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SCHOOL OF BUSINESS
DPS 401(DAY): CONTEMPORARY ISSUES IN SUPPLY CHAIN MANAGEMENT
TOPIC: PERFORMANCE MEASUREMENT IN SUPPLY CHAIN
INSTRUCTOR: S. NYAMWANGE DATE: 10th Feb 2012
GROUP 6 MEMBERS: 1. GEOFFREY OKONGO 2. CHRISTINE KANINI 3. DEKA MUSA 4. ROBERT MUGO 5. ROSEMARY MUASYA 6. KWAMESA AGGREY D33/28025/2009 D33/27089/2009 D33/30604/2010 D33 /31995/2010 D33/32449/2010 D33/31712/2010
INTRODUCTION Performance measurement in a supply chain is the ability to meet end-customer needs through efficiency in terms of minimizing costs involved and effectiveness, product availability and effectiveness in terms of responsiveness (on-time delivery)of customers demand. Performance measurement is an evaluation of supply chain activities based on various attributes and describes the feedback. The basis of performance measurement is changing and that there are certain characteristics that have been deemed necessary in order to produce what is relevant for improving world-class manufacturing performance. Traditional performance measures based on productivity are no longer appropriate or representative of the information needs of today‟s competitive global market. Alternative performance systems have been proposed that range from time as the basis of all measures to the integration of a variety of performance measures. Definition Performance measurement is defined as the evaluation of the ability of the organization to meet its objectives. It therefore deals with measuring the effectiveness and efficiency of the supply chain and establishing the parameters within which programs and investments reach the desired results. There are several key terms used in this definition. Measurement: This refers to evaluation of what has been set out, for instance the objectives, standards, targets etc. Measurements are criteria to gauge results. Organizations undertake measuring function to identify process improvement opportunities, ensure compliance to organizational standards, identify cost saving opportunities or to benchmark against future performances.
. It is basically a measure of productivity derived from the formula Production = Output/ Input Effectiveness This is the extent to which the organization meet its objectives or requirements of its customers. E. good fair or excellent. transportation. bad. g delivery time. Performance measurement leads to better decisions as performance and results are more visible. Efficiency This is the extent to which the organization resources are utilized to produce a given level of customer satisfaction. Importance of measuring performance of a supply chain. cost. Ensure that all members of the supply chain are working towards a common goal. Cost leverage KEY PERFORMANCE INDICATORS (KPI) KPIs are metrics.g.Performance This implies measuring how well a particular activity has been carried out. KPIs are therefore targets that measure how well an organization is doing on achieving its overall operational objectives or critical success factors for a particular project. Performance is therefore grading how somebody is doing. Ensure Customer satisfaction and quality compliance and maintenance. efficiency. Identify areas of improvement Support decision making. E. KPIs evaluate factors that are crucial to the success of an organization. effectiveness etc Principles of good performance measurements 1 Measure what is important: An organization should consider measuring what is strategic so that they can be in a position to meet their goals and targets. To support better communication across the supply chain. Promote clear understanding of the job roles To improve performance by noting key areas that requires more effort. goals or targets commonly used by an organization to evaluate its success or the success of a particular activity in which it is engaged.
7 Communication: The result of performance measurement should be communicated to the staff and the departments concerned. it is important to measure key areas like quality.2 Simplicity or Keep it simple stupid (KISS): It is important to use measurement approaches or tools that are easy to apply and require fewer resources. 9 Determine whether corrective actions are necessary after comparing performance. For instance. 5 Flexibility: The organization should use flexible methods of measurements that are capable of being adopted to meet changing circumstances. delivery performance and cost reduction. . 8 Cost: The cost measuring performance should not out weigh the benefit of the exercise. 10 Comparison: The method used should be retained for a reasonable period of time to facilitate comparison between the past and present performance Performance measurement process 1 Identify the process flow 2 Identify the critical activities to be measured 3 Establish performance goals or standards to be achieved by the performance measurement exercise 4 Establish the performance measurement matrix whether qualitative. 9 Robust/ Strong: This means that the measurement being used should be able to work again and again. 4 Achievability: use methods that must achieve realistic standards of performance so that the targets must be achieved. 3 Acceptability: the methods or tools of measuring the performance should be acceptable by all stakeholders. quantitative or the balance score card model 5 Identify the responsible parties to conduct the performance measurement 6 Collect data on what is being measured 7 Analyze the data and report the actual performance 8 Compare the actual data to the set goals and objectives and determine the variations. 6 Appropriateness: The methods of measurement and factors must be relevant to the needs of the shareholders and the business.
