Research paper “Measuring the unmeasurable” – measuring and improving performance in the supply chain

Remko I. van Hoek

Introduction
In measuring performance in the supply chain, where control is no longer based on ownership only, but rather on networking across interfaces, the measurement system may reflect a system of measuring the unmeasurable. Activities not under the direct control of an individual company (i.e. a manufacturer) have to be measured and controlled (by the manufacturer and its supply chain partners), making the supply chain transparent, to a level not experienced before and leading the way for performance improvements. The purpose of this research note is to outline the relevance of research into supply chain measurement systems. Suggestions are developed about the specific content and approach that research may need to take in aiming to contribute to the improvement of the competitiveness of supply chains. Apart from management control studies, this notes uses studies in the logistics area. The area of logistics is used as an example of a set of activities that need to be measured on a different basis, following the emergence of supply chain management.

The author Remko I. van Hoek is at the Erasmus University, Rotterdam, The Netherlands. Abstract The supply chain concept fundamentally changes the nature of organizations; control is no longer based on direct ownership and control, but rather based on integration across interfaces between functions and companies. This has consequences for the measurement of performance. Traditional measurement approaches may have to be abolished and a supply chain measurement system developed. Traditional performance measures may limit the possibilities to optimize supply chains, as management does not “see” supply chain wide areas for improvement. This note raises issues critical to measuring supply chain performance. A new measurement approach should lead the way for supply chain competitiveness and should direct management attention to areas for supply chain optimization. A preliminary framework for measuring unmeasurable performance is developed.

Background
Supply chain management is characterized by control based on networking and integration of processes across functional, geographical and organizational interfaces (van Hoek, 1998a). The perspective of supply chain management is its view of the final customer (van Dierdonck, 1997; Womack and Jones, 1996). This focus on interfaces in the operational process opposes the traditional approach of control based on ownership and vertical integration with a view of the person one step higher in the hierarchy. The adoption of the supply chain approach holds numerous consequences for individual sets of business activities, like logistics activities, as well as for the (now horizontal and not vertical) measurement and control of activities in the supply chain. Figure 1 displays a number of these challenges to the organization. Logistics optimization is based on the notion that suboptimization at one point in the logistics organization is permitted as long as that contributes to overall optimization. In a supply chain approach this notion is expanded across functional, geographical and

Supply Chain Management Volume 3 · Number 4 · 1998 · pp. 187–192 © MCB University Press · ISSN 1359-8546

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Of course.. in relating these world class logistics capabilities to the (traditional) performance measures such as ROI and gross margin used in the study. supply chains compete with each other (Christopher... exit and entry barriers are lowered as capital investments can be shared among players. when. but rather on interfaces. • While companies may be involved in multiple supply chains (Cooper et al. indicated that the contribution to customization of individual logistics service suppliers can be expanded if they integrate 188 . It is well known that managers tend to search for the answer to the question: “What’s in it for me?” It can be questioned to what extent existing measurement systems can help answer this question. thus. Van Hoek (1998b) for example. Determining the amount of management attention needed for a particular interface is dependent on various factors (Cooper et al. 1997) and the network.Measuring and improving performance in the supply chain Supply Chain Management Volume 3 · Number 4 · 1998 · 187–192 Remko I. An indication of this fact may be found in the fact that the World Class Logistics study published by the CLM (1995) was able to develop extensive insights into what logistics operations and competitiveness in the modern market-environment is all about. Companies are no longer the units in the competitive battle. the network also become temporal. there may not be one leading player in the supply chain to determine the division of benefits. traditional measures may no longer apply and new supply chain measurement may be needed. Complexity may result from the fact that: • Supply chains consist of multiple layers of companies. These new characteristics of organizations have their effect on the measurement of performance of activities in the chain. Another challenge for organizations is the dominant focus of competitive strategy. temporal organizational interfaces to a chain-wide level. • As integration is no longer based on large investments in vertical integration. As a general statement. the format of the supply chain may change over time (Cooper et al. this may cause implementation difficulties. van Hoek Figure 1 Changes in organizations resulting from the adoption of supply chain management Based on ownership Vertical/Hierarchy Cost saver Companies Position Static Control Integration Logistics Competitive unit Authority basis Organization Based on networking Across interfaces Value adder Supply chain Contribution to competitiveness Partial. The question then also becomes how to divide supply chain revenues among players in the chain. • Not all interfaces in the supply chain deserve the same amount of integration. Driven by the customer focus. The need for a new approach to performance measurement Numerous studies have developed indications of how supply chain integration can contribute to the growth of multiple and individual players in the chain. additionally. • Indeed. as this implies that individual companies may have to sacrifice internal efficiencies to overall chain-optimization. 1997). however. The study did not succeed. and close co-ordination. A complexity in that respect is that it is often complex to define what the supply chain is. logistics can evolve from a cost-saving function (as in Ducker’s statement from the 1960s about the last frontier in cost savings being physical distribution) to a value adding function as logistics services are fundamental in delivering value to customers. A critical challenge for organizations may thus be to develop and implement new measurement systems that can direct management attention and effort to the areas for improvement in the modern supply chain operating format. 1992). 1997). is partial.

