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The metrics that should be introduced to evaluate performance beyond the borders of the firm are discussed in the context of the following supply chain activities/processes:
(1) plan
(2) source
(3) make/assemble
(4) delivery/customer
You can see below an extended study:
1. Metrics for order planning
1.1. The order entry method
This method determines the way and extent to which customer specifications are converted into information exchanged along the supply chain.
1.2. Order lead-time
The total order cycle time, called order to delivery cycle time, refers to the time elapsed in between the receipt of customer order until the delivery of finished goods to the customer. 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 competitiveness.
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.
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 such growth. Supply chain partnership is a collaborative relationship between a buyer and seller which recognizes some degree of interdependence and cooperation on a specific project or for a specific purchase agreement. Such a partnership emphasizes direct, long-term association, encouraging mutual planning and problem solving efforts. Supplier partnerships have attracted the attention of practitioners and researchers. All have contended that partnership formation is vital in supply chain operations and as such for efficient and effective sourcing. Partnership maintenance is no less important. Performance evaluation of buyers or suppliers is simply not enough-relationships must be evaluated.
The parameters that need to be considered in the evaluation of partnerships are the ones that promote and strengthen them. For example, the level of assistance in mutual problem solving is indicative of the strength of supplier partnerships. Partnership evaluation based on such criteria will result in win–win partnerships leading to more efficient and more thoroughly integrated supply chains.
3. Measures and metrics at production level
After the order is planned and goods sourced, the next step in to make/assemble products. This is the activity carried out by organizations that own production sites, and their performance has a major impact on product cost, quality, speed of delivery and delivery reliability, and flexibility. As it is quite an important part of the supply chain, production needs to be measured and continuously improved. Suitable metrics for the production level are as follows:
Range of product and services: a plant that manufactures a broad product range is likely to introduce new products more slowly than plants with a narrow product range. Plants that can manufacture a wide range of products are likely to perform less well in the areas of value added per employee, speed and delivery reliability. This clearly suggests that product range affects supply chain performance.
Capacity utilization: From the above assertion, it is clear that the role-played by capacity in determining the level of activities in a supply chain is quite important. Many aspects of production performance, capacity utilization directly affects the speed of response to customer demand through its impact on flexibility, lead time and deliverability.
Effectiveness of scheduling techniques: Scheduling refers to the time or date on or by which activities are to be undertaken. Such fixing determines the manner in which resources will flow in an operating system, the effectiveness of which has an important impact on production and thus supply chain performance. For example, scheduling techniques such as JIT, MRP and ERP have implications on purchasing, throughput time and batch size. In case of the supply chain, since scheduling depends heavily on customer demands and supplier performance, the scheduling tools should be viewed in that context.
4. Evaluation of delivery link
The link in a supply chain that directly impacts customers is delivery. It is a primary determinant of customer satisfaction; hence, measuring and improving delivery is always desirable to increase competitiveness. Delivery by its very nature takes place in a dynamic and ever-changing environment, making the study and subsequent improvement of a distribution system difficult. It should be noted that it is not an easy matter to anticipate how changes to one of the major elements within a distribution structure will affect the system as a whole.
4.1. Measures for delivery performance evaluation
An increase in a delivery performance is possible through a reduction in lead time attributes. Another important aspect of delivery performance is on-time delivery. On-time delivery reflects whether perfect delivery has taken place or otherwise and is also a measure of customer service level. A similar concept, on time order fill, is a combination of delivery reliability and order completeness. Another aspect of delivery is the percentage of finished goods in transit, which if high signifies low inventory turns, leading to unnecessary increases in tied up capital. Various factors that can influence delivery speed include vehicle speed, driver reliability, frequency of delivery, and location of depots. An increase in efficiency in these areas can lead to a decrease in the inventory.
Number of faultless notes invoiced: An invoice shows the delivery date, time and condition under which goods were received. By comparing these with the previously made agreement, it can be determined whether perfect delivery has taken place or not, and areas of discrepancy can be identified so that improvements can be made.
