Performance Measures

in Supply Chain
Management

ZIKRUL MCIPS; PMP

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 The concept and forms of
value-added and evaluate the
benefits of value-added
solutions

Session-02

ZIKRUL MCIPS; PMP

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 Value

 Value generation is intangible, it is not quantifiable, unlike

money; cash saved can be counted and touched!
 Value means different things to different people.
 “Added Value” can be defined as: ‘The difference between a
particular product's final selling price and the direct and
indirect input used in making that particular product.’
 Value can change. It can be based on time, or a place and
or people in relation to their changing environmental factors.
 It is a creative energy exchange between people and
organisations in our marketplace and the commercial
environment that we work in.

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 Value Adding in P&SM
 Improvement in the product quality, for example this could mean
there are no product recalls for any of your products;
 Improvement in the levels of customer services provided, for
example the outsourcing and management of call centres to ensure
that the high standards to the customers are met by a specialised
team/company;
 Reduction in time to market and cycle time, for example managing
a just-in-time process with your key suppliers;
 Assurance of supply so that there are no time delays for a
manufacturing line;
 Management and audit of suppliers corporate social
responsibilities;
 Management of sustainability;
 Increased new product development
 Allowing suppliers and the P&SM to work in an environment that
allows the development of a creative concept for the organisation
or a customer.
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Added Value by of Effective Purchasing Performance Measurement

Cost of Savings made in the cost of the goods or services, using the
goods and technology as an effective tool to support price setting in the
services tendering process, and then driving contract compliance. Average
(C) savings of 5%-15% are common.
Process Benefits accrued from reduced time spent in administration,
efficiency elimination of duplicate process steps internally and within suppliers,
(P) automation of manual low value tasks from the process. Process
costs can be reduced by as much as 40%-50%.
Service Reduced process times to improve responsiveness to customers, and
improveme empowerment of staff to enable them to do their job better. Cycle time
nt (S) reductions of 50% – 75% have been achieved.
Visibility of Access to key management information to support decision making;
spend (V) capture and analysis of the organisation’s spend behaviour, better
monitoring and control; compliance to contractual arrangements of
sourced products with approved suppliers and to the process for
ordering these.

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 Added Value Performance Measurement

The concept and forms of value-added and evaluate the benefits

of value-added solutions including:

 Savings resulting from improved performance

 Reducing inventory costs and administration
 Extending payment and warranty terms
 Using consignment stock
 Improving operational efficiency

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 Framework for Value adding Effective Purchasing tool

The technology-enabled systems and tools

e-Sourcing e-Procurement e-Payment Management
Tools:- Tools:- Tools:- Information
e-Tender, Catalogues e-Invoicing & e- Tools:-
e-RFQ Complex goods Payment Benchmarking
e-Auction and services Procurement Card Contract
Supplier Adoption Content and Travel & Expenses management
Demand Catalogue Supplier
Management Management Performance
Purchasing e-Marketplaces Performance
Intelligence Management
Spend Analysis
EDI

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 Added Value & Value Chain

Added Value: The achievement of equivalent financial

savings or benefits that are not based on a movement in
unit price only.

A value chain is a set of activities that a firm operating

in a specific industry performs in order to deliver a
valuable product (i.e.goods and/or services.) for
the Market. The concept comes through business
management and was first described by Michael
Porter. 

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 Basic model of Porter’s value chain

• Support activities
Firm infrastructure (General management, IT systems)

Human Resource (Recruiting, training development)

Technology development (R&D, product and process improvement

Procurement (purchasing of raw materials, machines, suppliers

Inbound Out
Marketing
logistics operations bound Service
& sales
logistics

• Primary activities

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 Primary value activities

 Inbound logistics are the activities concerned with receiving, storing

and disseminating inputs: materials handling, warehousing, inventory
control etc.
 Operations are concerned with the transformation of inputs into
finished goods or services.
 Outbound logistics are concerned with storing, distributing and
delivering the finished goods to customers.
 Marketing and sales are responsible for communication with the
customers to provide a means by which they can purchase the
product (as well as an inducement to do so).
 Service covers all of the activities which occur after the point of sale to
enhance or maintain the value of the product for the customer.

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 Secondary (support) activities

 Firm infrastructure refers to systems and assets for planning, finance,

quality control and management.
 Human resources are all the activities involved in recruiting,
deploying, retaining and developing people in the organisation.
 Technology development activities relate to both equipment, systems
and methods of work organisation: product design and improvement
of production processes and resource utilisation.
 Procurement is all activities to acquire inputs for primary activities.