CATEGORIES OF SUPPLY CHAIN PERFORMANCE MEASUREMENT Supply chain measures can be broadly divided into three categories: 1. cost of re-works.Transport and handling costs Manufacturing costs. labor hours. Resource utilization This is minimizing cost by using effective resources.10 Make changes where necessary to bring back the organization with predetermined targets. 11 Set new goals or targets if necessary.Cost of machine maintenance. purchase of raw materials and equipments Inventory costs. a)financial measures Financial measures include cost of operations Cost It is important to measure the various costs in the supply chain as they directly affect the profitability of the organization. and delivery time etc customer service level . We measure resource utilization by terms such as machine hours. The various costs are: Distribution costs. Labor costs. They can be classified into financials and non-financials. methods and minimizing wastes. finished goods Incentive costs/ subsidiary costs Taxes Intangible costs/ quality costs Overhead costs. b) Non-financials measures They include. WIP.costs incurred when the organizations over or under produce. machine costs.QUANTITATIVE MEASURES These measures provide numerical targets and findings.cost of storing raw materials.
2. Lead time. The various qualitative measures include Quality. flexibility. These are performance measures that describe situations not measureable numerically.The extent to which the customer order quantities are met Stock out probability.time between placing and receiving an order.Customer service level in supply chain is fraction of different performance indexes such as. QUALITATIVE PERFORMANCE MEASURES Performance measures are descriptions of situations or conditions which cannot be recorded numerically. trust and innovativeness. Quality may be measured through: Customer dissatisfaction.Time required when the product starts to be manufactured until the time it leaves production unit On time delivery. visibility.Delivery performance is calculated by. 1) Order to delivery lead time that elapses between placement of an order and receipt of the same order. Can be measured by reaction time (time it takes to receive a special order). 2) The supply chain lead time process is the time spent by the supply chain to convert raw materials into final products and the time it takes to reach the end users. losing customer to your competitor Customer response time. Also called order cycle time. QUALITY This is a standard of a product or service which is related to customer satisfaction level.This is a probability that a requested item is out of stock .complaint from customers. order fill rate stock out rate back order level probability on time delivery Cycle time or lead time Two categories of lead time are considered in performance measurement. manufacturing time and delivery time. Number of orders/ total number of orders * 100 Fill rate.
TRUST AND INNOVATIVENESS Visibility Information flow is critical in supply chain and should not be distorted as it passes along the supply chain. Process level flexibility Material handling flexibility Routing flexibility. Its measured by efficiency of switching. having many lines Volume flexibility. process level and at the out put level.How accurate in meeting specifications given by the customer.g. VISIBILITY.measures the number or variety of products which can be produced without incurring a loss.Extent to which a Machine can provide different services. Accuracy. Visibility of supply chain is assisted by information technology Trust It is the extent to which the organization keeps its word. Measured by the percentage of accurate goods/ services delivered.workers who are cross trained Machine flexibility.How to vary volume production depending on demand Mix flexibility. Organizations can measure the time it takes for information to pass across the members of a supply chain as well as the accuracy of information passed. Input level: Labor flexibility. FLEXIBILITY This is the extent to which an organization can adapt to change.How flexible the organization can modify the product to meet different tastes and preferences. Improvement flexibility Modification flexibility. . It also measured by the duration of time required to produce a new product.Different ways of manufacturing a product of offering a service e. Expansion flexibility.How fast/ slow the organization can expand capacity. Flexibility can be measured at the input level. This is measured by the consistency of quality and delivery.
Evaluation provides suppliers with an incentive for continuous improvements Help in deciding which supplier should specific order is placed Supplier performance rating methods Subjective .e. It is also measured by the extent of Resource use in the organization such as use of renewable energy. 3) ENVIRONMENTAL PERFORMANCE MEASURES This is a way of measuring the extent to which the supply chain adopts green concept. Why evaluate supplier performance Evaluation can significantly improve supplier performance Assist in decision making regarding when a supplier is retained or removed from an approved list. These are. It is measured by the Launch of new products and the use of technology. water.Innovativeness This is how efficiently an organization comes up with new products and services or new ways of operations. This is measured by the level of Emissions to the natural environment i. comparative approaches and purchasing management audit approach. recycled water etc. Emission to air Emissions to water Emission to land and Resource use Example of performance measurement. 2) Supplier performance evaluation. land. air. management by objective. 1) Purchasing performance evaluation that can be evaluated using. Accounting approach. Environmental performance indicators have been zeroed in to four key categories that are also considered to be significant to various businesses.
