Chapter 14 performance measurement

Traditional Performance MeasuresUse of Organization Costs, Revenue, & Profitability Measures Use of Performance Standards & Variances Use of Firm-Wide Productivity & Utilization Measure

CHAPTER 14

PERFORMANCE MEASUREMENT

Learning Objectives Learning Objectives

You should be able to:

 Describe why firms need to measure & assess

Traditional Performance Measures

Use of Organization Costs,

Revenue, & Profitability

Measures

Use of Performance Standards &

Variances

Use of Firm-Wide Productivity &

Utilization Measures World-Class Performance Measurement Systems Developing World-Class Performance Measures

SC Performance Measurement Systems Specific Chain Performance Measures

The Balanced Scorecard The SC Operations

Reference Model

“ You can’t improve what you can’t measure ”

measurement- more likely to achieve

leadership positions & twice as likely to

handle a major change successfully

company to company

complicates performance measurement

communicated to all members of the SC

Viewing the SC as a Competitive Weapon

Understanding End Customers- SCs need to look at each segment of

the market they serve & determine the needs of those customers.

 Variety of products required

 Quantity & delivery frequency needed

 Service level desired

 Product quality desired

 Price of the products

Understanding SC Partner Requirements- SC strategies must consider

the potential trade-offs existing between the:

 Cost

 Quality

 Quantity

 Service

Viewing the SC as a Competitive Weapon- Cont

Adjusting SC Member Capabilities

 SC members audit their capabilities & those of their

supply partners to determine if what they do is

consistent with the needs of the end customers & the SC.

 Matching SC capabilities to end-customer requirements means that firms & their partners must continually

reassess their performance with respect to

requirements.

 The best SC performers are more responsive to

customer needs, quicker to anticipate changes in the

markets, & much better at controlling costs.

Traditional Performance Measures

Traditional Performance Measures

cost-based information do not reflect the

underlying performance of the productive

systems of an organization; cost & profit

information can be hidden or

manipulated

current stock prices do not necessarily

reflect that the firm is performing well

important, cannot adequately capture a

firm’s ability to excel in these areas

Traditional Performance Measures- Cont.

Use of Organization Costs, Revenue, & Profitability

Measures- Several problems are associated with using

these measures to gauge performance, for example:

 windfall profits that occur when prices suddenly rise

due to supply interruptions, caused for the most part by uncontrollable environmental conditions.

Another problem is the difficulty, to attribute cost, revenue,

or profit contributions to the various functional units or

business units

Allocating costs based on a department’s percentage of

direct labor hours causes managers to waste time trying to

reduce direct labor.

Traditional Performance Measures- Cont.

Use of Performance Standards & Variances

 Establishing standards for comparison purposes can

be trouble-some

• Employees & managers do whatever it takes to reach the goal

• Shoddy work

• “Cooking” the books

 Performance variance - the difference between the standard & actual performance

 Managers can be pressured to find ways to make up these variances, resulting in decisions that may not

be in the long-term best interests of the firm.

Traditional Performance Measures- Cont.

Use of Firm-Wide Productivity & Utilization Measures-

useful but have the same problems as revenues, costs, & profits

 Decisions made to increase productivity may prove

to actually increase a firm’s costs & reduce quality.

 Tendency to continue producing & adding to

inventory to keep machines & people busy

 Less time is spent doing preventive maintenance & training for greater performance & profits in future.

 Traditional performance measures also tend to be

short-term oriented

World-Class Performance Measurement Systems

Developing World-Class Performance Measures

required capabilities

performance over time

describe each area’s capabilities

that must be implemented

measures to be used

system

World-Class Performance Measurement Systems

SC Performance Measurement Systems

Performance measurement systems must:

 Link SC trading partners to achieve breakthrough

performance in satisfying the end users

 Overlay the entire SC to assure that all contribute to SC strategy.

In a successful chain, members jointly agree on a SC performance

measurement system

SC Performance Measurement Systems- Cont.

Specific Supply Chain Performance Measures

 Total SCM costs: cost to process orders; purchase &

manage inventories; & information systems

 SC cash-to-cash cycle time: Average # of days between

paying for materials and getting paid by SC partners

 SC production flexibility: average time required to provide an unplanned 20 % increase in production

 SC delivery performance: average % of orders filled by

requested delivery date

 SC perfect order fulfillment performance: average % of

orders that arrive on time, complete, and damage free

 Supply chain e-business performance: average % of

electronic orders received for all supply chain members

The Balanced Scorecard

Balanced scorecard (BSC) developed

by Kaplan and Norton to align an

organization’s performance measures

with its strategic plan and goals The

BSC framework consists of four

The Balanced Scorecard- Cont.

Vision and Strategy

Objectives Measures Targets Initiatives

FINANCIAL

“To succeed financially, how should

we appear to our

shareholders?

”

Objectives Measures Targets Initiatives

LEARNING AND GROWTH

“To achieve our vision, how will we sustain our ability to change and improve?”

Objectives Measures Targets Initiatives

Objectives Measures Targets Initiatives

INTERNAL BUSINESS PROCESS

“To satisfy our shareholders and customers, what business processes must we excel at?”

The Balanced Scorecard- Cont.

Supply Chain Operations Reference (SCOR) Model

Developed by the Supply-Chain

Council for supply chain management

diagnostic benchmarking, and

process improvement tool The SCOR

model separates supply chain

operations into 5 process categories:

Supply Chain Operations Reference Model- Cont.

Supply Chain Operations Reference Model- Cont.

Supply Chain Operations Reference Model- Cont.