An Essay: Measurement and Supply Chain Management

Supply Chain Management (SCM) has been a major component of

competitive strategy to enhance organizational productivity and profitability
(Gunasekaran, 2004). However, the management of SCM faces challenges in
the choice and use of performance measurements (Keebler, et al., 1999)
(Shepherd & Gunter, 2006). In particular, globalisation contributed to further
challenges, as firms search for better ways to manage issues within SCM to
remain competitive (Gong, 2008). Agrawal (2012) argues that in SCM it is
important to select the right measurement that could potentially turn SCM
into a revenue generator instead of a cost center. First, there are arguments
to suggest that measurements are fragmented - both within and across
organizations and there is a lack of agreement of the standard metrics to be
used (Gunasekaran, 2001). Secondly, once measurement problems are
identified at an organisation level there are fewer description of how
problems can be communicated, understood and managed (Stadtler & Kilger,
2008). Thirdly, there is a lack of a universal viewsof universal views on
developing effective methods and tools that could be used across the supply
chains (Wisner, et al., 2015).
Several example and case studies have been used to establish the link
between SCM and profit maximisation in this study. Strengths and
weaknesses of measurements are discussed to provide a more objective and
quantifiable set of measurements that reflect the contribution that the
management function can make to the bottom line of an organisation. The
main question guiding this essay is how does the SCM measurements
affects the organizations bank balances?
Neely (1995) defines Performance Management (PM) as quantifying
effectiveness and efficiency. The term effectiveness here refers to the
ability of metrics to meet customers needs while the term efficiency refers
to the economic use of resources in time of measuring a predetermined level
of customers' satisfaction. In essence, Performance Measurements or metrics
are important management tools since organizations cannot manage what
they cannot measure (Kennerley & Neely, 2003). (Sink and Tuttle, 1989).
Measurements in SCM: Measurements in SCM serve a number of
purposes.
Gunasekaran and Kobu (2007) suggest that these include
identifying the following:; success, whether customer needs are met, better
understanding of processes, bottlenecks, complications and improvement
opportunities, waste, providing truthful decisions, empowering progress,
pursuing progress, simplifying a more open and clear statement and cooperation (Akyuz & Erkan, 2010).

Neely (1995) defines Performance Management (PM) as quantifying

effectiveness and efficiency. The term effectiveness here refers to the
ability of metrics to meet customers needs while the term efficiency refers
to the economic use of resources in time of measuring a predetermined level
of customers' satisfaction. In essence, Performance Measurements or metrics
are important management tools since organizations cannot manage what
they cannot measure (Kennerley & Neely, 2003). (Sink and Tuttle, 1989).
Chan (2003) argues that PM system is based on the organizational
strategy, value drivers and important goals of the companies and the whole
supply chain. Melnyk et al. (2004) adds that PMs are very important in
providing; key information to enable decision-making to take place and;
assisting organizations to manage and re-engineering business processes to
allow a continuous improvement of SCM (Olsen, et al., 2007). Melnyk et al.
(2004) introduced the term performance metrics aimed at serving the
following purposes: (a) Control evaluating performance through a control of
scarce resources (b) Communication - In the case of the Motor industry, Car
manufacturers in the US could have earned $2 billion (1.29 billion) extra
profit by improving their relations with suppliers. This was a matter of a lack
of communication within the industry. This is a clear indication that failure to
use the correct SCM measurements could lead to losses and in return affect
the profits (Green, 2015) (c) Improvement by identifying the gaps between
performance and expectations.
Measurements in SCM: Challenges. Performance management is
useful in SCM (Fawcett and Cooper, 1998). However, challenges exist in
intra-organizational level due to the facts that PM is concentrated on tangible
and financial factors (Austin, 1990). Also, only fewer firms achieve PM goals
(Gong et al., 2007). Most measurements are based on unreliable data,
therefore, making it difficult for organizations to gain their return on
investment (Luo, et al., 2009). Cahn Qi (2004) suggests that despite the
usefulness of PM in SCM, adequate attention has not been paid to the field.
Weaknesses and strengths are highlighted below.
Balance score card: The Balanced Scorecard (BSC) was made popular
by Kaplan and Norton (1992) and since then they have been used by a
number of organizations to measure supply chains (Thakkar et al. 2006;
Mehrjerdi 2009). BSC measures performance using four elements: customer,
internal business, financial, innovation and learning. BSC seeks to maintain a
balance between short term and long term objectives, between financial and
non-financial measures, between lagging and leading indicators and between
internal and external performance (Kaplan & Norton, 1996).

