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Journal of Transnational Management Development

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Performance Metrics: Key to Success in Global Supply Chain Management

Abbas Foroughi , Mehmet C. Kocakulah & William C. Perkins
a a b c

School of Business, University of Southern Indiana, 8600 University Boulevard, Evansville, IN, 47712 E-mail:
b

School of Business, University of Southern Indiana, 8600 University Boulevard, Evansville, IN, 47712 E-mail:
c

Kelley School of Business, Indiana University, Bloomington, IN, 47405-1701 E-mail: Published online: 22 Oct 2008.

To cite this article: Abbas Foroughi , Mehmet C. Kocakulah & William C. Perkins (2003) Performance Metrics: Key to Success in Global Supply Chain Management, Journal of Transnational Management Development, 8:3, 35-45, DOI: 10.1300/ J130v08n03_04 To link to this article: http://dx.doi.org/10.1300/J130v08n03_04

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Performance Metrics: Key to Success in Global Supply Chain Management

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Abbas Foroughi Mehmet C. Kocakulah William C. Perkins

ABSTRACT. The globalization of business has created new challenges for supply chain management. Many multinational companies have formed partnerships with, and depend on, the cooperation of firms halfway around the world. Managing, controlling, and measuring the performance of global supply chains is growing in complexity, but also in its importance, in order for companies to make a success of their cross-border partnerships. This paper discusses the particular challenges of global supply chain management, the complexity of decisions regarding the location of new facilities, and new information system technologies which facilitate global supply chain management. The paper also presents real-world examples of the successful use of performance metrics to monitor global supply chains and discusses ongoing challenges of global supply chains. [Article copies available for a fee from The Haworth Document
Delivery Service: 1-800-HAWORTH. E-mail address: <docdelivery@haworthpress. com> Website: <http://www.HaworthPress.com> 2003 by The Haworth Press, Inc. All rights reserved.] Abbas Foroughi is Professor of CIS and Coordinator of eBusiness, School of Business, University of Southern Indiana, 8600 University Boulevard, Evansville, IN 47712 (E-mail: aforough@usi.edu). Mehmet C. Kocakulah is Professor of Accounting, School of Business, University of Southern Indiana, 8600 University Boulevard, Evansville, IN 47712 (E-mail: mkocakul@ usi.edu). William C. Perkins is Professor of CIS, Kelley School of Business, Indiana University, Bloomington, IN 47405-1701 (E-mail: perkinsw@indiana.edu). Journal of Transnational Management Development, Vol. 8(3) 2003 http://www.haworthpress.com/store/product.asp?sku=J130 2003 by The Haworth Press, Inc. All rights reserved. 10.1300/J130v08n03_04

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KEYWORDS. Global supply, chain management, performance

INTRODUCTION Modern business management has undergone a significant paradigm shift. The traditional model of business vs. business competition is being replaced by a new paradigmsupply chain vs. supply chain. More and more businesses and manufacturers have formed partnerships with suppliers, distributors, and retail outlets, creating supply chains of multiple businesses which process goods or services from source through consumption. With the globalization of business, many multinational companies have formed partnerships with, and depend on the cooperation of, firms halfway around the world. According to international management consulting firm McKinsey & Co., 80% of the world GDP will be sold across international borders, as compared to 20% today (Kulik, 2002). In this era of inter-network competition, the success of a single business depends on managements ability to integrate the companys complex network of business relationships (Lambert and Pohlen, 2001). The market for supply chain management solutions is said to be set to grow 25-35% annually over the next five years (Hewlett Packard, 2001). Managing the supply chain is not an easy task. Effective supply chain management requires integrating all of the shareholdersthe supplier, manufacturer, distributor, retail outlets, and customer requirements into one cohesive process, using the expertise of all the entities involved in the supply chain. To efficiently manage the supply chain, all functions and entities must be fully integrated through the use of communications networks such as the Internet, intranets, and EDI, which allow collaboration among the various entities and functions of the supply chain. Measuring the effectiveness of supply chains now requires organizations to look outside their own walls and use tools to track and measure the performance of all shareholders in a supply chainfrom suppliers to end-users. The potential benefits of using effective supply chain metrics systems are substantialprocesses can be aligned across multiple firms, targeting the most profitable market segments, and obtaining a competitive advantage through differentiated services and lower costs (Lamber and Pohlen, 2001). On the other hand, you cant manage what you cannot measure is a long-standing axiom in supply chain management circles (Hoffman, 1999, 1). The lack of effective supply chain metrics can

