SCM

Performance Measurement
Dr. Bonivasius Prasetya,S.Si, M.Eng
Magister Teknik Industri Universitas Mercu Buana
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Role of Performance Measurement
When performance is measured, performance
improves. When performance is measured and
reported, the rate of improvement accelerates.
- Thomas Monson
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Measurement Creates Understanding
Performance measurement systems provide
insight into the nature and workings of value-
added processes.

A well defined performance measurement
system provides feedback regarding:
1. Customer requirements
2. Company and supplier capabilities
3. Probable success of collaborative initiatives
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Measurement Drives Behavior
Measurement is more critical than
communication, training, or perhaps anything
else when it comes to managing human behavior.
Measurements influence on behavior is
pervasive because people pay attention to how
they are measured.
Managers must adopt measures that truly
promote collaborative behavior.
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Measurement Leads to Results
Measurement is a prerequisite for high level
execution and attainment of world-class
results.
Well-designed measurement systems must
provide accurate and relevant information in a
timely manner.
Incorrect measurement systems lead to non-
aligned strategies, poor understanding, and
inconsistent if not counterproductive
behavior.
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Traditional Measurement
Areas that are essential to measure to accomplish
customer service and profitability goals:
1. Asset Management
2. Cost
3. Customer Service
4. Productivity
5. Quality
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Measures of Asset Management
Sourcing Operations Logistics
Raw material
inventory levels
Raw material
inventory turns
Inventory
obsolescence
Return on Assets
Economic value
added
Work in process
inventory
Inventory
obsolescence
Return on Assets
Return of
Investment
Economic value
added
Inventory turns
Inventory
obsolescence
Return on Assets
Inventory days
supply
Economic value
added
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Measures of Cost
Sourcing Operations Logistics
Unit price
Acquisition cost
Total cost of
ownership
Cost as a percent of
sales
Administrative
Direct labor costs
Manufacturing
overhead
Costs per unit
Inventory carrying
cost
Warranty costs
Inventory
carrying cost
Total landed cost
Outbound
freight
Warehousing
labor costs
Administrative
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Measures of Customer Service
Sourcing Operations Logistics
On-time delivery
Order to delivery
cycle
Percent shipments
expedited
Response time to
inquiry
Production to due
date
Manufacturing
cycle time
Backorders
New product lead
time
Customer
complaints
Fill Rate
On-time
delivery
Order cycle time
Complete orders
Customer
complaints
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Measures of Productivity
Sourcing Operations Logistics
Purchase orders per
employee
Dollar spend per
employee
Commodity teams
per employee
Percent transactions
automated
Labor productivity
Equipment
downtime
Changeover time
Engineering
change orders
Total factor
Productivity
Units shipped
per employee
Equipment
downtime
Order
productivity
Warehouse labor
productivity
Transportation
labor
productivity
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Measures of Quality
Sourcing Operations Logistics
Shipments rejected
Defect rateparts
per million
Percent suppliers
certified
Percent orders from
certified suppliers
Response to inquiry
Defect rateparts
per million
Percent rework or
scrap
Statistical process
control
Total hours quality
training per year
Percent employees
six sigma trained
Damage
frequency
Order entry
accuracy
Picking/shipping
accuracy
Document/invoi
cing accuracy
Number of
customer returns
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Traditional Measurement - Caveats
Traditional measurement systems are not
holistic, they are designed to capture and
communicate primarily functional
information.

Traditional measures are primarily oriented to
short-term financial results and cost-cutting.
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Contemporary Supply Chain Measures
Measurements consistent with supply chain
management core principles emphasize:
Goal alignment
Customer satisfaction
Process integration
Total costs
Inter-organizational collaboration
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SC Measures Customer Satisfaction
Traditional customer service measurements
often do not provide a clear understanding of
customer expectation or satisfaction levels.

Internal service measures do not identify what
the customer values or their perception of the
value they receive.
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Customer Satisfaction Metrics
Traditional Practice
Internal service measures
over satisfaction measures

Measures that are
expressed as averages

Measures that treat all
customers the same
Best-In Class Practice
External assessment that
reveals what customers
really think is important
Absolute measure
expressed in customer
centric terms
Measures that recognize
unique needs of individual
customers
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SC Measures Total Cost
Total costing is a prerequisite to good process design
and management

Total cost is the sum of all the costs incurred in
planning, designing, sourcing, making, and
delivering a product from raw material to the final
customer.

Managers lacking accurate total cost information
make decisions that favor their own companys
financial performance when making trade-offs
within the supply chain.
17
Total Supply Chain Cost
Total supply chain costs are the sum of all costs incurred
in planning, designing, sourcing, making, and delivering a
product from raw materials to the final customer.
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SC Measures Activity Based Costing
Activity based costing links costs directly to
the activities that drive them.