whereas there are no measures addressing a combination of integrated and non-integrated measures. Also. sometimes make it difficult to incorporate cross-organizational interfaces. This combination may allow a player in a supply chain to assess the overall competitiveness of the chain as a whole. In this case the OEM cannot measure performance based on traditional measures like ROI and headcount only. SMART (the new mini-car developed by Mercedes and Swatch) provides an even more drastic indication of how measurement and control has to be adjusted or changed under the supply chain format. between functions or between organizations) and the operational context. functional area. or intended to be used for chain-wide measurement. This may cause some difficulty in practice as LaLonde and Pohlen (1996) indicated. while enabling it to focus improvement efforts on its own performance. are to be further developed. time from cash to cash) in order to avoid optimization at one point in the chain without considering potential consequences at other points in the chain. Cavinato. Bechtel and Jayaram (1997) state that available integrated measures such as time from cash to cash. percentage of fill rate against customer specifications and total response times. such as lead times. that existing and widely-published measurement systems like total costs of ownership and direct product profitability. relations and contracts with supply chain players. Bechtel and Jayaram (1997) state that measurement in the supply chain may use integrated measures that are cross-functional and can be applied to the entire process (for example. are focused at particular segments of the chain and are not explicitly focused at. using integrated measures. 1989 for publications in various disciplines). Additionally. like complete steering wheel and steering columns and assemble them into the car. working from a workshop within the OEM’s factory. Distributors perform final manufacturing and product modifications based on customer orders. based on non-integrated measures. control becomes a critical concern as ownership and operational control are no longer limited to the OEM. Ellram and Feitzinger. depending on the level of measurement (activity. Ploos van Amstel and D’hert (1996) have indicated that the specific type of measures used for (logistics) activities differs. 1997 and Hergert and Morris. van Hoek upstream into the chain of their manufacturing clients by offering postponed final manufacturing and related activities as an extension of transport and warehousing services. they can supplement financial measures Figure 2 The “squeeze out” of the OEM calls for a different type of control Inputs/ modules/ products in progress Suppliers OEM Distributors Stage: Purchasing/ Primary manufacturing Final manufacturing Distribution Outputs In progress: Inputs Modules Supply chain 189 . Figure 2 shows how the operational role of the automotive OEM decreases in the value adding process (horizontal bar) as suppliers and distributors take over larger shares of operational activities and cross-functional and organizational integration is extended. What then should the measurement system look like? Towards a new measurement approach Many authors have studied measurement in a supply chain context (see for example. As a result the OEM is almost entirely “squeezed out” of the operations and control by the OEM now is based on managing interfaces. 1992. However.Measuring and improving performance in the supply chain Supply Chain Management Volume 3 · Number 4 · 1998 · 187–192 Remko I. Scapens (1998) stated that modern measurement systems should support innovative strategies like teamwork and that non-financial measures. SMART suppliers manufacture super-modules.

