The concept of supply chain management (SCM), according to Thomas and Griffin (1996) represents the most advanced state in the evolutionary development of purchasing, procurement and other supply chain activities. At the operational level, this brings together functions that are as old as commerce itself? seeking goods, buying them, storing them and distributing them. At the strategic level, SCM is a relatively new and rapidly expanding discipline that is transforming the way that manufacturing and non-manufacturing operations meet the needs of their customers.
Development of cross-functional teams aligns organizations with process oriented structure, which is much needed to realism a smooth flow of resources in a supply chain. As suggested by Trend and Monika (1994), such teams promote improved supply chain effectiveness. They minimize or eliminate functional and departmental boundaries and overcome the drawbacks of specialization, which according to Facets (1995), can distribute the knowledge of all value adding activities such that no one, including upper level managers, has complete control over the process.
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Such teams helped in the formation of modern supply chains by promoting greater integration of organizations with their suppliers ND customers. Supplier partnerships and strategic alliances refer to the co- operative and more exclusive relationships between organizations and their upstream suppliers and downstream customers. Today many firms have taken bold steps to break down both inter and intra firm barriers to form alliances, with the objective of reducing uncertainty and enhancing control of supply and distribution channels.
Such alliances are usually created to increase the financial and operational performance of each channel member through reductions in total cost and inventories and increased sharing of information (Malone ND Benton, 1997). Rather than concerning themselves only with price, manufacturers are looking to suppliers to work co-operatively in providing improved service, technological innovation and product design. This development has produced a significant impact by expanding the scope of SCM through greater integration of suppliers with organizations.
The growth and development of SCM is not driven only by internal motives, but by a number of external factors such as increasing globalization, reduced barriers to international trade, improvements in information availability, and environmental concerns. Furthermore, computer generated production schedules, increasing importance of controlling inventory, government regulations and actions such as the creation of a single European market, and the guidelines of GATE and WTFO have provided the stimulus for development of an existing trends in SCM.
Supply chain integration is needed to manage and control the flow in operating systems. Such flow control is associated with inventory control and activity system scheduling across the whole range of resource and time constraints. Supplementing this flow control, an operating system must try to meet the broad competitive and strategic objectives of laity, speed, dependability, flexibility and cost (Slack et al. , 1995; Sexagenarians et al. , 2001; Denton and Tonight, 2001). Control is also essential as both customer needs and supply chain performance might change with time.
To meet objectives, the output of the processes enabled by the supply chain must be measured and compared with a set of standards. In order to be controlled, the process parameter values need to be kept within a set limit and remain relatively constant. This will allow comparison of planned and actual parameter values, and once done, the parameter values can be influenced through certain reactive measures in order to improve the performance or re-align the monitored value to the defined value.
For example, an analysis of the layout of facilities could reveal the cause of long distribution time, high transportation and movement costs and inventory accumulation. Using suitable approaches like re-engineering facilities, problems can be tackled and close monitoring and subsequent improvements can be possible from analysis of the new design. Thus, control of processes in a supply chain is crucial in improving performance and can be achieved, at least in part, through measurement. Well- defined and controlled processes are essential to better SCM.
There are number of conceptual frame works and discussions on supply chain performance measurements in the literature; however, there is a lack of empirical analysis and case studies on performance metrics and measurements in a supply chain environment. We will discuss the background for the research, review the selected literature on supply chain performance metrics and measurements, develop a framework based on the literature and an empirical analysis, and finally, summarize the findings and conclusions. It is important to measure the performance of the complete supply chain and the individual processes.