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 Added Value Opportunities

Operation related savings:

 Eliminating or changing the initial requirement specified by the end user or
customer
 Changing the product/service specification or standard
 Substituting lower cost items-links to value analysis techniques
 Extended payment terms
 Extended warranty terms
 Reducing stock or using a consignment stock facility
 Improved operational efficiency-links to learning curve theory
 Lower administration costs
 Lower transactional costs.
Performance targets headings:
 The same goods or service for lower cost, or
 The same costs but improved goods or services, or
 Both lower costs and improved good or services

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 A supply chain flow model

Stock
Stock
management
management
Stock
Stock control,
control,
WIP
WIP Materials
Materials
Inbound
Inbound handling
handling
Goods
Goods in
in systems
systems

Purchasing Finished
Finishedstocks
stocks
Purchasing
Transport
Transportandand
Goods/services
Goods/services distribution
distribution
Information flow
Suppliers’
Suppliers’ Partnerships
Best Customers
Customers
Best sources
sources Continuous improvement
Added Value
Purchasing Partners Customer Partners

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 How purchasing can add value

 By selecting appropriate suppliers they can improve the quality of

inputs, with consequent improvement in the quality of outputs.
 By effective negotiation and/or tendering they can reduce the cost of
inputs.
 By effective functional management they can reduce the cost of
processing purchase transactions.
 By effective dialogue with user departments they can improve
specifications so that purchasing needs are fulfilled more efficiently
and at lower cost. CFT
 By effective liaison with user departments and suppliers they can
ensure that inputs surplus to requirements are eliminated.
 By effective inventory management they can minimise the costs of
acquiring and holding stock.

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 Efficiency and effectiveness of purchasing

Measures of purchasing efficiency Measures of purchasing effectiveness

Basic purchase price of inputs Quality of output

Cost of placing an order Quality of service to customers

Cost of staffing the purchasing function Achieving objectives within budget

Speed of transaction processing Quality of supplier relationships

Use of information technology Impact on profitability

Efficiency of organisational structure Prompt delivery to customers

Efficiency of supplier management

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 Added value factors in buyer performance

 Willingness to work with the supplier to create and share

value gains
 Willingness to consult the supplier when developing
specifications. ESI
 Willingness to share knowledge and expertise and
information with the supplier in order to partner more
effectively.
 Responsiveness to supplier recommendations
 ‘Intelligent customer’ qualities

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 Improved Performance

Efficiency Effectiveness
 Actual costs of the buying  Customer service levels
process  Goods or service within budget
 Buyers’ cost per order, or per  Quality levels
pound spent  Goods and services reach
 The cost of acquisition customers on time
 Savings achieved  Service delivery to customers
 Added value gained  Improved relationships
 Cycle time  Impact on capital efficiency, asset
 Use of information technology management and profits
 Organizational structure
ZIKRUL MCIPS, PMP
 Supplier management 18
 Areas of continuous improvement

 Selecting the most suitable suppliers

 Managing the quality of incoming supplies
 Managing the timely delivery of incoming supplies
 Managing the purchasing process
 Achieving cost reductions by appropriate negotiations with
suppliers
 Improving supplier performance by means of vendor rating
 Ensuring appropriate levels of inventory are held

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Achieving improve performance by continuity of supply

 For some supplies, a buyer may use a number of different

suppliers. He ensures continuity of supply by spreading the
risk of supplier failure.
 For other supplies, the buyer may prefer a single-sourcing
agreement. He ensures continuity of supply by careful checks
on the single supplier’s capability and by engaging the
supplier’s loyalty and close collaboration.
 Other relevant techniques include careful management of
stock levels, and regular, systematic market research

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 Measures relating to continuity of supply

 The cost of being without supplies

 The cost of holding ‘buffer’ stock as a protection
against supplier failure
 The number of times production is held up because
of supply shortages
 Performance in delivering products or services to
customers

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 Management of purchasing procedures

 Preparation of a purchasing policies manual

 Statement of purchasing policies and ethics in the overall
corporate plan
 Appropriate training in the Six rights of purchasing
 Appropriate training in bid evaluation and contract award
criteria
 Development of suitable IT systems

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 Measures of management performance

 Basic purchase price of key materials and price movements

over time
 Cost of placing a purchase order
 Number of orders placed per period
 Timeliness of evaluating tenders
 Total staff costs, and movements in costs over time

