SCM Measurement

SCM Measurement

Introduction to SCM Measurement

Measuring the performance in the supply chain management, control is no longer based on ownership only, but it also focuses on  networking across interfaces, such that the measurement system may reflect a system of measuring the non-measurable. It is important that the activities not under the direct control of an individual company needs to be measured and controlled (by the manufacturer and its supply chain partners), thereby making the supply chain transparent, to a level not experienced before and leading the way for performance improvements. The sole objective is to outline the relevance of research into supply chain measurement systems. Thereby suggestions are developed about the specific content and approach that research may need to take in aiming to contribute to the improvement of the competitiveness of supply chains.

SCM is majorly characterized by control based on networking and integration of processes across functional, geographical and organizational interfaces. The primary focus on interfaces in the operational process as opposed to the traditional approach of control based on ownership and vertical integration with a view of the person is a step higher in the hierarchy. There are a lot consequences of The adoption of the supply chain approach for individual sets of business activities, like logistics activities, measurement and control of activities in the supply chain.

Complexity in defining supply chain

• Supply chains consist of multiple layers of companies.
• Companies might get involved in multiple supply chains and the network, thus, is partial.
• Integration is no longer based on large investments vertical integration, but it is based rather on interfaces
• The networks have become temporal due to which exit and entry barriers are lowered since capital investments can be shared among players.
• Format of the supply chain may change over time
• All interfaces in the supply chain does not require the same amount of integration, and close co-ordination.
• Amount of management attention needed for a particular interface is dependent on various factors

All these characteristics of organization have their post effects on the measurement of performance of activities in the chain. One of the critical challenge for organization may be developed and implement new measurement systems which helps to direct management attention and effort for improvement in the modem supply chain operating format.

New Approach to Performance Measurement

Various studies have been developed indicating how supply chain integration contributes to the growth of multiple and individual players in the supply chain. Van Hoek indicated that the contribution to customization of individual logistics service suppliers can be extended if they integrate upstream into the chain of their manufacturing clients by offering postponed annual manufacturing and related activities as an extension of transport and warehousing services.

New Measurement Approach

It has been often said that supply chain measurement may use integrated measures that are cross-functional and can be applied to the entire process (e.g., time from cash to cash). Therefore to avoid optimization at one point in the chain it is important to consider potential consequences at other points in the chain. In the set of management components of the supply chain  control involving internationalized use of  performance measurement in the chain together with planning, in the set of management components of the supply chain.

Therefore the objective of measurement and control in the supply chain is to offer a set of actions that can be taken in improving performance and planning competitiveness-enhancing efforts to the management. This approach is also referred as design-oriented approach in management control literature.

The three steps considered fundamental to the development of a new measurement approach to provide input to the control of supply chains are,

1. Provide Context for Measurement: We extend the supply chain definition to provide a context for measurement  since existing definitions do not explicitly provide a basis for measurement.
2. Developing New Measure: Development of new measures and the development of new benchmarks, based on these measures for developing the new measurement format, there are various aspects of the supply chain can affect the specific mix of measures used. In which case the position of players in the chain affects their contribution, relevant measures, level of integration such that the strategic approach may affect the relevance of measures. Here creating benchmarks on the basis of new measurement systems contribute to directing management effort in optimizing the supply chain.
3. Developing Tools to support implementation: Development of tools help support the implementation of new measurement approach is a crucial final step leading for actual application of new measurement approaches. Note that the tools cannot be limited to the measurement system itself they must also include strategic trade-off and planning frameworks in order to assure executive “buy-in” and commitment and initiate actual improvement processes in the supply chain process.

Moving towards the New Approach

Kaplan and Cooper (1997) specified the need for performance measurement to start driving performance improvement and move away from the passive administrative tradition. To begin with a new development of supply chain measurement format was developed.

This highlights the selection of relevant measures and a measurement approach, based on the strategic context and operational contribution of players in the supply chain competitiveness. Vertical bars in the figure reflects possible contributions of players in the chain to overall chain competitiveness. Cost savings, customer service and overall chain integration are used, as they may reflect basic strategies for players in the chain  where horizontal bars reflects the stage of development of logistics in an organisation, developed by Bowersox and Closs (1996) as a set of activities contributing to market creation.

Framework for SCM Measurement

The figure indicates how a supply chain approach to performance measurement, and the content of a measurement system may differ, depending on the supply chain operating format and the strategy approach or the evolution of strategies. The challenge is to develop findings that can contribute to the actual generation of a supply chain measurement system. The result may indicate that the managers could see the areas where supply chain performance could be improved, so that they focus attention, leading to dramatically high new standards of performance, measurable at present.

Note, Supply Chain Metrics (or measurements) are used to track Supply Chain performance. They can help you understand how a company is operating. Supply Chain Measurement can cover many areas including Procurement, Production, Distribution, Warehousing, Transportation and Customer Service.

Supply Chain Balanced Scorecard

Supply Chain Balanced Scorecard tracks a limited number of key metrics  such that these metrics are closely aligned to the company’s strategic objectives. The measurements usually cover 4 areas,

• Financial – Like cost of manufacturing, warehousing, transportation etc.
• Customer – Like Order Fill Rate, Backorder Levels, OnTime Delivery.
• Internal Business – Like Adherence-To-Plan, Forecast Error.
• Training: Like in house Training Hours, APICS Membership/Certification

Key Terms

Inventory Replenishment Cycle Time – It measures the Manufacturing Cycle Time plus the time included to deploy the product to the appropriate distribution center.

Cash to Cash Cycle Time – Number of days between paying for Raw Materials and getting paid for product. Calculated by Inventory Days of Supply plus Days of Sales Outstanding minus Average Payment Period for Material.

Supply Chain Cycle Time – Total time taken to satisfy a customer order if all inventory levels were zero. It is calculated by adding up the longest lead times in each stage of the cycle.

Defects Per Million Opportunities (DPMO)

DPMO in Six Sigma is used to calculate the amount of defects in a process per one million opportunities.

DPMO = (Total Number of Defects / Total Number of Opportunities for a Defect) x 1 Million.

Challenge here is determining exactly what qualifies as a defect such that some defects can pass through a quality inspection and have little impact on the end product where on the other hand other defects can result in re-work or scrap. DPMO is sometimes used instead of Defect per Unit to allow for comparison between processes with different levels of complexity.

Primarily, Six Sigma uses statistical analysis to measure a company’s performance by identifying defects in a manufacturing process. The primary goal of Six Sigma is to reduce process output variation to positive or negative six standard deviations. This results in no more than 3.4 defects per million opportunities.