The performance measurement system should be based on the strategy, value drivers and important goals of the companies and the whole supply chain. Performance measurement provides information for management and decision makers, enable identifying the success and potential of management strategies and facilitating the understanding of the situation. In addition performance measurement assists in directing management attention, revising company goals, and re-engineering business processes. SC performance measurement is helpful in the continuous improvement of SCM. Chain 2003). According Melvyn et al. 2004) the performance metrics have three basic functions: control, communication and improvement. Control means that the metrics enable managers and workers to evaluate and control the performance of the resources. The performance is communicated for internal needs and external stakeholders’ purposes by the metrics. Improvement means the possibility to identify the gaps between performance and expectations and to indemnify the areas where the development work is needed. (Melvyn et al. 2004). Sexagenarians et al. 2001) stated that there is a great need of study measures and metrics in the context of following reasons: . Lack of balanced approach. The importance of financial and non-financial measures have been realized, but typically the companies have failed to create the balance between those. Financial performance measurements are important for strategic decisions and external reporting, and non-financial measures handle more day-to-day control of manufacturing and distribution operation. 2. Lack of understanding on deciding on the number of metrics to be used.
A study has indicated that by 1941 about half of US companies were using budgetary control in one form or other and by 1958, over 95 % of the companies, budgets were used for overall control of company performance (Bourne et al. , 2003). These accounting eased performance measures were financially based, internally focused, backward looking and more concerned with local departmental performance than with the overall health or performance of the business (Bourne et al. , 2003). These traditional financially-based performance measurement systems failed to measure and integrate all the relevant factors critical to business success.
By the sass, traditional accounting measures were being criticized as inappropriate for managing businesses of the day. The mid-1980 was a turning point in the performance measurement literature, as it marked the beginning of the second phase. This phase as associated with the growth of global business activities and the changes brought about by such growth. In the late sass, some frameworks, which attempted to present a broader view of performance measurement started to appear (Gomes et al. , 2004).
They underscored the need for the alignment of financial and non-financial measures in order to be in accordance with business strategy. The emphasis was on the development of better integrated performance measurement systems. The structure of the business organization also evolved during this period. The early 19th century saw the birth of systematic large organizations. During the sass’s the business organizations became global and sass’s were significant with automation of business processes. The sass’s saw the emergence of e-commerce and boarder less business activities.
MS also changed with this evolution of business organization from cost accounting system (before sass), mixed financial and non-financial systems (sass’s) to balance integrated approach (sass’s). Table 1 summarizes the evolution of SCAM in an organizational context. Table 1 . Evolution of MS in an organizational context (Gomes et al. , 2004 and Morgan, 2007) Period Characteristics of business organization Characteristics of MS Before 1980 Systematic large organizations I. Cost Accounting orientation. It. Retroactive approach and results used to promote organizational efficiency, iii. Acclimate budgeting and attract capital from external entities ‘v. Performance measurement dominated by transaction costs and profit v. Determination 1980- 1990 Business organizations became global I. Cost Accounting orientation it. Retroactive approach and results used to promote organizational efficiency. Iii. Enhanced to include operations and value adding perspectives. 1990 – 2000 Automation of business processes I. A mixed financial and non-financial orientation. It. A mixed retroactive and proactive approach. Iii. Results are used to manage the entire organization. ‘v.
MS enhanced to include process, quality & customer focus 2000 – 2010 e-commerce and borderless business activities I. A balanced and integrated orientation. I’. A more proactive approach. Iii. Results are used to enhance organizational responsiveness. Lb. Performance measurement enhanced to give a balanced view of the organization and included the SC & inter-process activities. Literature survey indicates development of a number of Performance Measurement Models since sass. Most of the models have gone through some empirical testing ND some have only theoretical developments.