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 Inventory OR Stock

 Inventory: Inventory (American English) or stock (British

English) is the goods and materials that a business holds for
the ultimate goal of resale (or repair)
 Inventory Costs: Costs of acquiring the stock + Costs of the
building and stores equipment + costs of staffing the stores +
costs of handling, managing and accounting for the stock
 Consignment Is an arrangement in which goods are left in
the possession of another party to sell.
 Stock: Asset, working capital in the balance sheet. Excess
stock ties up cash and reduce liquidity, insufficient stock may
reduce levels of service to customers

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 Costs stock

 The once-for-all cost of setting up and maintaining an

information system for processing orders.
 The cost of preparing an order requisition each time stock is
required.
 The cost of selecting a supplier, perhaps involving the
comparison of several different quotations.
 The cost of preparing and processing a purchase order.
 The cost of preparing and processing a goods received note.
 The cost of clerical time, stationery, postage or fax charges
incurred each time an order is placed.
 The cost of preparing and processing payment.

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 Costs of acquiring (Purchasing/producing) stock and holding stock
Costs of acquiring (producing) stock Costs of holding stock
Setting up and maintaining an information system
for processing orders Opportunity costs of funds tied
up in purchase of large orders
Preparing an order requisition
Evaluating & Selecting a supplier Owning or renting warehouse or
Preparing and processing a purchase order stores space
Preparing and processing a goods received note Employing warehouse or stores
staff
Clerical time, stationery, postage or fax charges Insuring stock
Preparing and processing payment
Deterioration of stock
Loss of bulk purchase discounts
Production set-up costs
Obsolescence of stock
Opportunity costs of stockouts

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 Reducing inventory costs

 JIT: Just-in-time philosophy

 Lean: Reduce waste
 WIP: Work in process
 Financial costs: Bank interests
 Opportunity costs: Best opportunity?
 Process costs: Buying the goods, handling the stock,
assembling and moving the stock, and finally issuing and
dispatching the finished stock produced

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 Operational Efficiency

 Buying costs include:

 The wages and salaries of buyers and purchasing staff
 The cost of office premises and support costs
 The cost of systems-both paper based and IT
 Operational Efficiency is based on:
 HR factors: Buyers’ personal and or professional competence-skill,
knowledge, experience, qualifications and attitude
 System and process factors: Purchasing procedures, strategy,
tactics, transactions, relationships, business IT systems and
communications

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 Operational Efficiency- Value and Volume

The volume of purchasing work:

 The number of orders placed over time
 The number of items/services undertaken
 The number of queries dealt with-how well the buying process works
The value of purchasing work:
 The monetary value of those orders
 The transactional costs involved- enquiries, evaluation, meetings etc.
 The savings made against budget

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 Operational Efficiency- Organisational Structure

 Centralization:
 Buyers can aggregate demand for maximum leverage with
suppliers
 Buyers may specialize in commodity sectors
 Buyers can cover each other more effectively over time
 Fewer orders are placed, resulting in improved control over costs
and budgets
 Administrative costs are reduced
 Risk of centralization:
 It may take longer to process orders centrally
 Buying staff may not understand local management or production
needs
 Buyers are not part of respective regional management team
 Buyers’ don’t know the local market or suppliers as well
 There is some duplication of costs of buying and administration

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 Added Value Performance Indicators in SC

KPI
1 Inbound Cost of acquisition, Cost of bringing goods in, handling inbound
Logistics goods.
2 Operations Availability and costs of goods to the operations, manufacturing
or process functions
3 Outbound Costs of packaging, picking and moving finished goods
Logistics outbound to the customer.
4 Marketing Working with this function on product development and on
and Sales products as they progress through their marketing life cycle.

5 Service Costs of services that relate directly to the added value

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 Value-added network (VAN)

VAN is "a private IT network linking organisations in a supply chain

together, enabling them to share information and electronic documents".
VANs can be used by organisations sharing data using electronic data
interchange (EDI).
Application approach:
 Decide whether a VAN or web-based EDI solution is the most
appropriate option and whether financial resources are sufficient to
implement and maintain the system, and to train employees. If the
former is chosen, the following steps illustrate its use.
 Company A creates a purchase order using its own internal business
software.
 EDI software translates the order.
 Company A sends the purchase order to company B using a third-
party VAN.
 Company B receives the purchase order, translates it from EDI to its
proprietary format and will then usually send an acknowledgement to
company A.

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 Value adding opportunity and risk in VAN

 Opportunity :
A VAN offers fast transportation of EDI documents between
businesses in the supply chain. VANs provide functions such
as message transport and tracking . VANs can add value to
the basic carriage of calls through computerised operations.