Feedback obtained during the measurement process may also be used to develop staff and organizational measurement skills. APPROACHES TO PERFORMANCE MEASUREMENT. helping to ensure continuous improvements in overall supplier performance. Measurement will identify on the part of the supplier. It will allow the supplier the opportunity to improve their performance (assuming that the cause of the weakness lies with the supplier). Survey method Comparative method Percentage based methods Example of supplier performance measurement Cost escalation against targets Technology roadmaps Compliance to environmental and social responsibilities standards Ability to integrate into supply chain Attainment of customer satisfaction Problems with purchasing and supply chain performance measurement Too much data and wrong data Measures are short term focused Lack of details Drive the wrong performance Setting unachievable targets Problems of accurate measurement. Below is a summary of several different methods we can use to measure suppliers Type Description . It will also allow the buying organization to seek compensation for poor performance.
the purchasing function is regarded as part of the company that controls assets and is responsible not only for expenditure but also income. Using supplies accreditations as a basis for performance. e. 2. Opinions are usually often converted to figures for positioning purposes. Statistics based Relies heavily on the availability of statistics.g. and is therefore oriented to measurable or transactional activities. 4. KEBS Using supplier’s existing or proposed self assessment of performance to avoid introducing a new performance measurement system in the buyer’s organization.ISO standards are recognized worldwide. but there may be a company or national scheme that could be used. There can be different levels of complexity in terms of content and statistical analysis. Research based Checking out a supplier’s performance through research.ACCOUNTING APPROACH a) The profit center approach In this approach. Is concerned with perceptions and opinions. The executive of the purchasing is therefore expected to base any decision on profit criteria and performance is . It can be an easy way to undertake a simple review of supplier’s performance. Self assessment 1. Standards and accreditations 5.1. The objective of this approach is to demonstrate that the purchasing function is a profit rather than a cost center. The approach involves establishing a centralized purchasing organization that controls assets such that purchasing sells to other functions at what is termed as transfer price. Perception based 3.
measured in terms of the profits generated by the function. simplified or fewer parts Elimination of unprofitable products. Number of suppliers per product= Number of suppliers Number of products Number of orders per product= Purchase orders Number of products Cost savings can be made by: Reducing the complexities of bought out items by means of standardization Reducing the amount of negotiation and number of suppliers by the introduction of single sourcing or an approved source list Improved design using standard. ABC highlights the fact that complicated products require enhanced negotiation expenses. Allocation of overheads to products. Analysis of cost drivers. ABC distinguish between value adding and non value adding activities and ultimately seek to eliminate all wasteful activities by using fewer suppliers. more suppliers and purchasing orders. b) Activity based costing (ABC) ABC costing contributes to performance measurement in the following ways: Together with JIT. then product X would incur higher proportion of the purchasing cost than product Y. The critic of this approach argues that this approach is more theoretical than practical although it is advocated on the ground that it: Provides a measure of efficiency of the supplies function Allows supplier managers to control their budgets and spend to save money. reduced inventory etc. c) Standard costing and budgetary control . minimal paper work. The following measures indicate the opportunities for cost savings by simplifying supplierdriven activities. increased administrative costs and similar cost drivers. If an ABC analysis shows that product X requires the purchase of items from 12 suppliers while product Y only involves purchase from 2 suppliers. A cost driver is an activity that creates a cost. improved reliability.
