drive Performance," Harvard Business Review, January–February 1992.
Measure Process, Not Just FunctionsA key balanced scorecard principle is that the measures should be aligned with strategic objectives. Yet these objectives differ for every company depending on its current competencies and stage of development. Start-up companies, for example, need to develop excellence within each of their operating units such as manufacturing, customer service, or logistics. More mature companies need to develop excellence in cross-functional processes, followed by excellence in interenterprise processes.
Historically, however, most performance-measurement efforts have remained at the functional level. Each department measures performance in its own terms. Its members are evaluated on their ability to meet objectives consistent with departmental goals. Not surprisingly, then, they drive operations toward improving performance in their own department, often at the expense of other functional areas. When each area sets its performance measures in isolation from others, narrow functional interests often conflict with broader organizational goals. For example, a logistics department's objective to reduce transportation costs may conflict with customer-service goals if shipments are held up until a truck is full or if customers are forced to order in full-truckload quantities.
To help integrate their supply chains, companies are starting to break down those functional silos by organizing around cross-functional processes. They are either establishing departments that are responsible for an overall process or creating cross-functional teams that drive an overall process, such as order fulfillment and operational planning. To support these organizational changes, companies will need to supplement function-based measures with process-based ones. This doesn't mean eliminating function-based measures. But it does mean focusing on overall process performance first and then using functional measures to provide "drill-down" diagnostic information.
For example, a perfect order concept measures the percentage of customer orders filled flawlessly. It measures the effectiveness of the order-fulfillment process in a way that crosses the functional boundaries. A failure during any step in the process or by any functional department (for example, a line-item shortage or an incorrect invoice) results in a failure to meet the overall objective of flawless fulfillment. In addition to overall process measurement, drill-down diagnostic measures, such as those shown in Exhibit 1, are needed for each task in the fulfillment process. The exhibit illustrates how top-level, cross-functional, process-based measures provide visibility to strategic supply chain performance. The lower-level, function-based measures are diagnostic in nature, useful for pinpointing operational problem areas.
Include Interenterprise Measures
The cross-functional approach to supply chain measurement applies to inter-as well as intra-enterprise processes. Fundamentally, the two most important measures of overall supply chain performance relate to (1) availability of products at the point of consumption and (2) total landed costs to get products to the point of consumption. Typically, multiple trading partners in the supply chain will affect these key measures. For this reason, supply chain management principles dictate that significant benefits accrue when interenterprise processes are put in place to synchronize and optimize the supply chain. These interenterprise processes also need to be measured.
To ensure that interenterprise processes are effective, you need to measure the performance of supply chain operations that lie outside your enterprise. This leads to the question of whether you should measure what you cannot directly control. For example, is a manufacturer responsible for the poor availability of its products on a retailer's shelf or for on-time customer delivery once a load is tendered to a carrier? If something directly or indirectly affects the availability or cost of products at the point of consumption, the answer to these types of questions should be yes. It makes sense to measure what you cannot control to uncover deficiencies in your supply chain's performance that can be addressed by interenterprise initiatives.
Limit the Number of MetricsA major challenge for many companies that are developing a measurement process is limiting the number of measures. Companies have complex business operations that span multiple business departments and geographies, involving a multitude of processes and tasks. There's a tendency to want to measure everything, which is impractical and administratively cumbersome. As a guide, one strategy consulting firm recommends that its clients limit the number of measures tracked to between three and five.
In selecting those key measures to be tracked, remember that the overriding objective is to better manage the business, not control it (another part of the balanced scorecard approach). Measures should be aligned with supply chain performance objectives, not devoted to tracking whether employees are adhering to managerial orders. In this way, supply chain performance—not individual action—is measured.
To establish a rational set of performance measures, start by understanding top management's strategic supply chain objectives. For example, to what degree is management trying to achieve enterprisewide and extended enterprise integration excellence? Once these objectives are understood, you can develop a limited, balanced set of executive-level measures directly aligned with these strategic objectives. These should include a balance of strategic objective and diagnostic-type metrics to help executives determine specific process areas that might need to be improved.
Management also needs performance measures that track tactical and operational activities and are aligned with strategic executive-level measures. Exhibit 2 depicts the relationship among executive and managerial measures. Using the lower-level measures, managers can gauge how well they are doing relative to overall strategic goals set in place by the executive team. These metrics also provide executives with drill-down functionality into the more diagnostic metrics shown in the exhibit.
| Author Information |
| Larry Lapide is vice president and service director, Supply Chain Practice, AMR Research Inc. |
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