CHAPTER 15: Performance Measurement

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Nov 18, 2013 (3 years and 11 months ago)

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CHAPTER 15:

Performance Measurement

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Measurement system
objectives


Operational
assessment


Financial assessment

Overview of performance measurement

“If you don’t measure it,
you can’t manage it.”

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Monitoring

system performance by establishment
of appropriate metrics to track and report


Controlling

system performance by having
appropriate standards of performance relative to
metrics being monitored


Directing

employee focus on system performance
through motivation and reward


Improving shareholder value

through superior
logistics performance

Measurement system objectives related
to logistical operations

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The Balanced Scorecard is a comprehensive
system of performance assessment

Figure
15.1
The Balanced Scorecard

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Financial perspective


Profitability and return on
investment


Internal operations
perspective


Process quality, efficiency and
productivity


Customer perspective


Logistics service, quality and
satisfaction


Innovation and learning
perspective


Process improvement,
benchmarking and human
resource development

Measurement focus using a balance
scorecard approach

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Functional perspectives


Measuring customer
accommodation


Determining appropriate
metrics


Supply chain
comprehensive metrics


Benchmarking

Operational assessment

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Cost


Customer service


Quality


Productivity


Asset management


Functional perspective on logistics
measures includes these major categories

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Typically measured in total dollars spent


Total logistics cost (aka total landed cost)


Sum of order processing + inventory + transportation +
warehousing and materials handling + facility network


Few organizations have ability to measure total cost


Common to report cost as a


Percentage of sales volume


E.g. transportation cost as 15% of sales volume


Cost per unit of volume


E.g. loading cost as $5.50 per order

Cost is the most direct reflection of
logistics performance

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Availability


Organization’s
fill rate


Item fill rate


Line fill rate


Value fill rate


Order fill rate


Operational performance


Average order cycle time

is
average number of days elapsed
between order receipt and
delivery to customer


Order cycle consistency


On
-
time delivery

Customer service requires specific measures for
each element of the basic service platform

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Accuracy of work activities
performed


Damage frequency is the ratio
of number of damaged units to
the total number of units


Number of customer returns of
damaged or defective goods


Number of instances when
information is not available on
request


Number of instances when
inaccurate information is
discovered

Quality measures often include service
reliability performance

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Labor productivity


Units shipped per employee


Units received per
employee


Equipment downtime

Productivity is measured in terms of output
of goods compared with quantities of inputs

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Facilities and equipment


Capacity utilization


E.g. warehouse utilization of 80% is not shipping all it is capable of shipping


Downtime is the percentage of hours that equipment is not utilized


E.g. forklift with a 2% annual downtime


Inventory


Inventory turnover rate

is most common measure of performance


Days of supply

is the amount available to meet forecasted sales volume


E.g. 50 days of supply (100 units per day forecast and 5000 units on hand)


Return on assets and return on investment

Asset management considers utilization of capital
investments in facilities, equipment and inventory

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Vast majority of firms use this
metric



Some retail firms use this
metric



This metric is used for products
whose cost or selling price
changes significantly during
relatively short periods of time


E.g. gasoline inventory

Inventory turnover rate is measured
differently by different types of firms

Critical that average inventory use as
many data points as possible

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Example of common metrics by
category

Table
15.1
Typical Performance Metrics

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Perfect order

measures the effectiveness of the
overall integrated logistical performance


Ratio of perfect orders to the total number of orders
completed during the same time period


Absolute performance

provides a better
indication of how a firm’s performance impacts
customers


“To us, 99.5 percent on
-
time delivery would mean that
on a typical day, over 5,000 customers received late
orders.”


Customer satisfaction

measurement requires
monitoring, measuring and collecting information
from the customer

Measuring customer accommodation
requires an additional set of metrics

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Competitive basis

reflects the fundamental choice
between responsive or efficient logistics performance


Measurement focus

is a continuum ranging from
operational metrics to strategic metrics


Measurement frequency

is the need to monitor day
-
to
-
day
performance versus less frequent review to diagnose
performance problems

Determining appropriate metrics using
the framework in Figure 15.2

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Illustration of framework use showing
metric 2 is closer to measurement need

Figure
15.2 Illustration of
Measurement Framework

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Supply chain comprehensive metrics


Cash
-
to
-
cash conversion time


Time required to convert a dollar
spent on inventory into a dollar of
sales revenue


Inventory days of supply


Calendar days of sales available
based on recent sales activity


Dwell time


Ratio of days inventory sits idle to
the days it is productively used or
positioned


On
-
shelf in
-
stock percentage


Percentage of time a product is
available on the shelf in a store


Total supply chain cost


Sum of costs across all firms in
the supply chain


Supply chain response time


Time required for all firms to
recognize a fundamental shift in
demand, internalize that finding,
replan, and adjust output to meet
that demand

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Illustration of supply chain total cost
extending beyond an individual firm

Figure
15.3
Total Supply Chain Cost

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Critical aspect of performance measurement


“Are we staying competitive?”