The most widely cited performance measurement systems are the SMART (1988), the performance measurement matrix (1989), the Balanced Scorecard (1992), and the integrated dynamic MS (1997). In the Indian context, there have been many attempts to measure the performance at the organizational level, but very few attempts have been made to measure the performance at inter-organizational level (Sad and Patella, 2006). Table 2 lists the major Performance Measurement Models based on literature survey. Table 2. List of Performance Measurement Models (Tactical et al. 010 and Morgan, 2007) Name of the model Period of introduction The ROI, ROE, ROCK and detentes. Before sass The economic value added model (EVA) The activity based costing (BBC) – the activity based management (BAM,1988) The strategic measurement analysis and reporting technique (SMART,1988) The supportive performance measures (SPA, 1989) The customer value analysis (C.V.,1990) The performance measurement questionnaire (MGM,1990) 1980-1990 The results and determinants framework (RDF,1991) The balanced scorecard (BBS,1992) The service-profit chain (SSP,1994) The return on quality approach (ARQ,1995) 1991-1995
The Cambridge performance measurement framework (CPM,1996) The consistent performance measurement system (CPM,1996) The integrated performance measurement system (IMPS,1997) The comparative business scorecard (CBS) The integrated performance measurement framework (MIFF,1998) The business excellence model (BEMA,1999) The dynamic performance measurement system (DUMP,2000) 1996-2000 The action-profit linkage model (PAL,2001) The manufacturing system design decomposition (MASS,2001) The performance prism (UP,2001) The performance planning value chain (PVC,2004) The capability economic value of intangible and tangible assets model (CAVEAT,20041) 001-2004 The performance, development, growth benchmarking system (PEGS,2006) The unused capacity decomposition framework (SCUD,2007) 2006-2007 3. PURPOSE OF PERFORMANCE MEASUREMENTS The information from the performance measurement is needed especially in top management level, but also several kinds of SCM measures are needed at every management and operational level. The management’s main interest is to know how efficient the SCM is. Also several management levels are interested in knowing about SCM capability and performance. Performance measuring is also essential when the SC is developed. Performance measurement provides information on how effective the development work has been. In manufacturing companies performance measurement provides information for the monitoring, control, evaluation and feedback functions for operations management. When implementing and executing a new business strategy, the performance measurement provides important feedback about the improvement.
Good performance measurement system also generates more open communication between people in organizations and in the network and hence improves the performance. (De Walla 2003, Kaplan 1996, Lehman et al. 2004, Newly et al. 994, Sexagenarians & Kobo 2007). Sexagenarians & Kobo (2007) presented following purposes of a performance measurement system: Identifying success Identifying whether customer needs are met Better understanding of processes Identifying bottlenecks, waste, problems and improvement opportunities Providing factual decisions Enabling progress Tracking progress Facilitating a more open and transparent communication and co-operation. 4. DESIGNING AND DEVELOPING THE PERFORMANCE MATRIX The performance measurement metrics should be designed and developed separately for each case. The measurement system should reinforce the firm’s tragedy as well as guide the organization to improve customer and shareholder satisfaction and competitiveness. When designing and developing the supply chain performance metrics, the strategy and goals of entire supply chain need to be understood. The network should pursue shared goals and avoid sub-optimization. (Newly et al. 1995, startled H. & Killer C. 2008). Startled H. & Killer (2008) presented some important issues when assessing the supply chain performance: Definition of indicators.
As the supply chains consist of several companies and functions, a common definition of all the measures is obligatory. The indicators should be understood and applied in the same way in every entity of the chain. Perspective on indicators. The two partners in supply chain may have a different perspective to the measures depending on their role in the chain. For example, a supplier may want to calculate the order fill rate based on the order receipt date and the ship date. The customer, on the other hand, might want to calculate it based on the requested date and the receipt date at the customer’s warehouse. This will lead different results with respect to an agreed order fill rate.
The both parties should agree on one perspective. Capturing of data. The data have to be captured in a consistent way throughout the supply chain. The units should be consistent and the reliable and up-to-date data should be available in adequate systems for the supply chain partners. Confidentiality. Confidentiality need to be kept in mind when the supply chain consists of more than one company. The individual companies might not want to give complete information about their internal processes and the targets to their partners. According Gallatin (1996) performance measurement system should have the following characteristics (Gallatin & Noble 1996):
A clearly defined set of improvement areas and associated performance measures that are related to company strategy and objectives Stresses the role of time as a strategic performance measure Allows dynamic updating of the improvement areas Links the areas of improvement and performance measurement to the factory shop floor Is used as an improvement tool rather than Just a monitoring and controlling tool Considers process improvements efforts as a basic integrated part of the system Utilizes any improvements in performance (I. E. Going beyond Just achieving improvement and actively planning for the utilization of benefits from an overall many perspective) Uses historical data of the company to set improvement objectives and to help achieve such objectives guards against sub-optimization Provides practical tools that could be used to achieve all of the above.