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have many negative consequences, such as suboptimization of departmental or company performance, the failure to meet consumer expectations, decreased competitiveness, and conflicts within the supply chain (Lambert and Pohlen, 2001). To be effective, supply chain metrics must: measure multiple dimensions, such as service, assets, and speed and have a cross-functional focus (Hausman, 2000). sum inventory all along the supply chain. take into account the complexity of the supply chain. extend the line of sight of managers by providing feedback about the objectives and performance of external companies who are their partners in the supply chain. point out the performance of the individual firms in the supply chain. match with the supply chains business, product strategy and value proposition. For a low-cost strategy, costs, capacity utilization, labor productivity, and information accuracy are appropriate measures. For flexibility and responsiveness, order response time, order change flexibility, product mix offerings, replanning times, and expediting capabilities are appropriate metrics (Hausman, 2000). CHALLENGES OF GLOBAL SUPPLY CHAINS Supply chain management is particularly complex for global companies. According to AMR Research, an industry consultant firm, Supply-chain optimization, planning and execution is on the mind of nearly every manager. But when it comes to automating international trade logistics, they seem to have a mental block . . . You cant fit international trade logistics systems square peg into domestic logistics round hole (Ziff, 1999, p. 2). Global operations have the effect of increasing business complexity by creating a greater variety of customer needs, more competitors, increasingly dispersed company operations, the shift to customer-driven/ just-in-time production cycles, and mass customization. Globalization also makes multinational companies vulnerable to the impact of global economic, political, financial, and natural disasters (Ziff, 1999). Companies involved in global business operations are forced to deal with the influence of political, economic, and cultural factors that vary

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from country to country (Global Supply Chain Associates, 2001). Li & Fung, the largest export trading company in Hong Kong, for instance, sometimes purchases yarn from Korea, that is woven and dyed in Taiwan, and then assembled in Thailand, using zippers from a Japanese company (Fung and Magretta, 1998). Cost factors include local labor rates, local space costs, freight tariffs, and currency exchange rates. Customs duties concerns include differences in rates by commodity and level of assembly, transfer pricing, and suspension of duty. Each country differs according to tax structure, which determines market taxes on corporate income, the existence of tax havens, and the make vs. buy effect. Export regulations, including export licenses and denied parties lists, are also factors to be dealt with. Time factors to be considered include lead time, cycle time, transit time, export license approval cycle, and customs clearance. Cultural aspects include language, values/beliefs, and customs. Effective communication with those in other cultures demands attention not only to direct translations, but also to expressions, gestures, and context. Not all cultures share American companies major concerns for efficiency, time, and effective communication (Wood et al., 2002). COMPLEXITY OF NEW FACILITY LOCATION Global companies usually base decisions to locate facilities in foreign countries on the strategic roles such facilities can play in their global supply chain network (see Table 1) (Ferdows, 1997). Global supply chains are considered fully integrated when the supply, manufacture, and distribution of products is accomplished by the coordinated efforts of various facilities, ranging from offshore facilities to leading facilities, around the world. Integrated global supply chains, such as that used by Toyota, for example, are designed to take advantage of the strengths of different locations around the world. Toyota has design facilities in the U.S. and Japan, outsources automobile parts and components in many different countries, performs assembly in the U.S., Japan, and Europe, sells its cars all over the world, and supports and serves its products for consumers (Wood et al., 2002). According to Wood et al. (2002), issues that international companies face related to infrastructure, supplier operating standards, information system availability, and human resources vary from country to country, but can be categorized according to level of economic development of the country in question (see Table 2). First World nations (Japan, the

Foroughi, Kocakulah, and Perkins TABLE 1. Facility Location Decisions

Type of Facility Facility's Strategic Role in the Global Supply Chain Low-cost supply source. Primary source of product for the entire global supply chain. Supplies the market where it is located. Environmental Requirements

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Real-World Example

Offshore facility

Low labor and produc- Asian nations that tion costs. waive import tariffs for factories who export. Low production costs, Nike's plants in Korea developed infrastruc- and Japan. ture, skilled workforce. Tax incentives, local content requirements, tariff barriers, high logistics costs to supply it from elsewhere. Tax incentives, local content requirement, tariff barriers, high logistics costs to supply it from elsewhere. Location of skills and knowledge the company seeks. Suzuki's Maruti Udyog facility.