The main strengths of BSC is the ability to improve the performance of

the organisation using control measures that focus on financial objects.
Within organisations, setting up effective financial goals could represent a
long-term strategy and this could lead to profit maximisation (Schwartz and
Jay, 2010). In most cases, Balance Scorecard focus on financial objects
relating to profitability the companies behavior towards shareholders;
emphasizes on the asset returns(Kaplan and Norton, 1996) - focusing on
these financial objects leads to
revenue enhancements and profit
maximization.
Despite its usefulness in maintaining the strategic vision through the
four elements, BSC has its limitations. First, it has been argued that the four
areas of the BSC (see diagram above) lack the causal-effect link in a sense
that the relationship between the elements are casuals. For example, the
link between the finance and the customer is hard to establish. Norrekelit
(2000) argues that the links between the variables could lead to wrong
assumptions hence a company could end up with wrong financial
projections (Norreklit, 2000).
Secondly, while the relationship between the points have been
questions, there is an issues of lack of an understanding of how these
elements could be timed. The lack of time dimension makes BSC
measurement a timeless activities. It has also been argued that despite the
fact that BSC provides no mechanism for maintaining the relevance of
defined measures (Hudson, et al., 2001 ). Fourth, within organizations there

are strategic levels and operational levels, the four elements provided by
the BSC fail to recognize this. As a result, this could lead to tensions as the
strategic level could end up projecting higher profits than what the
operational levels could generate. Generally, BSC cannot be quantified and
does not use financial analysis or risk management. In financial language,
BSC is likely to add another reporting document that is of non-financial
value to the organization.
Perfect Order Measurement: is a measure seeking to capture the
activities in the business and how satisfied your customers are with your
business performance. This is mainly used in procurement and transportation
businesses. Goals are set and the more satisfied customers the more the
profit. The main question that this measurement attempts to answer is: how
well they are meeting customers needs? According to Bhote (1996) stages in
Perfect order measurement are broken down to ten customer related
characteristics,characteristics; these are compared to the four stages of
customer satisfaction loyalty. To maximize profit one needs customers, for
this matter the strengths of Perfect Order Measurement is to understand your
customers characteristics towards your organization. Weaknesses of using
Perfect Order Measurement is that it could be difficult since the 10
characteristics and checklist vary according to organizations. Customers
needs tend to change and therefore new criteria would have to be generated
each time ( Bhote, 1996). Most organization that useuses Perfect order they
failfails to measure imperfect order. A good example is CISCO Company.
In 2001, they lacked inventory visibility and demand slowed. Cisco took $2.2
billion inventory write-down; stock dropped by 50% (Supply Chain Digest,
2006). Recently, they have had to revamp their SCM system by putting their
applications in the Cloud and decision-making capabilities in the hands of its
supply chain personnel to meet customers needs. Another example,example
is that of FoxMeyers 1996 Distribution Disaster one the leading drug
manufacture who attempted to use the automated system in their supply
chain. The system had bugs and led to massive financial losses due to repeat
orders and disruption. The company filed for bankruptcy (Supply Chain
Digest, 2006).
Cash to Cash Cycle Time: This metric measures the number of days
between paying for materials and getting paid for product. It attempts to
answer the question: How long is our operational capital tied up? The longer
the operational capital is tied in somewhere, the longer it affects other
operations. This measurementsmeasurement contributes perfectly to the
overall profit maximization. The supply chain is deemed profitable if the cash
is rolled in quicker. There is a link between this measurement and profit. A
good cash flow is important ins supply chain management. The weaknesses
of using this measurement is that it does not focus on the value created. Too

much focus is placed on how quick the cash is coverted. Kroes and Manikas
(2014) have argued that Cash flow management could lead to good firm
financial performance, however, that should not be the sole focus in SCM
(Kroes & Manikas, 2014).
Customer Order Cycle Time: is Tthe measurement of the time it takes
to deliver a customer order after the purchase order is received. This is an
important measure linked to the profitability. Meeting the order cycle time is
a way of meeting customers need. A good example of good practices that
lead to profit is IKEA a company whose success is credited to its
communications and relationship management with materials suppliers and
manufacturers. With nearly 1046 suppliers in 52 countries they still manage
to deliver within a short period of time therefore making them profitable (Lu,
2014).
In 2001, NIKE introduced new products, however, due to logistic
software problems this led to failure to deliver products on time and this
resulted to a $100 million revenue shortfall (Supply Chain Digest, 2006).

