A framework for supply chain performance measurement

Abstract

Supply chain management (SCM) has been a major component of competitive strategy to enhance organizational productivity and profitability. The literature on SCM that deals with strategies and technologies for effectively managing a supply chain is quite vast. In recent years, organizational performance measurement and metrics have received much attention from researchers and practitioners. The role of these measures and metrics in the success of an organization cannot be overstated because they affect strategic, tactical and operational planning and control. Performance measurement and metrics have an important role to play in setting objectives, evaluating performance, and determining future courses of actions. Performance measurement and metrics pertaining to SCM have not received adequate attention from researchers or practitioners. We developed a framework to promote a better understanding of the importance of SCM performance measurement and metrics. Using the current literature and the results of an empirical study of selected British companies, we developed the framework presented herein, in hopes that it would stimulate more interest in this important area.

Introduction

By the late 1980s, outsourcing in US industries contributed to nearly 60% of the total product cost (Ballou, 1992). In the UK, a survey showed that 40% of the UK's gross domestic product was spent on distribution and logistics related activities (Department of Trade and Industry, UK, 1990). Such findings and developments present significant visible impact of distribution, purchasing, and supply management on company assets. Managers in many industries, especially those in manufacturing, are trying to better manage supply chains. Important techniques/methodologies like just-in-time (JIT), total quality management, lean production, computer generated enterprise resource planning schedule (ERP) and Kaizen have been embraced. 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 organisations with process oriented structure, which is much needed to realise a smooth flow of resources in a supply chain. As suggested by Trent and Monczka (1994), such teams promote improved supply chain effectiveness. They minimise or eliminate functional and departmental boundaries and overcome the drawbacks of specialisation, which according to Fawcett (1995), can distribute the knowledge of all value adding activities such that no one, including upper level managers, has complete control over the process. Such teams helped in the formation of modern supply chains by promoting greater integration of organisations with their suppliers and customers.

Supplier partnerships and strategic alliances refer to the co-operative and more exclusive relationships between organisations 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 (Maloni and 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 organisations.

The growth and development of SCM is not driven only by internal motives, but by a number of external factors such as increasing globalisation, 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 GATT and WTO have provided the stimulus for development of and 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 quality, speed, dependability, flexibility and cost (Slack et al., 1995; Gunasekaran et al., 2001; De Toni and Tonchia, 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 frameworks 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.