Considers metrics and processes


Which organizations should we benchmark against?


Internal groups are easier to identify


Johnsons & Johnson has 150+ business units with ample opportunity to
share best practices


Provides little information about performance against the competition


Nonrestricted benchmarking compares metrics and processes to
best practices regardless of where the practice is found


Belief that learning is possible from
any

firm with outstanding performance

Benchmarking makes management aware of
state
-
of
-
the
-
art business practice

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High
-
achieving firms are more involved in
benchmarking than average
-
achieving firms

Table
15.2
Performance Benchmarking Differential

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Critical tools for financial
assessment


Segmentation of data


By channel, territory,
customer, product, and
supplier


Cost
-
revenue analysis


Strategic profit model

Financial assessment is needed to link supply
chain performance to financial results

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Accounting deficiencies
make this difficult


3 approaches are available
to identify and control
logistics expenses


Contribution


Net profit


Activity based costing

Cost
-
revenue analysis is needed to provide a
financial view of integrated logistics

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Costs are aggregated on a standard account
basis rather than activity basis


Inbound freight expense is deducted from gross
sales


Outbound freight is reported as an operating
expense


Freight is not reported as a specific cost


i.e. Products purchased on a delivered price basis


Failure to specify and assign inventory cost

Accounting practices to prepare financial
statements create some deficiencies

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Fixed costs

are those that do not directly change
with volume


Variable costs

are those that change as a result of
volume


Direct costs

are those specifically incurred
because of the existence of the segment of analysis


E.g. product, customer, channel


Indirect costs

exist because of more than one
segment of business

Contribution analysis requires all costs
be identified as fixed or variable

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Example of contribution analysis

Table
15.3
Contribution Margin Income Statement for Two Customers

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Net profit analysis requires all operating costs be
charged or allocated to an operating segment


Each segment must be
allocated its fair share of
costs


Example from Table 15.3
would require indirect fixed
cost of $41,000 to be
allocated to each segment


E.g. allocate based on
sales volume


Disagreements arise in
determining how to
allocate indirect costs


Allocations are arbitrary
and may result in
misleading financial
assessment


But, many indirect
expenses are not fixed


Rather they rise and fall
based on business demand
of operating segments

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Activity
-
based costing (ABC)

suggests costs be traced to
activities


Activities are then related to
product, process or customer
segments


Biggest challenge with the ABC
approach is identifying the
activities, related expenses and
drivers of expense

Activity
-
based costing is a partial
solution to arbitrary allocations

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Return on investment
(ROI)

is critical measure of
financial success


Return on net worth
(RONW)

measures
profitability of funds
invested by owners


Return on assets (ROA)

measures profitability
generated by managing
operational assets

Strategic profit model shows relationship of
income and balance sheet to ROA

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Illustration of strategic profit model with
example data

Figure
15.4
Strategic Profit Model

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Manage net profit margin
improvements


Net profit margin

is net profit
divided by net sales


Measures portion of each sales
dollar that is kept by the firm


Manage asset turnover
improvements


Asset turnover

is ratio of total
sales divided by total assets


Measures efficiency of
management utilization of assets

Two fundamental ways to improve
return on assets

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Model is very adaptable to a
spreadsheet


Can use SPM in combination
with other methods to examine
ROA for customer or product
segments


Table 15.4 provides an example


Other segment profitability and
ROI analyses can be conducted


Very useful framework for
relating logistics activities to
the overall financial objectives
of the organization

Applications of the strategic profit
model (SPM)

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Product B contributes a higher return
even though its gross margin is lower

Table
15.4
CMROI for Two Products

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Example showing ROA improvement if
inventory cost is reduced to $300

Figure
15.5
Strategic Profit Model (Inventory Reduction)

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Sarbanes
-
Oxley Act of 2002 (SOX)


Section 404 requires an internal control report to be filed along with corporate
annual report


Firms must have internal measurement capabilities that comply with
SEC requirements


SOX requires disclosure of all off
-
balance
-
sheet liabilities that have
material effect on financial reports


Vendor
-
managed inventories


Long
-
term purchase agreements


Slotting allowances


Also required to report any event that may have material effect on
financial reports


E.g. shipments with long lead times that may be held a international border

Requirements for financial reporting provide
more supply chain visibility to management

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Example metrics to validate financial
elements in columns 3 and 4

Adapted from Table
15.5

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Example metrics to validate financial
elements in columns 3 and 4 (continued)

Adapted from Table
15.5
(continued)

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Example metrics to validate financial
elements in columns 3 and 4 (continued)

Adapted from Table
15.5
(continued)