Wisher (1991) presented nine-steps for developing a performance measurement metrics (Wisher & Facets 1991): 1 . Clearly define the firm’s mission statement. 2. Identify the firm’s strategic objectives using the mission statement as a guide (profitability, market share, quality, cost, flexibility, dependability, and innovation). 3. Develop an understanding of each functional area’s role in achieving the various tragic objectives. 4. For each functional area, develop global performance measures capable of defining the firm’s overall competitive position to top management. 5. Communicate strategic objectives and performance goals to lower levels in the organization. Establish more specific performance criteria at each level. 6.
Assure consistency with strategic objectives among the performance criteria used at each level. 7. Assure the compatibility of performance measures used in all functional areas. 8. Use the performance measurement system to identify competitive position, locate problem areas, assist the firm in updating strategic objectives and making tactical decisions to achieve these objectives, and supply feedback after the decisions are implemented. 9. Periodically re-evaluate the appropriateness of the established performance measurement system in view of the current competitive environment. Thacker (2009) proposed some features for the performance metrics used in SC performance measurement (Thacker et al. 009): Measurement system should have the capability to capture the essence of organizational performance Measurement system should ensure an appropriate assignment of metrics to the areas where they loud be most appropriate Minimum deviations should exist between the organizational goals and measurement goals Metrics should reflect an adequate balance between financial and nonofficial measures Measures should reflect their clear linkages with various levels of decision making such as strategic, tactical, and operational level. Newly (1995) proposed that the system can be analyses by exploring issues such as (Newly et al. 1995): Have all the appropriate elements (internal, external, financial, nonofficial) been covered? Have measures which relate to the rate of improvement been introduced? Have measures which relate to both the long- and short-term objectives of the business been introduced? Have the measures been integrated, both vertically and horizontally? Do any of the measures conflict with one another? If the measures are not aligned to the network strategy and goals, it may happen that one supply chain entity pursue a conflicting goal.
The reduction in order cycle time leads to reduction in supply chain response time, and as such is an important performance measure and source of competitive advantage it directly interacts with customer service in determining imitativeness. 5. 1. 3. The customer order path The path that an order traverses is another important measure whereby the time spent in different channels can be determined. By analyzing the customer order path, non-value adding activities can be identified so that suitable steps can be taken to eliminate them. 5. 2 Evaluation of supply link Traditionally supplier performance measures were based on price variation rejects on receipt and on time delivery.
For many years, the selection of suppliers and product choice were mainly based on price competition with less attention afforded to other criteria like quality, reliability, etc. More recently, the whole approach to evaluating suppliers has undergone drastic change. Evaluation of suppliers: The evaluation of suppliers in the context of the supply chain (Efficiency, flow, integration, responsiveness and customer satisfaction) involves measures important at the strategic, operational and tactical level. Strategic level measures include lead time against industry norm, Quality level, Cost saving initiatives, and supplier pricing against market.
Tactical level measures include the efficiency of purchase order cycle time, booking in procedures, cash flow, quality assurance methodology and capacity flexibility. Operational level measures include ability in day to day technical representation, adherence to developed schedule, ability to avoid complaints and achievement of defect free deliveries. Purchasing and supply management must analyze on a periodic basis their supplier abilities to meet the firm’s long-term needs. The areas that need particular attention include the supplier’s general growth plans, future design capability in relevant areas, role of purchasing and supply management in the supplier’s strategic planning, Potential for future production capacity and financial ability to support