Source facility

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Server facility

Contributor facility

Serves the local market, but also conducts product customization, improvement, modification, and development. Obtains access to knowledge/skills in a certain region that serves the entire supply chain network.

Maruti facility now develops products for Indian and global Suzuki market.

Outpost facility

Location of global firms in Japan.

Lead facility

Creates new products, Good access to skilled Location of facilities in First World countries. processes, and tech- workforce, hi-tech nologies for the entire resources. global supply network.

(Source: Adapted from Chopra and Meindl, 2001, p. 306)

United States, and western Europe), emerging nations (Thailand, Taiwan, China, Brazil, Argentina, eastern Europe), and Third World nations present very different environments and challenges for supply chain management. Although geographic and political differences do exist in First World countries which impact on supply chain management, manufacturing and logistics infrastructure is generally highly developed. In emerging countries, advanced logistics infrastructures are not always recognized as providing a strategic advantage, and infrastructure development has focused mainly on exports. However, many emerging countries are now putting into place national transportation policies. Supply chain decisions in related to infrastructure in Third World countries must deal

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JOURNAL OF TRANSNATIONAL MANAGEMENT DEVELOPMENT TABLE 2. Regional Supply Chain Challenges

Region Infrastructure Supplier Operating Standards Information System Availability

First World Highly developed High Generally available Available

Emerging Under development Variable Support system not available Available with some searching

Third World Insufficient to target advanced logistics Typically not considered Not available Often difficult to find

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Human Resources

(Source: Permission is granted to use Table 7.1, page 162 from the first edition of the McGraw-Hill title, DESIGNING AND MANAGING THE SUPPLY CHAIN by Simchi-Levi, Kaminsky, and Simchi-Levi.)

with poor roads and the unavailability of warehousing facilities and distribution systems. In First World countries, operating standards are high, contracts are adhered to as legally binding documents, and companies are expected to obey environmental regulations and constraints. Emerging nations vary greatly in the value placed on high expectations, contracts, and agreements, and foreign partners must deal with the involvement in, and changing whims of, governments in these countries. Supply chain concerns can be particularly acute in Third World countries, where traditional performance measures are not applicable, shortages are common and customer service measures such as stock availability/speed of service/service consistency are not part of the mix. In such environments, the timing and availability of inventory are uncertain and out of control. Most First World countries are similar in their level of development of computer information technologies, although European EDI standards differ across countries and industries, and security standards such as data protection and document authentication vary across countries. Many emerging countries are still in the processing of developing support systems, such as communications networks and technical support expertise, that are necessary for efficient information systems. Most Third World countries still completely lack the support systems for advanced information technology. Most First World countries have abundant workers skilled in technical and managerial areas, but unskilled labor tends to be expensive in these countries. With some effort, skilled managerial and technical personnel can be found in emerging countries. In Third World countries, skilled technical workers are sometimes available, but less frequently