the revision of current policies a) Economic value added (EVA) This is a value based financial measure. Alternatively. Improving returns with little or only minimal capital investment Investing new capital only in processes or equipments that will at least recover their capital costs. Indicate the extent to which actual results have exceeded or fallen below those budgeted. EVA therefore reduces all financial performance to a single measure of ways to improve EVA. EVA therefore is a net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an organization. A reduction in such costs by reducing prices. . Calculating the net operating profit after tax Identifying the organization‟s capital Determine a reasonable capital cost rate Calculate the organization‟s economic value added. .This is a control technique which compares costs and revenues with actual results to obtain variances which are used to stimulate improved performance. Appraising budgets to correct adverse trends or take advantage of favorable conditions Exercising centralized control in circumstances of decentralized activity Providing a basis for future policies and where necessary. more effective procedures or outsourcing will increase profitability. Establish the extent and causes of budget variations. EVA concept is relevant to purchasing as supplies and their procurement are important operation costs. the amount by which earnings exceed or fall short of the required minimum return investors could get by investing in other organizations offering a comparable risk. while avoiding investments with lower than capital cost returns Identifying and eliminating processes or operations where the return is below capital cost and where there is no possibility of improving the returns. EVA can be improved by. This measure is calculated by. Standard costing can monitor performance by variance analysis while budgetary control assists performance measurement by: Defining the results to be achieved by functions and their staff for the purpose of realizing overall objectives.
00 3.87 Score 15 target 15 Score 1 . supplier‟s performance is typically measured by: Quality-could be the number of acceptable deliveries in relation to the total number of deliveries received. measured against a target. SIMPLE VENDOR RATING. It‟s a tool that will act as a control on performance.97 3. Factor Quality(by delivery) Delivery timing(by 13 delivery) After sales service Price Total target actual Overall assessment 10 290 20 300 0. allowing corrective action to be taken by either or both parties as appropriate. Price-could be measured as the delivery price quoted by the supplier against the lowest delivery price for the same article by any one supplier.5 0. At a simplistic level.33 83% 15 0.2. Delivery-could be the number of deliveries delivered on time in relation to the total number of deliveries received After sales service-could be the time taken in hours or days for queries to be resolved.33 4. Problems will be highlighted. Vendor rating is the process of measuring performance of a vendor (supplier): it‟s usually implies the use of a process or system.
The original target set is therefore a moving target and must be subject to continuous reassessment.Comparing internal function with those of the external practitioners of those functions irrespective of the industry they are in. Clearly. Very often this will be centered on a checklist Performance categories ratings . There are four types of bench marks namely: • • Internal benchmarks.Comparing organizational performance against that of the competing organizations.Method of comparing the performance of an operating unit or function within an organization with those of a similar business within the same industry Functional bench marks (Genuine or operational benchmarks) . 3.evaluating alternatives. Benchmark performance result in ever higher levels of achievement by competitive market forces. • • Competitive benchmarks. 3. in which the buyer can assess the supplier in some depth. From this we can say that the supplier‟s performance over the measured period of time was 83% of that required. Strategic benchmarks. An alternative to vendor rating is the category mode. implementing strategies and improving performance by understanding and adapting successful organizations that may be competitors or partners.COMPARATIVE APPROACH Bench marking Bench marking can be defined as a measurement standard for comparison that is recognized as the standard of excellence for a specific business process.*compare the actual with the target and express as a percentage. PERCEPTION BASED RATING. this information supported by the raw data can form the basis for serious discussions on service improvements. Benchmarking improves supply chain in that.gap between where we are and best in class organization Motivates in that it provides objectives achieved by others Experience and knowledge base of employees is enhanced Bench marks are not static. This is „a measured best in class‟ achievement. It provides a gap analysis tool.
good Delivery performance( correct quantities) Delivery performance( on time) Price( performance over time) Quality and compliance to specifications Invoicing and financial performance Good accurate documentations Problem solving when difficulties occur acceptable poor In this example a good. which makes it easier to compare suppliers. 4. Another common method is to allocate numerical positions for example 1=poor and 5=excellent. This then allows some basic calculations to be made. THE BALANCE SCORECARD . and poor rating has been used. acceptable.
. government. The balanced scorecard has evolved from its early use as a simple performance measurement framework to a full strategic planning and management system. improve internal and external communications. balance score card retains the financial measures but financial measures only indicate past events and therefore inadequate. but helps planners identify what should be done and measured. processes. It provides a framework that not only provides performance measurements. technology and innovation. employees. suppliers.It was developed in the early 1990‟s by Robert Kaplan and David Norton of the Harvard business school. According to them. and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization. The "new" balanced scorecard transforms an organization's strategic plan from an attractive but passive document into the "marching orders" for the organization on a daily basis. Thus it is important for companies to make future values through investment in customers. It enables executives to truly execute their strategies. and monitor organization performance against strategic goals. The balanced scorecard is a strategic planning and management system that is used extensively in business and industry.