ABC costing requires process transparency
and detailed information on products,
customers, activities, and resource costs.

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Activity-Based Costing
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Supply Chain Performance Measures
Superior supply chain performance moves
beyond simple functional excellence.

New measures are required to facilitate
collaboration throughout the entire supply
chain.
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Characteristics of Effective Measures
Aligned with organizational
goals
Aligned with project goals
Customer oriented
Meaningful to workers,
managers, & customers
Consistent across appropriate
functions or departments
Promotes cooperative behavior
both horizontally & vertically
Communicated to all relevant
individuals
Simple, straightforward, &
understandable
Easy to collect the needed data
Easy to calculate
Available on a timely basis
real time when possible
Strategic and tactical
Quantifiable
Designed to drive appropriate
behavior
Designed to drive learning &
continuous improvement
Designed to provide information
that is actually used in decision-
making
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Supply Chain Performance Measures
SC Inventory Days
of Supply
Total number of days of inventory required to support the supply chainfrom raw
materials to the final customer acquisition. Expressed as calendar days of supply
based on recent actual daily cost of sales
Supply-Chain
Response Time
The theoretical number of days required to recognize a major shift in market
demand and increase production by 20 percent
Total Supply Chain
Cost
The sum of all the costs incurred in planning, designing, sourcing, making, and
delivering a product broken down for each member of the supply chain
Cash-to-Cash
Cycle Time
The time required to convert a dollar spent to acquire raw materials into a dollar
collected for finished product. (Total Inventory Days of Supply + Days Sales
Outstanding Days Payables Outstanding).
Perfect Order
Fulfillment
A perfect order is an order that is delivered complete, on time, in perfect
condition, and with accurate and complete documentation. Fulfillment is the
percent of orders that are perfect (Perfect orders/Total orders).
Inventory Dwell
Time
The ratio of days inventory sits idle to days inventory is being productively used
or positioned
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Supply Chain Performance Measures
Source/Make Cycle
Time
The cumulative time to build a shippable product from scratchif you start with
no inventory on hand or on order. Consists of total sourcing lead time, release-to-
start build, total build cycle time, and complete build-to-ship time
Customer Inquiry
Response Time
The average elapsed time between receipt of a customer call and connection with
the appropriate company representative
Customer Inquiry
Resolution Time
The average elapsed time required to completely resolve a customer inquiry
Order Fulfillment
Cycle Time
The average actual lead times consistently achieved, in calendar days, from
customer order to customer delivery. Includes, order authorization to entry, entry
to release, release to shippable, shippable to customer receipt, and receipt to
customer acceptance
On-Shelf In-Stock
Percentage
The percentage of time that a product is available on the shelf, rack, or wherever
the customer expects to find and buy it. Measures the supply chains ultimate
ability to satisfy the end customer
Value-Added
Productivity
Total company revenues generated less the value of externally sourced materials
expressed as a ratio of total company headcount
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Supply Chain Performance Measures
Measures of supply chain performance:
Supply chain inventory days supply
Supply chain response time
Total supply chain costs

These measures allow for identification of
inefficiencies throughout the entire supply
chain.
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SC Measures - Scorecards
Process encompasses objectives, measures,
targets, and action plans.

Typical scorecard emphasizes cost, quality,
delivery, responsiveness, and innovation.

Provide mechanism for evaluation and
communication of performance along critical
dimensions.
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SC Measures - Scorecards
1. Help companies select and monitor both
suppliers and customers
2. Support recognition programs
3. Benchmark leading-edge practices
4. Disseminate best practices throughout the
supply chain
5. Identify deficiencies that can be overcome
through continuous improvement efforts
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Supplier Scorecard
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Benchmarking
The formal process of comparing the attributes
of one organization to those of another.
Process consists of:
1. Define attribute to be benchmarked and identified a
best in class comparison company.
2. Document the best in class process at strategic and
operational levels. Compare with current practice
specifying any and all differences.
3. Develop a strategy, complete with specific
methods, for adopting best practices.
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Benchmarking - Types
Competitive Benchmarking evaluating best
practices of leading competitors within
industry.

Noncompetitive Benchmarking evaluating
best practices regardless of industry.

