Chapter 14 performance measurement

CHAPTER 14 PERFORMANCE MEASUREMENT Learning Objectives You should be able to:  Describe why firms need to measure & assess performance  Discuss the merits of financial & non-financial performance measures  List a number of traditional & world-class performance measures  Describe how the balanced scorecard & the SCOR models work  Describe how to design a supply chain performance measurement system MBA Nguyen Phi Hoang@2015_SCM Chapter 14 Outline Viewing the Supply Chain (SC) as a Competitive Weapon Understanding End Customers Understanding SC Partner Requirements Adjusting SC Member Capabilities Traditional Performance Measures Use of Organization Costs, Revenue, & Profitability Measures Use of Performance Standards & Variances MBA Nguyen Phi Hoang@2015_SCM 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 Introduction “You can’t improve what you can’t measure”  Companies using performance measurement- more likely to achieve leadership positions & twice as likely to handle a major change successfully  Performance measurements vary from company to company  World-class status may initially cost more  Adding several tiers of suppliers & customers complicates performance measurement  Performance measures must be visible & communicated to all members of the SC MBA Nguyen Phi Hoang@2015_SCM 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 MBA Nguyen Phi Hoang@2015_SCM 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 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 MBA Nguyen Phi Hoang@2015_SCM Traditional Performance Measures Traditional Performance Measures  Financial statements & traditional costbased information not reflect the underlying performance of the productive systems of an organization; cost & profit information can be hidden or manipulated  Decisions made solely to maximize current stock prices not necessarily reflect that the firm is performing well  Financial performance measures, while important, cannot adequately capture a firm’s ability to excel in these areas MBA Nguyen Phi Hoang@2015_SCM 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 MBA Nguyen Phi Hoang@2015_SCM Traditional Performance Measures- Cont Use of Performance Standards & Variances  Establishing standards for comparison purposes can be trouble-some • Employees & managers 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 MBA Nguyen Phi Hoang@2015_SCM Traditional Performance Measures- Cont Use of Firm-Wide Productivity & Utilization Measuresuseful 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 MBA Nguyen Phi Hoang@2015_SCM 10 World-Class Performance Measurement Systems Developing World-Class Performance Measures  Identify the firm’s strategic objectives  Develop an understanding of each functional area’s role & the required capabilities  Identify internal & external trends likely to affect the firm & its performance over time  For each functional area, develop performance measures that describe each area’s capabilities  Document current performance measures & identify changes that must be implemented  Assure the compatibility & strategic focus of the performance measures to be used  Implement the new performance system  Periodically reevaluate the firm’s performance measurement system MBA Nguyen Phi Hoang@2015_SCM 11 World-Class Performance Measurement Systems MBA Nguyen Phi Hoang@2015_SCM 12 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 MBA Nguyen Phi Hoang@2015_SCM 13 SC Performance Measurement SystemsCont 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 MBA Nguyen Phi Hoang@2015_SCM 14 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 perspectives:  Financial perspective  Internal business process perspective  Customer perspective  Learning and growth perspective MBA Nguyen Phi Hoang@2015_SCM 15 The Balanced ScorecardCont FINANCIAL Objectives “To succeed financially, how should we appear to our shareholders? ” Measures Targets Initiatives CUSTOMER “To achieve our vision, how should we appear to our customers?” Objectives INTERNAL BUSINESS PROCESS Measures Targets Initiatives “To satisfy our Objectives shareholders and customers, what business processes must we excel at?” Vision and Strategy LEARNING AND GROWTH “To achieve our vision, how will we sustain our ability to change and improve?” Objectives Measures Targets Initiatives Measures Targets Initiatives The Balanced ScorecardCont MBA Nguyen Phi Hoang@2015_SCM 17 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 process categories:      Plan Source Make Deliver Return MBA Nguyen Phi Hoang@2015_SCM 18 Supply Chain Operations Reference Model- Cont MBA Nguyen Phi Hoang@2015_SCM 19 Supply Chain Operations Reference Model- Cont MBA Nguyen Phi Hoang@2015_SCM 20 Supply Chain Operations Reference Model- Cont MBA Nguyen Phi Hoang@2015_SCM 21 ... Utilization Measures World-Class Performance Measurement Systems Developing World-Class Performance Measures SC Performance Measurement Systems Specific Chain Performance Measures The Balanced... the performance measures to be used  Implement the new performance system  Periodically reevaluate the firm’s performance measurement system MBA Nguyen Phi Hoang@2015_SCM 11 World-Class Performance. .. firms need to measure & assess performance  Discuss the merits of financial & non-financial performance measures  List a number of traditional & world-class performance measures  Describe