 Risk:
VANs can be more expensive to operate than direct networks
because of the service fees incurred. VANs are often
unsuitable for small and medium enterprises because of the
resources and costs implicated in the setup and maintenance
of these networks. VAN providers have been forced to modify
their pricing structures in recent years to compete with more
reasonably priced Internet solutions.

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 Performance measurement in VAN

 Cost-benefit analysis: Evaluation of the return on investment

(ROI) of implementing EDI and VAN technologies,
assessment of whether alternative web-based solutions are
more cost effective.
 Procurement’s role in the generation and capture of value in
supply chains.
 Cost per transaction: A measure of the value of EDI.
 Lead times pre- and post-adoption of EDI and VAN
technologies.

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 Value analysis (VA)

VA is a systematic interdisciplinary examination of

factors affecting the cost of a product or service in
order to devise means of achieving the specified
purpose most economically at the required standard
of quality and reliability.

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 Value analysis (VA)

Applicability:
 Select a suitable project for investigation. For example, think about
where the greatest potential for savings is to be made.
 Obtain information relating to the item (e.g. cost of materials,
machining and assembly times, methods and costs, quality
requirements, and so on) and define the functions of the product,
particularly in relation to the costs of providing them.
 Brainstorm ideas for achieving the desired function, reducing costs or
improving the product.
 Select the best ideas produced from the previous stage and evaluate
their SFA. Team based VA will see each specialist approach things
differently before reporting back.
 Present recommendations to the level of management able to
authorise suggested changes (e.g. what changes are being
proposed? What are the costs and the projected savings?).
 Approve changes and agree recommendations that can be
progressed through the normal production, purchasing and other
procedures. This is the final implementation step

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 Advantages & cost of VA
Potential advantages VA,
Along with standardisation and variety reduction, allows purchasing
professionals to consolidate requirements, reduce acquisition costs, obtain
volume discounts and increase leverage.
Extensive use of VA can improve purchasing performance by creating and
sustaining a value culture that manifests in all different types of purchasing
activities.
Potential cost:
 Although VA provides a way of making non-value added costs visible, defining
what is value added versus what is non-value added can be problematic.
Regardless of how rigorous the process is there is always some level of
subjectivity
Successful application of VA tends to be restricted to organisational
environments that are team-based and collaborative. Usually, these
environments already have existing structures that combine to foster a culture
of innovation, creativity and problem-solving.
 Activity VA can often become a 'people issue'. Generally employees do not
like to be labelled as performing non-value added activities, therefore, labelling
could potentially become a threat to job security or reputation.
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 Measuring performance

The value can be expressed as

 Performance capability/cost,
 Function/cost. Function and design value benchmark
questions: does it contribute value? Are its cost proportionate
to its usefulness? Does it need all its features? Is there
anything better for the intended use?
 Cost benchmark questions relating to cost: can a usable part
be made by a lower-cost method? Do materials, reasonable
labour, overheads and profit total its cost?
 Supply benchmark questions: can a standard product be
found that will be usable? Can another dependable supplier
provide it for less? Is anyone buying it for less?

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 Generation and Capture of Value in Supply Chains

Only by understanding the limitations around existing measures of

performance, and the nature of value for organisations and
customers, can purchasers hope to demonstrate the effectiveness
and efficiency of its output. Failure to use the concept of value
risks procurement being constrained, and ultimately threatened,
by not being assessed or appreciated for its broader contribution.
For creation of value to SC, we will consider five common
procurement strategies, namely, Aggregation, Standardisation,
Category management, Outsourcing, and Relationship
management and three major tools - Specification, Tenders,
and Contracts.

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 Generation and Capture of Value in SC- Aggregation

Lower costs from reduced number of orders & lower stock holding. Longer
production runs, more efficient supply chain and logistics operations. Lower
Cost procurement and planning costs.

Lower pricing reflecting lower cost base. More significant purchase volumes
Price creates more market interest and more competitive pressure.

Risk Lower operational risks, quality losses and operational variability.

Downtime due to stock-out reduced. Lower level of inventory relative to

Time activity levels, higher stock-turn.

Innovation Limited or no impact on innovation

Market Market knowledge from tendering. How different supplier’s value

knowledge volumes of business – value chain analysis. Cost modelling.

Aggregation as a Value Strategy

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 Generation and Capture of Value in SC- Standardisation
Significant reductions in stocking levels because of reduced item variety. Opportunity to
explore consignment stocking. Reduced number of suppliers for purchasing to handle.
Cost Further savings in acquisition costs because of reduced supply base resulting in lower
order & invoice handling. Reductions in training costs because fewer variants. Enables
aggregation.