Internal Benchmarking - large global firms
may find opportunities to disseminate best
practices within the organization.
Magister Manajemen Industri Universitas
Mercu Buana
Supply Chain Measurements
or Supply Chain Metrics
Inventory Turns, Cycle Time, DPMO and Fill Rate are used
to track Supply Chain performance.
Metrics can help SC manager to understand how the
company is operating over a given period of time
Supply Chain Measurements can cover many areas including
Procurement, Production, Distribution, Warehousing,
Inventory, Transportation, Customer Service - any area of
logistics
Magister Manajemen Industri Universitas
Mercu Buana
A Few Things To Keep in Mind
1. Tracking your Metrics allows you to view your performance
over time and guides you on how to optimize your Supply
Chain. It allows management to identify problem areas. It also
allows for comparison to other companies through like industry
benchmarking
2. Certain metrics, such as Cycle Time, have a widely accepted
definition. Other metrics, such as Backorders, may need to be
customized for your particular industry or logistics business
model

Magister Manajemen Industri Universitas
Mercu Buana
A Few Things To Keep in Mind
3. Measurements alone are not the solution to your weak areas! The
solution lies in the corrective actions that you take to improve
the measure. The solution comes from process or system
improvements
4. Measurements should have owners....people or departments that
are responsible for achieving a target on the metric. Supply
Chain Management needs to encourage and support the process
changes to achieve the desired targets

Magister Manajemen Industri Universitas
Mercu Buana
7 Basic Steps
1. Identify the metrics that you want to use. Dont use metric
available. Focus on the vital measurements (mean the most to
business)
2. Understand the meaning of these metrics.
3. Learn the mechanics behind the measurements. What drives
them...positive & negative. Try to understand the various factors
that influence your results
4. Using this information, identify weakness or areas of
improvement in your current processes
Magister Manajemen Industri Universitas
Mercu Buana
7 Basic Steps
5. Set goals based on these improvement areas. The goals should be
aggressive, but yet obtainable
6. Put corrective action in place to improve your processes. Make
sure all effected areas have a clear understanding of the changes
7. Monitor your results. Did your corrective actions yield your
desired results? If so, what is your next area for improvement? If
you did not get the desired results, what went wrong?
Magister Manajemen Industri Universitas
Mercu Buana
Backorder
Backorder: An unfilled customer order. A backorder is demand (immediate or
past due) against an item whose current stock level is insufficient to satisfy
demand.
This calculation can vary. Some companies count items that are not confirmed
(not allocated) and past the Requested Delivery Date (or Requested Ship
Date). Other companies may also count those items with stock confirmed, but
past due.
Backorders may be expressed in "pieces", or in "value". Backorder
calculations are often tracked at a variety of levels. Example: Customer,
Division, Total Company
Aged Backorder: Reports on backorders in past-due time buckets based on the
Requested Delivery Date/Requested Ship Date
Magister Manajemen Industri Universitas
Mercu Buana
SCM Balanced Scorecard
Tracks a limited number of key metrics. These metrics should be closely aligned to the
companies strategic objectives.
The measurements usually cover 4 areas:
1. Financial - Example: The cost of manufacturing, warehousing, transportation etc.
2. Customer - Example: Order Fill Rate, Backorder Levels, On Time Delivery
3. Internal Business - Example: Adherence-To-Plan, Forecast Error
4. Training: Example: In house Training Hours, APICS Membership/ Certification.
The central idea is to focus on key metrics that have real meaning to your company. You
don't want to get lost in a sea of numbers that don't really mean anything.
The Balance Scorecard approach helps you to keep your measures aligned with your
objectives. These measures should be tracked over time (usually monthly) with specific
targets for each.
Magister Manajemen Industri Universitas
Mercu Buana
Cycle Time Measurement
Customer Order Promised Cycle Time: The anticipated or agreed upon cycle time of a
Purchase Order. It is gap between the Purchase Order Creation Date and the Requested
Delivery Date.
This tells you the cycle time that you should expect (NOT the actual)
Customer Order Actual Cycle Time:
The average time it takes to actually fill a customers purchase order. This measure can be
viewed on an Order or an Order Line level.
The measure starts when the customers order is sent/received/entered. It is measured along
its various steps of the order cycle. Through credit checks, pricing, warehouse picking and
shipping. The measure ends at either the time of shipment or at the time of delivery to the
customer (sometimes tracked by using an EDI #214). This "actual" cycle time should be
compared to the "promised" cycle time.
Magister Manajemen Industri Universitas
Mercu Buana
Cycle Time Measurement
Manufacturing Cycle Time:
Measured from the Firm Planned Order until the final production is reported. It usually
takes into account the original planned production quantity versus the actual production
quantity. Example: X% of the planned quantity must be completed on a production run or
the cycle time should not be considered.
Purchase Order Cycle Time:
Measured from the creation of the PO to the receipt at your location (Distribution Center,
Hub etc). One of the keys here is not not have your RDD (Requested Delivery Date)
exceed the agreed to lead time. If it does, it may artificially inflate your Lead Time.
Additionally, any in-between points available will add value to the metric. Example:
Creation of the PO, Shipment from the Vendor, Receipt at the DC. This will tell you the
manufacturing time vs the transit time.
Magister Manajemen Industri Universitas
Mercu Buana
Transportation Metrics
Freight cost per unit shipped:
Calculated by dividing total freight costs by number of units shipped
per period. Useful in businesses where units of measure are
standard (e.g., pounds). Can also be calculated by mode (barge,
rail,ocean, truckload, less-than-truckload, small package, air freight,
intermodal, etc.).
Outbound freight costs as percentage of net sales:
Calculated by dividing outbound freight costs by net sales. Most
accounting systems can separate "freight in" and "freight
out." Percentage can vary with sales mix, but is an excellent
indicator of the transportation financial performance.