Flexibility of delivery systems to meet particular customer needs: This refers to flexibility in meeting a particular customer delivery agreed place, agreed mode of delivery and with agreed upon customized packaging. This type of flexibility can influence the decision of customers to place orders, and thus can be regarded as important in enchanting and retaining customers.
4.2. Total distribution cost
Perhaps the most important research concerning logistics is going on in the area of design of efficient and cost effective distribution systems. For this, an understanding of total distribution cost is essential, so that proper trade-offs can be applied as a basis for planning and reassessment of distribution systems. The urgency of dealing with transportation cost signifies that since transportation cost accounts for more than half of the total logistics cost, more active research is needed in the area. To deal with distribution costs, measuring individual cost elements together with their impact on customer service encourages tradeoffs that lead to a more effective and efficient distribution system.
5. Measuring customer service and satisfaction
To a world class organization, a happy and satisfied customer is of the utmost importance. In a modern supply chain customers can reside next door or across the globe, and in either case they must be well served. Without a contented customer, the supply chain strategy cannot be deemed effective. To assess supply chain performance, supply chain metrics must center on customer satisfaction.
5.1. Flexibility
Of the factors by which supply chains compete, flexibility can be rightly regarded as a critical one. Being flexible means having the capability to provide products/services that meet the individual demands of customers. Some flexibility measures include: (i) product development cycle time, (ii) machine/toolset up time, (iii) economies of scope referring to the production of small quantities of wider range (e.g. JIT lot size) and (iv) number of Inventory turns.
5.2. Customer query time
Customer query time relates to the time it takes for a firm to respond to a customer query with the required information. It is not unusual for a customer to enquire about the status of order, potential problems on stock availability, or delivery. A fast and accurate response to those requests is essential in keeping customers satisfied.
5.3. Post transaction measures of customer service
The function of a supply chain does not end when goods are provided to the customer. Post transaction activities play an important role in customer service and provide valuable feedback that can be used to further improve supply chain performance.
6. Supply chain and logistics cost
The efficiency of a supply chain can be assessed using the total logistics cost- a financial measure. It is necessary to assess the financial impact of broad level strategies and practices that contribute to the flow of products in a supply chain. Since logistics cut across functional boundaries, care must be taken to assess the impact of actions to influence costs in one area in terms of their impact on costs associated with other areas. For example, a change in capacity has a major effect on cost associated with inventory and order processing.
6.1. Cost associated with assets and return on investment
Supply chain assets include accounts receivable, plant, property and equipment, and inventories. With increasing inflation and decreased liquidity, pressure is on firms to improve the productivity of capital - to make the assets sweat. In this regard it is essential to determine how the cost associated with each asset, combined with its turnover, affects total cash flow time. One way to address this is by expressing it as an average days required to turn cash invested in assets employed into cash collected from a customer. Thus, total cash flow time can be regarded as a metric to determine the productivity of assets in a supply chain. Once the total cash flow time is determined, this can be readily combined with profit to provide insight into the rate of return on investment (ROI). This determines the performance by top management is terms of earnings on the total capital invested in a business.
With customer service requirements constantly increasing, effective management of inventory in the supply chain is crucial. In a supply chain, the total cost associated with inventory can be broken down into the following:
Opportunity cost, consisting of warehousing, capital and storage; Cost associated with inventory at the incoming stock level and work in progress; Service costs, consisting of cost associated with stock management and insurance; Cost of finished goods including those in transit; Risk costs, consisting of cost associated with pilferage, deterioration, and damage; Cost associated with scrap and rework; and Cost associated with too little inventory accounting for lost sales/lost production.
6.2. Information processing cost
This includes costs such as those associated with order entry, order follow/updating, discounts, and invoicing. On the basis of survey results from various industries, identified information processing cost as the largest contributor to total logistics cost. The role of information technology is shifting from a general passive management enabler through databases, to a highly advanced process controller that can monitor activities and decide upon an appropriate route for information. Modern information technology, through its power to provide timely, accurate, and reliable information, has led to a greater integration of modern supply chains than possible by any other means
Customer Relationship Management (CRM) and Supplier Relationship Management (SRM) are the most accurate metrics for performance outside the firm.