It sheds some initial light on the selection of relevant measures and a measurement approach. in the set of management components of the supply chain by Cooper et al. as they may reflect basic strategies for players in the chain. (1997) state that more research is needed on measurement in the supply chain. (3) The development of tools that can help support the implementation of the new measurement approach may be a crucial final step leading to the actual application of new measurement approaches. In that respect they call for a practical and action-oriented research that aims to contribute to the actual application of new measurement systems. from logistics as a cost-saver to logistics as a set of activities that can contribute to market creation. they point out the need to include the entire chain in the measurement system (integrated measures). Creating benchmarks based on the new measurement systems may contribute to directing management effort in optimizing the supply chain. ERP systems) are expected to enable this development. This approach is called the design-oriented approach in management control literature (Vosselman. A first step up to the new approach In management control literature. This suggests that the purpose of measurement and control in the supply chain is to provide management with a set of actions that can be taken in improving performance and planning competitivenessenhancing efforts. manufacturer. as developed by Bowersox and Closs (1996). (1998). together with planning. Cooper et al. in developing the new measurement format. They call for the development of metrics and an assessment of implementation barriers to overcome in implementing these metrics. (1997). and most relevant in this respect.g. This may be supplemented with the purpose of letting this measurement system actually contribute to the optimization of supply chains. wholesaler. In that respect three steps may be fundamental to the development of a new measurement approach to provide input to the control of supply chains: (1) The extension of the supply chain definition to provide a context for measurement. In that set-up. depending on the strategic context and operational contribution of players in the supply chain competitiveness. attention in performance measurement shifts from short to longer term. (2) The development of new measures and the development of new benchmarks. based on these measures. Modern ICT (e. When logistics is (still) dominantly used as a cost saver and the contribution of players is in the area of costs (left bottom segment) relevant 190 . they also need to include strategic trade-off and planning frameworks in order to assure executive “buy-in” and commitment and initiate actual improvement processes in the supply chain. The framework may work as follows. In particular. it is not strange that Cooper et al. Existing definitions do not explicitly provide a basis for measurement. can help in directing management attention towards areas for strategic improvement. the level of integration and the strategic approach may affect the relevance of measures. various aspects of the supply chain definition can be expected to affect the specific mix of measures used. As a first step to the development of such a new supply chain measurement format. 1997). Finally. The tools cannot be limited to the measurement system itself. The vertical bar reflects possible contributions of players in the chain to overall chain competitiveness. a number of aspects relevant for a new measurement approach are specified (see Figure 3). customer service and overall chain integration are used.Measuring and improving performance in the supply chain Supply Chain Management Volume 3 · Number 4 · 1998 · 187–192 Remko I. The horizontal bar reflects the stage of development of logistics in an organization. van Hoek in approaches like the balanced scorecard. service supplier) affects their contribution and relevant measures. Figure 4 was developed. Kaplan and Cooper (1997) point out the need for performance measurement to start to drive performance improvement and move away from the passive administrative tradition. In short. only point at measurement as one of the management components in their supply chain definition framework. for example. Cost savings. The position of players in the chain (supplier. Using information in a feed-forward approach. as opposed to a feed-back approach. This can be related to the fact that control (operationalized using performance measurement in the chain) is mentioned.

depending on the supply chain operating format and the strategy approach or the evolution of strategies. in a supply chain approach to performance measurement. unmeasurable at present. leading to dramatically high new standards of performance. 8 No. the result may be that managers could see the areas where supply chain performance could be improved. Conclusion Figure 4 provides a first indication of how. A retailer that has reached the second stage of market penetration/market extension and is focused on delivering customer service (middle segment) may benefit from a measurement approach that. Bowersox. References Bechtel. Relevant measures used by SMART may be level of commitment of individual players in the chain and percentage of customization achieved with respect to customer orders and specific activities in the chain. C. SMART. New York. as traditionally used by suppliers. The International Journal of Logistics Management.J. uses logistics to create new markets. It is promising that the Council of Logistics Management has launched such an initiative. J. (1996). Vol. based on an innovative supply chain format (as described above) and is focused on integrating the entire chain (top right segment).Measuring and improving performance in the supply chain Supply Chain Management Volume 3 · Number 4 · 1998 · 187–192 Remko I. Macmillan. D. instead.J. van Hoek Figure 3 Evolution in management control Passive administration Feedback Operational Short term Units (partial measures) Approach Information use Application Time span Scope Proactive performance improvement Feedforward Strategic Long term Whole chain (integrated measures) Figure 4 Preliminary framework for a supply chain measurement system Contribution of organization to supply chain competitiveness Integration Customer service CostEx: Traditional effectiveness suppliers Cost saver Market penetration/ Market extension Ex: Retailer Ex: SMART Market creation Strategy/Strategic Sophistication measures may be part per minute. the content of a measurement 191 . Of course. so that they could focus attention. NY. 15-34. uses fill rates and response times. If successful. the Integrated Supply Chain Process. 1. percentage of logistics costs as a share of total costs. D. “Supply chain management: a strategic perspective”. (1997). and Closs. Logistical Management. finally. the challenge now is to develop findings that can contribute to the actual generation of a supply chain measurement system. system may differ. and Jayaram. pp.

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