Magister Manajemen Industri Universitas
Mercu Buana
Transportation Metrics
Inbound freight costs as percentage of purchases.
Calculated by dividing inbound freight costs by purchase dollars. It is
important to understand the underlying detail. The measurement can vary
widely, depending on whether raw materials are purchased on a delivered,
prepaid, or collect basis
Transit time:
Measured by the number of days (or hours) from the time a shipment leaves
your facility to the time it arrives at the customer's location. Often measured
against a standard transit time quoted by the carrier for each traffic
lane. Unless you are integrated into your customers' systems, you will have to
rely on freight carriers to report their own performance. This is often an
important component of leadtime. Transit times can vary substantially, based
on freight mode and carrier systems.

Magister Manajemen Industri Universitas
Mercu Buana
Setting Goals for Supply Chain Metrics
Focus on a limited number of measurements that add value. Choose those
metrics that will track your companies true performance. You don't want to get
into the trap of "analysis paralysis". Over-analysis leads to confusion and
sometimes conflicting goals. 5 - 7 key measures per functional area (referred to
as KPI's:Key Performance Indicators)
Set the goals. This will enable your organization to track it's performance to
expectations. But how do you set these goals? How do you determine what to
target? At what point have you achieved Supply Chain optimization? Your
overall company goals should be considered when setting your Supply Chain
targets. Supply Chain goals do not conflict with the company objective.

Magister Manajemen Industri Universitas
Mercu Buana
Some Guidelines.....

First, make sure you understand exactly what it is your
measuring. What drives this measure? What causes failure?
Where do you need improvement? Once you can answer
these questions, you're in a better position to set your goals.

Some companies use a guideline of 10% improvement per
year. But, this is a very general guideline
Magister Manajemen Industri Universitas
Mercu Buana
Benchmarking
One way to set your goals is Benchmarking. There are various
benchmarking services, that for a fee, will compare your company to
other "like" companies. You submit your answers to a set of questions.
Those answers are averaged in with other companies submissions.
Averages are calculated and World Class levels are set.
As an example, if the average Fill Rate for your industry is 93% and
your performing at a 80% level, then it's obvious you need to set an
aggressive goal. However, if the industry average is 93% and you're at
94%, you may want to target a minimal gain. Your aggressive efforts
should probably be focused in other areas. The caveat here is defining
"like" industries. Make sure the comparison your making is a fair one.
Magister Manajemen Industri Universitas
Mercu Buana
SMART Goals
Specific: Provide enough detail so that there is no question on what is being measured and
no question how the metric is calculated. You should be specific as to the measurement,
goals and responsible people/department.
Measurable: Here is where you use your metric. Make sure you have a reliable system in
place that will accurately measure your performance
Attainable: Will the Supply Chain projects you have scheduled for the year produce results
that will achieve your goal? The person setting the goal and the person responsible for
achieving the goal should agree with the target. If results are un-attainable or unrealistic,
they will have a de-motivating effect on your employees.
Realistic: Don't plan to do things if you are unlikely to follow through. Better to plan only a
few things and be successful rather than many things and be unsuccessful. Your Supply
Chain goals should be challenging, but realistic in relation to the improvement projects you
have in place.
Time frame: Identify when your targeting to hit your goal.
Example: Your current Fill Rate is 87% and your Supply Chain projects should improve
your measure to 93%. But is the 93% goal for the final month of the year OR is it averaged
out over a specific timeframe?
Magister Manajemen Industri Universitas
Mercu Buana
Customer Service Policy
Additionally, make sure that your Supply Chain goals are aligned with
your Customer Service Policy.
Example: Your agreement to your customer might be a 95% Fill Rate,
with an Order Cycle Time of 10 days. Make sure that your goals
reflect these customer agreements.

Supply Chain optimization is difficult to achieve. But with the right
metrics in place and proper goals set, you now know where to focus
your improvement projects. You have just gotten closer to Supply
Chain optimization.