Very significant reduction in input prices because of much higher volumes but also
Price reduced selling costs for the suppliers. Enables more competition for standard items and
consolidated volumes.

Further reduction in risk from stock-outs. Opportunity to negotiate preferred customer

status in case of supply limitations. Opportunity for negotiations of long term spares
Risk availability.. Reduced complexity reduces risk. Increased marketability – ease of transfer,
more credible competitive threat. Commercial risks diminished.

Lower downtime due to stock-outs. Fewer variants mean more staff are familiar with
equipment and repair time is reduced. Significantly fewer tenders are required for projects
Time and projects can be completed faster. Timescales for benefiting from innovations is greatly
reduced. Supply chain partners benefiting similarly.

Baselines established in standardisation process mean that innovations by current

Innovation suppliers or new suppliers can be more readily assessed for significant benefits. Less
time absorbed managing complexity.

Market As a by-product of the standardisation process tacit knowledge is codified and learning
takes place about what the customer values.
knowledge

Standardisation asMCIPS,
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PMP Strategy
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 Generation and Capture of Value in SC- Category Management

By carefully selecting categories, opportunities for substitution and innovation can be

examined for process and conversion benefits, reduced waste and losses, and environmental
Cost benefits. Greater depth of knowledge – stronger market awareness. Better anticipation of
supply chain and product/service changes. Greater opportunity to influence and shape events.
Translates to longer term cost reductions.
Category management can reduce input prices by revealing lower priced alternatives or by
Price increasing the competitive pressures from widening the range of potential suppliers or by
developing alternatives.
Knowledge risk reduced. Operational, financial and reputational risks all potentially reduced by
Risk greater market awareness and product or service knowledge.
Improved market knowledge increases pace of innovations and change management
Time capability. More strategic understanding and structure increases ability to manage change
securely.
Innovation depends upon numbers attempting it and the widest range of perspectives, and the
Innovation global marketplace provides ample opportunity. Stronger linkages to internal business
strategies increased dialogue and alignment enhances supplier contribution and innovation.
Market Category management provides a structured way to gain knowledge and learn about different
knowledge markets and to benefit from value arbitrage. Creates a subject body of knowledge. Category
Manager is the custodian of sourcing strategy on behalf of the organisation.

Category Management as a Value Strategy

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 Generation and Capture of Value in SC- Outsourcing

The outsourcing area cost are removed BUT the outsourced service supplier
Cost must now be required to add value in the same way internal function had to.
Outsource supplier has aggregation benefits (supply chain, technology or skills).
The outsourced services now become input prices that need to be assessed in
Price terms of the added value created by the supplier of the outsourced service.
Economics of scale. Price becomes an explicit measure.
The outsource supplier will carry the financial risk (proxy value) but based on the
Risk supply chain value model, risk will be transferred to the buyer who must ensure
the delivery of real value from the outsource supplier.
An outsource supplier should be able to deliver improved value far more quickly
Time that could be achieved in-house. Service terms are more explicit.
Because the outsourced service suppliers will major in the service, immediate
Innovation and then medium to long term innovation can be expected.
Market Potentially the external supplier’s greater knowledge will enhance that of the
knowledge buying organisation.

Outsourcing as a Value Strategy

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 Generation and Capture of Value in SC- Relationship Management

Using term contracts as a vehicle, relationship management seeks to harness

Cost both parties knowledge and expertise to take out costs across the supply chain.

Where the relationship results in cost reductions in the suppliers’ value

Price generation processes, the buyer would expect to achieve lower input prices
without compromising the suppliers margin.
A key objective of relationship management is to provide a structure that will
Risk better identify risk in the supply chain and, therefore, reduce it for both parties.
Customer and supplier intimacy reduces risk.
By managing the on-going relationship and sharing more information, the
Time dynamics of the supply chain are improved and wasted time is reduced. Cultural
barriers are reduced. Communication is more efficient.
By managing the relationship, innovations by suppliers will be picked up sooner
Innovation and often ahead of the competition. Often preferential access can be secured.

Market Suppliers are a source of market intellegent. Create the ability to generate new
knowledge knowledge and insights by working together.

Relationship Management as a Value Strategy

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Q7. Purchasing can add value. Explain with example.
Q8. Define the Costs of acquiring (Purchasing/producing) stock
and holding stock. How to reduce inventory costs.
Q9. Discuss the Generation and Capture of Value in Supply
Chains.
Q10. Discuss the Basic model of Porter’s value chain with
example.

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