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found are employees with skills in logistics and modern management, making training an important issue in such environments. TECHNOLOGY FOR MONITORING GLOBAL SUPPLY CHAINS Despite the varying, often poorly developed infrastructures, information systems, operating standards, and human resources in many countries around the world, many multinational companies have been successful in managing and monitoring the performance of the complex workings of their global supply chains. A significant part of their success is due to Internet technologies such as Java and Extensible Markup Language, which are enabling the development of systems that allow companies along supply chains in locations all over the world to exchange information (Chabrow, 2000). This capability is particularly important for companies in emerging nations and Third World countries, who are low-tech and lack the facilities necessary to carry on business through EDI. Now, instead of risking errors possible with phoning, faxing, or mailing orders, they communicate and place orders over the Web and can provide real-time updates on the status of products as they move along the supply chain. Web-browser-enabled applications such as Maersk Logistics M-Power allow customers to view their supply chain, from the time a product leaves the assembly line to when it reaches retailers shelves, and provides reports that enable companies to perform in-depth analysis of their supply chain performance (Chabrow, 2000). The difficulty of determining the cost of products to be sent across borders that results from the wide variation and frequent changes in customs duties, tariffs, and taxes is being addressed by DHL Airways, of Redwood City, California, which is piloting a Web-based service that will enable shippers to determine duties and tariffs before shipping products overseas. The DHL system will soon include customs information from 50 nations (Chabrow, 2000). RosettaNet, a consortium of more than 200 companies, is creating supply-chain standards for the computer and electronic parts industries. Viacores new hub on the Internet is facilitating the development of supply-chain partnerships by enabling distributors, suppliers, and customers to see what companies are using RosettaNet interfaces (Chabrow, 2000).
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To handle increasingly the increasingly complex logistics of global supply chains, many companies now depend on third part logistics experts. Each member of a multinational companys supply chain has its own particular business and socioeconomic culture and distribution requirements. Integrated global logistics networks receive input from regional facilities and can be tailored to meet the needs of the variously located partners along a companys supply chain (Stromeyer, 2000).
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CASE STUDIES: WHIRLPOOL CORPORATION AND FILEMAKERS EXPERIENCE WITH GLOBAL SUPPLY CHAINS According to J. Paul Dittman, Vice President of Global Logistics for Whirlpool Corporation, many companies tend to use too many performance measures for supply chain management, making for a confusing situation. Companies must decide on the most important dashboard measures and focus on them. In the case of Whirlpool, world-class operating costs, world-class working capital levels, and improved customer service and/or product availability are used as goals for supply chain management (Hoffman, 1999). Whirlpool has a global supply chain task force of 20 people representing manufacturing, procurement, logistics, and sales/marketing who consider the probable impact each new project will have on its dashboard measurescost, availability/customer service, and working capital. To avoid double-counting of measurement outcomes from multiple projects, such as inventory reduction, inventory processes are carefully segmented to enable accurate analysis. According to Dittman, Whirlpool has been very happy with the improvement in our supply chain performance measures over the past year, as we have seen a reduction in working capital and a continuing aggressive reduction in operating cost, and availability (Hoffman, 1999, p. 3). Measures of supply chain performance played a key role in the success of FileMaker Inc., a database software manufacturer. With manufacturing and distribution based in Ireland, the firm was finding time to market and freight expense significant for servicing the Asia Pacific region. Fill rates were less than 80 percent, order turnaround time was 14 days, and the firm also had communications difficulties, a fixed-cost structure in support of a cyclical business, and substantial inventory and fixed-property investments.

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FileMaker consulted the Eclipse Group, in Santa Clara, California, for assistance in globally tying its structure together better and begin global outsourcing with one company that could integrate its efforts worldwide. Corporate objectives of the project were to achieve a 4-5 day order turnaround, a 95 percent order fill rate, and achieve cost reductions with sacrificing customer satisfaction. Eclipse identified two major types of supply chain measurementsoperational (customer satisfaction issues) and financial (fixed costs, variable costs, asset measurements)that would impact on the success of the project. Possible solutions were evaluated according to how they would impact on these performance measures. The performance measurements become, in effect a driving force behind the change process, said Steve Cook, Vice President of Eclipse Group. The more you can tie the recommendation you are making to specific performance measurements, the more comfortable people are going to be to embark on the change process (Hoffman, 1999, p. 6). FileMaker decided to outsource it manufacturing and distribution to a third party, Modus Media International, which can serve it from multiple global locations. Turnaround to FileMakers Japanese market is two or three days. The biggest benefit by far was our improvement in gross margin, Lewis said. By outsourcing, we were able to substantially reduce our fixed infrastructure costs and move much of our cost structure to a more variable model. We also are seeing considerable gains . . . in our time to market (Hoffman, 1999, p. 6). CONCLUSION One of the underlying principles for success in supply chain management is the sharing of information between the various companies along a supply chain. Multinationals must commit to openness and transparency in dealing with their supply chain partners around the world and to sharing critical manufacturing and engineering expertise (Simchi-Levi et al., 2000). In doing so, they become vulnerable to technology theft, either from supply chain partners or from their governments. In many cases, companies that began as partners end up being competitors. Hitachi, which originally collaborated with Motorola, now manufactures its own microprocessors. The Taiwanese company Sunrise Plywood and Furniture began as a partner of Mission Furniture, in California, but has now become one of the American companys major competitors. According to Ziff (1999), the mass customization which many multinational companies are turning to in order to reduce inventory-handling