In a knowledge-worker organization. customer. The balanced scorecard suggests that we view the organization from four perspectives. it also includes things like mentors and tutors within the organization. These are leading indicators: if . people -. The Customer Perspective Recent management philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. internal business process and learning and growth and to develop metrics. what the Baldrige criteria call "high performance work systems. the balanced scorecard transforms strategic planning from an academic exercise into the nerve center of an enterprise. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action." The Business Process Perspective This perspective refers to internal business processes. learning and growth constitute the essential foundation for success of any knowledge-worker organization. In the current climate of rapid technological change. It also includes technological tools. These metrics have to be carefully designed by those who know these processes most intimately. with our unique missions these are not something that can be developed by outside consultants. Kaplan and Norton emphasize that 'learning' is more than 'training'. it is becoming necessary for knowledge workers to be in a continuous learning mode.the only repository of knowledge -. and whether its products and services conform to customer requirements (the mission). It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. Metrics can be put into place to guide managers in focusing training funds where they can help the most. Metrics based on this perspective allow the managers to know how well their business is running. In any case.are the main resource. financial.The balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. When fully deployed. as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. collect data and analyze it relative to each of these perspectives: The Learning & Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement.
and managers will do whatever necessary to provide it. There is perhaps a need to include additional financial-related data. based on their estimate of in-house capabilities and resources. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. THIRD PARTY INVOLVEMENT AND TESTING PROCEDURES. The Financial Perspective Timely and accurate funding data will always be a priority. for example. Poor performance from this perspective is thus a leading indicator of future decline. even though the current financial picture may look good. Ultimately. they will eventually find other suppliers that will meet their needs. such as risk assessment and cost-benefit data. This will include the assessment of: Available finance Available time Staffing levels and staffing skills Organizational policies and procedures Quality of internal relationships Size and technical content of the project or purchase . often there is more than enough handling and processing of financial data. in third party quality testing the work is undertaken by someone who is not the buyer or seller. which may be available either from internal or external sources. the success of any measurement system depends on the skills of the people who operate and use it Additional support and training may be needed. This involves the inclusion of another party in what is usually a two-party relationship. In fact.customers are not satisfied. it is hoped that more of the processing can be centralized and automated. With the implementation of a corporate database. Supply and purchasing management must decide this. customers should be analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups. 5. In developing metrics for satisfaction.
perception of purchasing staff on their contribution to profitability. THE PURCHASING MANAGEMENT AUDIT APPROACH Scheuing defines audit approach as a comprehensive. Purchasing organization. decision making and status in the organization. or assesses for compliance with international standards such as ISO 9000 On building projects a whole range of performance measurement can be carried out via architects and surveyors For some service contracts. 6. Regular changes of the contract‟s personnel which often make continuity different. systematic. a central purchasing function. Purchasing management audits covers such areas as.Following this assessment a decision can be made on the potential for involving third party organizations. assesses a suppliers total capability. third party suppliers will provide „mystery shoppers‟ who will test performance The principle disadvantages of using third parties include: Cost. Loss of interest by contractor. Consultants often offer high level personnel at the beginning . independent and periodic examination of a company‟s purchasing environment. Purchasing perspective problems and opportunities. objectives and tactics to identify problems and opportunities and facilitate the development of appropriate action plans. the interfaces. Purchasing audits helps to. procedures and methods that conform to best working practice Monitor and measure the extent to that resources are used effectively Assist in the prevention and detection of fraud and malpractice Purchasing audits are carried out by external and internal auditors. improvements of the purchasing function . Specialist consultants can provide advice and guidance on how to implement a suppliers measurement project The provision of IT services Market and supplier research External testing houses can test specific components. Typical areas of involvement include the following: The provision of skilled labor or a project manager for a period of time.Rank of the chief purchasing officer in the organization hierarchy is the function centralized or decentralized. The need to monitor the contract‟s services. Police the extent to which the purchasing policies laid down by senior management are adhered to Help to ensure that the organization is using techniques. a purchasing research function and external management consultants. but gradually change this over the life of the contract. especially over long periods.