On Time Shipping (OTS) Rate: This is the percentage of items or order

value that arrives on or before the requested ship date.

On Time Shipping rate = (Number of On Time Items / Total Items) * 100

In SCM, this measurement is important as the high rate of OTS RATE
rate indicates that the supply chain is efficient. The on time shipping rate is
key to customer satisfaction. A high rate indicates an efficient supply chain
and this could be linked to profit. However, the weakness of using this
measurement is when you do not have the details of the items i.e. numbers
or quantities. The main weakness is that since the focus is on generating the
higher rate and meeting profit targets, this could compromise quality. Also,
the measurement does not focus on reasons for the delay such as bad
weather etc. On a good side, if this measurement is used perfectly and
customers receive goods on time it could add value and increase profit. As
Lillelund (2015) suggests that For B2C, the impact on delayed orders is
more fragmented. Some customers will return late orders; others give bad
reviews. Some want refunds, influencing cash flow.

Return on Investment measurement(ROIC):

ROIC, in Supply chain Management is a measurement of a company's

use of capital. According to Cecere (2014) the goal is to drive higher returns
than the market rate of the cost of capital. Despite its usefulness at
indicating the use of capital that has been invested in a supply chain project,
this measurement could be misleading. For example, the use of the term
"most improved" over a specific time period does not mean best over that
same time period (Cecere , 2014). As a part of the Supply Chain Index, the
purpose is to measure improvement in SCM. For ROIC to lead to profits within
SCM, year to year indicators are offered. Knowing that the company`s capital
has been put into good use can lead to profit generation.
To conclude, we can argue that a good performance measurement in
SCM is linked to profit maximization and the overall organizational strategy.
Ffor example, in the pharmaceutical industry Astra Zeneca is posting the
best performance in the portfolio of SCM metrics (Cecere, 2015). Astra
Zeneca gained that position by employing effective PM metric.
Measurements that have been reviewed in this study point to the direction
that the right choice of measurement is key to avoiding losses. The following
were identified; a weak link between strategy and actions, a heavy reliance
on financial measures causing reactive behaviour, and a confusing multitude
of isolated measures.
In Gunasekaran et al. (2001) mentioned that measures and metrics
generally have the following shortcomings; (a) lack of a balanced between
financial and non-financial measures, (b) most organizations have a large
number of performance measures leading to a confusion on what is
important (c) A lack of a clear distinction between metrics at strategic,
tactical, and operational levels - each metric could be assigned to a level
where it would be most appropriate, however, this is not always the case. In
the motor industry a lot of money could have been saved if VW, Toyota and
others had an established relationship. It was suggested that supplier
relationship management be included as part of the metrics used to evaluate
buyers performance (Green, 2015).
Regardless of their use, all performance measurements need to have
specific characteristics that could be linked to performance and profitability.
For example, Ghalayini and Noble (1996), they suggested that Pperformance
Mmeasurement tool should have the following characteristics: - clear defined
set of improvement linked to the company strategy and objectives. This is
the opposite of what is seen in BSC where variables are not linked (lacking a

causal-effect). Secondly, a good measurement should stress on the role of

time and dynamism (Fawcett, et al., 2014). Third, the organization has both
operational and strategic areas- these need to be linked, measurement such
as BSC do not offer this distinction. Fourth, in order to maximize profit the
measurement tools should be used for improvement rather than monitoring.
Fifth, a good tool should seek to use historical data as a base for future
performance.
In light of the above discussions, This paper makes several the
following recommendations are put forward:. First, as SCM measurements
are fragmented - a new model that will comply with the international
standards is needed (Eccles and Pyburn, 1992; Fawcett et al., 2014). SCM
should have measurements that span the entire supply chain. Second, as
mentioned in Brewer and Speh (2000), there is a need for a framework which
includes the balancing of different dimensions of performance by introducing
other metrics to support and improve SCM and performance. Third, SCM
needs to capitalise on the development in ICT to maximise profit (Fawcett, et
al., 2014). The increased use of Cloud computing brings about new and
modern database techniques. However, this suggestion might take longer to
be realised since many firms are still using a combination of old and new
computer systems, computer software and database structures that that
might delay the introduction of the new systems.

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