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costs is pushing the limits of existing supply chain management practices. Mass customization necessitates flexible in-transit assembly operations that include sourcing from multiple global locations, dropshipping directly to customers, and the merging of components for final assembly near the customer. Supply chain management practices that have been effective in domestic markets cannot merely be extrapolated onto the global market (Ziff, p. 2). Of companies engaged in the global market, . . . most have taken piecemeal approaches, addressing individual bottlenecks rather than enacting more comprehensive global supply-chain improvements (Ziff, p. 3). To effectively manage an increasing number of variables and uncertainties posed by cross-border operations, global supply chain management will require new types of software and best practices that facilitate continuous, real-time performance monitoring along global supply chains, enable firms to respond to new opportunities and exceptions with more flexibility, and facilitate rapid execution of real-time supply chain decisions (Ziff, 1991). The entry of more and more companies into the global marketplace through e-business also makes effective, accurate measurement of supply chain performance ever more important. Partnerships between companies in different countries create a scenario in which miscommunication about supply chain activities is highly possible, as is the need for quantifiable measures which can applied to performance of all of the partners in a supply chain. As the global economy grows, so will the importance of agreement on the use of supply chain metrics which can serve as standards for measuring supply chain performance worldwide. REFERENCES
Chabrow, E. (April 3, 2000). Supply chains go global. Informationweek.com. http:// www.informationweek.com/780/prglobal.htm Chopra, S. and Meindl, P. (2001). Supply chain management: strategy, planning, and operation. Upper Saddle River, New Jersey: Prentice Hall. Cooke, J. A.(1999). Measure for measure. Logistics management and distribution report, Vol, 38, No. 7, 111-113. Ferdow, K. (1997). Making the most of foreign factories. Harvard business review, 73-88. Fung, V. and Magretta, J. (September 1, 1998).Fast, global and entrepreneurial: supply chain management, Hong Kong style: an interview with Victor Fung, Harvard business review. http://www.hbsp.harvard.edu/hbsp/prod_detail.asp?98507

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Global supply chain associates, (2001). Global business issues. http://www.gsca.com/ globusis.htm Hausman, W. H. (December 14, 2000). Supply chain performance metrics, White Paper, Management Science and Engineering Department, Stanford University. Hoffman, K. C. (April, 1999). Performance is only as good as the metrics chosen to measure it. Global logistics and supply chain strategies. http://www.supplychainbrain. com/archives/4.99.performance.htm?adcode=75 Hewlett Packard Press Release (May 30, 2001). HP and SAP to jointly deliver supply chain management solution, Palo Alto, California. http://www.hp.com/hpinfo/ newsroom/press/30may01a.htm Kulik, D. G. (March, 2002) As supply chains grow more complex, you will need a 3pl with truly global scope and ability. Global logistics and supply chain strategies. http://www.supplychainbrain.com/archives/03.02.kulikopinion.htm?adcode=95 Lambert, D. M. and Pohlen, T. (2001).Supply chain metrics. International journal of logistics management. Vol. 12, No. 1, 1-19. Simchi-Levi, D., Kaminsky, P. and Simchi-Levi, E. (2000). Designing and managing the supply chain: concepts, strategies, and case studies. Boston, MA: Irwin McGraw- Hill. Stromeyer, F. C. (October, 2000). A successful global logistics network for the new multinational. Global logistics & supply chain strategies. http://supplychainbrain. com/archives/10.00Opinion2.htm?adcode=30 Wood, D. F., Barone, A., Murphy, P. and Wardlow, D. (2002). International logistics, 2nd edition. New York, NY: AMACOM. Ziff, P. (May, 1999). Global commerce management: executing in a world of opportunity. Global logistics & supply chain strategies. http://www.supplychainbrain.com/ archives/5.99.opinion.htm?adcode=30

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