*value for money audit-v. This is helpful.written or not. When preparing the report to be presented to senior management auditors should highlight policies. such as better quality of product service *audit trail. files.m. supplier relationship manual.does company use ABC analysis.the audit trail is an important part of any management process of this kind. *process audit-on any measurement process that runs for a long time it is useful to check that the systems are working as intended. as the system becomes live.number of staff. but the key principles should be transparency and openness It should start with a well documented plan that sets out what is to be achieved and how it‟s to be carried out.are all procedures computerized? Inventory. commend good practice and performance and support constructive proposals made by purchasing staff that may receive greater attention if made by the outside source. their qualifications. because the intention is to continuously improve. and minutes generated by activity as the process is running. and this cannot be measured without data It will include regular reports to senior management as required . records. data.etc. It will include all necessary documents. and at regular intervals thereafter during its life. Purchasing policies. audit sets out to establish whether the organization is gaining value from the processes. have we gained in other areas. Purchasing personnel. purchasing manual Purchasing procedures. Rate of turn over etc. This is particularly important. because it allows better planning.f. duties etc. Typically this might be done once. procedures and personnel where efficiency and effectiveness can be improved. facilities audit. Much of it will be documentation. and acts as a benchmark for assessing progress. and would typically focus on benefits: Can we show what we have saved relative to wh at we have spent? Are there cash savings? If there‟s no cash savings.
Benchmarking. standard descriptions of management processes. at the end of which the actual performance will be compared with the desired results. a framework of relationships among the standard processes. known as key result analysis requires functional heads to identify their key tasks. standard metrics to measure process performance and management practices that produce best-in-class performance.g. performance standards and control information with a view to suggesting how their individual performance and the performance of their function can be improved. One approach to MBO. The Primary Use of SCOR is to describe measure and evaluate supply chain configurations. Improvement objectives that seek to improve performance in specific ways in relation to specific factors such as to “reduce the prices paid for all costing used in the assembly of conveyor rollers by 5 per cent in the financial year. There are three main types of objectives. It will act as a valuable training for other projects. “maintain zero defect level in production Supply chain operations reference model (SCOR) SCOR integrates Business Process Reengineering. and for inducting new members. 7. and Process Measurement into a cross-functional framework. skill and experience e. Importance of SCOR model Determine what processes to improve and by how much to improve them Guide the consolidation of internal supply chains (which results in significant cost reductions from eliminating duplicative assets) Create standard processes and common information systems across business units (which generates major cost savings. cycle-time and quality improvements) .” Maintenance objectives which express intentions to maintain performance at its current level e. MANAGEMENT BY OBJECTIVES (MBO) The aim of the MBO is to identify the objectives that a manger or function should be expected to achieve within a given time. The model contains. “to commence by the next financial year a business degree course. Personal development objectives that relate to personal growth objectives or the acquisition of the expanded job knowledge.g.
Develop a common scorecard by which customers can measure their performance and by which SCC members can measure suppliers‟ performance (which can lead to major cross-organizational process improvements). Evaluate and compare their performances with other companies effectively Identify and pursue specific competitive advantages Identify software tools best suited to their specific process requirements SUPPLY CHAIN OPERATIONS REFERENCE MODEL (SCOR): BASIC MANAGEMENT PROCESSES Plan (Processes that balance aggregate demand and supply to develop a course of action which best meets sourcing. verify. production and delivery requirements) Balance resources with requirements Establish/communicate plans for the whole supply chain actual demand) Source (Processes that procure goods and services to meet planned or Schedule deliveries (receive. transportation management. typically including order management. transfer) Make (Processes that transform product to a finished state to meet planned or actual demand) Schedule production Deliver (Processes that provide finished goods and services to meet planned or actual demand. and distribution management) .
TRADITIONAL PERFORMANCE MEASURES Traditionally. Companies began to lose market share to overseas competitors who were able to provide higher-quality products with lower costs and more variety. return on investment and productivity. but also implemented new technologies and philosophies of production management (i. During this period labor was the major cost driver that management accounting systems emphasized and other costs were de-emphasized by putting them together in one overhead category. just in time (JIT).e. return on investment. However. Traditional management accounting systems. flexibility. The implementation of these changes revealed that traditional performance measures have many limitations and the development of new performance measurement systems is required for success. The most significant limitation of traditional performance measures is that they are based on traditional management accounting systems that were “initially developed for the purpose of attributing the total costs of manufacturing operations.e. sales per employee. optimized production technology (OPT) and total quality management (TQM)). 1. This has resulted in most measures focusing on financial data (i. productivity and profit per unit production). today the average labor cost . performance measures have been primarily based on management accounting systems. Of these performance measures productivity has been considered the primary indicator of performance. Warehouse management from receiving and picking product to load and ship product. The first phase began in the late 1880s and went through the 1980s. short lead time and dependable delivery. In this phase the emphasis was on financial measures such as profit. computer-integrated manufacturing (CIM). To regain a competitive edge companies not only shifted their strategic priorities from low-cost production to quality. return on sales. price variances. flexible manufacturing systems (FMS). General limitations of traditional performance measures There are eight common limitations of traditional performance measures and traditional management accounting system. The second phase started in the late 1980s as a result of changes in the world market. Return (Processes associated with returning or receiving returned products) Manage Return business rules CONTEMPORARY ISSUES IN PERFORMANCE MEASUREMENT Performance measurement has evolved in two main phases.
even departments within the same company have their own characteristics and priorities. they are lagging metrics that are a result of past decisions.e. operators find typical financial reports difficult to understand which leads to frustration and dissatisfaction. As result operators. Traditional performance measures have not incorporated strategy.” 8. Fisher (1992). increase labour efficiency and machine utilization. Since in this case overhead is allocated based on the minor cost element of direct labor this allocation approach is not valid. Traditional financial reports are inflexible in that they have a predetermined format which is used across all departments.) argues that setting standards for performance measures in general conflicts with continuous improvement. Relevance to practice. shorter lead time and lower cost management . Therefore. traditional performance measures are often ignored in practice at the factory shop floor level. Workers may hesitate to perform to their maximum if they realize that the standard for upcoming periods may be revised upward by current results. adherence to delivery schedule. Thus. 3. Traditional performance measures try to quantify performance and other improvement efforts in financial terms. Rather the objectives have been to minimize costs. Inflexible. The preparation of traditional financial reports requires an extensive amount of data which is usually expensive to obtain. performance measures that are used in one department may not be relevant for others. lead time reduction. 5. Customer requirements and management techniques. Continuous improvement. In addition. Lagging metrics. operational managers consider financial reports too old to be useful for operational performance assessment. customer satisfaction and product quality). 2. Expensive. 6. most improvements efforts are difficult to quantify in monetary terms (i. “If standards were not carefully set. 7. Corporate strategy. Yet.component is lower compared to the manufacturing cost. they had the effect of setting norms rather than motivating improvement. Maskell (1992) argues that traditional performance measures are no longer useful since in order to meet customer requirements of higher-quality products. As a result. supervisors. However. Financial reports are usually closed monthly. 4.
A. J. no. R. (2005). This section will only deal with time as a strategic performance measure. supervisors. & Sarkis.S (2001). traditional financial reports used by middle managers do not reflect a more autonomous management approach. International journal vol. (1983). 21. Hervani.htm 4. Performance measurement for green supply chain management. CONCLUSIONS. Performance measurement provides opportunities for new ventures and improvements in operations hence giving an organization competitive advantage over its competitors REFERENCES 1.S. the international Journal of advanced manufacturing technology vol. measures should foster improvement versus just monitor it. A. retrieved October 11. No.emeraldinsight. There three main emerging performance measurement metrics namely: Balance score card. performance measurement in supply chain. SCOR model and Time. Consequently.have given shop floor operators more responsibility and authority in their work.e.. purchasing and supply chain management. Helms.emeraldinsight. 7.. 2011. M. 12. 3. Chan F. primarily non-financial measures (i. M. 4. operational) so they can provide managers. Retrieved March 29.T. Kaplan. Pearsons education ltd pg 671 2.com/1463-5771. Performance measurement is important to every organization as it provides insight to the operations of the organizations and analyzes the weaknesses and threats that the organization faces. The characteristics of emerging performance measures include: measures related to manufacturing strategy. seventh edition. and measures should change as is required by a dynamic marketplace. "Measuring manufacturing performance: a new challenge for managerial accounting research". Simple measures so that shop floor operators can easily use and understand them. www. Balance score card and SCOR models have been discussed earlier. . 2011. Lysons k and Farrington B (2006).com. and operators with information required for daily decision making. www.
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