A framework for supply chain performance measurement

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ARTICLE IN PRESS342A. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347for production will be grouped to reduce manufacturinglead-time.5.2. Supply link evaluation metricsDue to the growing importance outsourcing,whereby firms outsource a major part of theirproducts, evaluation of supply link performance isvery important in managing the supply chain forpeak efficiency and effectiveness. In this section,the importance of performance measures/metricsin a supply chain link (includes purchasing andsupplier management activities) are rated inimportance. Based on the literature, six keyperformance indicators (KPI) pertaining to thesupplier link were included in the survey andranked by participants. These measures include:supplier delivery performance, lead-time againstindustry norm, supplier pricing against market,efficiency of purchase order cycle time, efficiencyof cashflow method, and supply booking procedures.The main objective here is to identify theKPI in supply link performance evaluation. TheKPI can be defined as the performance indicatorsthat have significant impact on the overallperformance of an organization in the areas ofstrategic, tacticaland operationalplanning andcontrol. The percentage importance ratings of thesix measures are included in Table 3.As can be seen in Table 3, supplier deliveryperformance emerged as the most importantmeasure pertaining to the evaluation of supplierperformance. It was the only highly importantmeasure. One can see from the table that it isclearly set apart from the others by its percentageimportance rating. The moderately importantmeasures in descending order are supplier leadtimeagainst industry norm, supplier pricingagainst market and efficiency of purchase ordercycle time. The less important supplier measureswere efficiency of cash flow method and supplierbooking in procedures. Most notable about thesupplier metrics is that firms regard the supplier’scapability to reliably deliver goods in a timelyfashion as more important than price. Price hasincreasing become an order qualifier rather thanan order winner. Other aspects of supplierperformance such as adherence to agreed uponTable 3Importance of supplier metricsAssessment Metrics PercentageimportanceHighly importantModeratelyimportantLess importantSupplier deliveryperformanceSupplier lead-timeagainst industry normSupplier pricing againstmarketEfficiency of purchaseorder cycle timeEfficiency of cash-flowmethodSupplier booking inprocedures23.2019.6918.3015.4212.3811.01schedules and terms of the order as well as promptdelivery of goods have become order winners.Firms would do well to not just use suppliermetrics for selection of suppliers, but rather theyshould work closely with suppliers to see that theyhave in place within their organizations, measurementsystems that will foster significant improvementin all of these areas. Such improvementcontributes to the overall success of a supplychain.5.3. Production performance evaluation metricsIn this section, supply chain production linkmetrics/measures are rated in importance. Theliterature provided the production link measures,and as with other metrics evaluated in this paper,the survey responses provided the basis for ratingthe importance of these measures. The performancemeasures for the production link includedpercentage of defects (a measure of productquality), cost per operation-hour, capacity utilization,range of product and services, and utilizationof economic order quantity. Table 4 contains themeasures and their percentage importance ratings.From the table one can see that the percentage ofdefects emerged to be the most important(24.27%), but two others, cost per operation hourand capacity utilization, were also highly important.The latter two are essentially measures of the
ARTICLE IN PRESSA. Gunasekaran et al. / Int. J. Production Economics 87 (2004) 333–347 343Table 4Importance of production metricsAssessment Metrics PercentageimportanceHighly important Percentage of defects 24.27Cost per operation hour 22.51Capacity utilization 21.61ModeratelyimportantLess importantRange of products andservicesUtilization of economicorder quantity18.0113.60efficiency with which resources are used inmanufacturing (produce/assemble), and good performancein these two areas translates into lowercost per unit to manufacture products/provideservices. Efficiency of operations is important forall supply chain partners, if the elusive goal ofsupply chain optimization is to be achieved. Notethat the percentage importance of each of thesethree clearly sets them apart from the moderatelyimportant and less important measures. We shouldcaution that maximum efficiency of each partnerin all areas might not be a desirable becausetradeoffs are necessary in order to achieve a globaloptimum for the supply chain—local optimums inall parts do not necessarily lead to globaloptimization for a system.The only measure rated moderately importantwas range of products and services. As noted in theliterature, a broader range of products tends toresult in fewer new products being introduced anda more narrow range is associated with greaterproduct innovation. For this reason, the measuredoes seem worthy of the attention of managers,especially in making decisions about the breadthand depth of product lines. The least importantmeasure in the production link measures wasutilization of economic order quantity. It was theonly measure rated less important. It may be thatthe participants, in assigning their ratings, regardedthe use of EOQ as a means to an end ratherthan an end in and of itself. In short, quality andefficiency seem to be more important considerationsin evaluating production performance.5.4. Delivery performance evaluation metricsAfter the orders are planned and goods sourced,produced and assembled, the remaining task is todeliver them to customer. Table 5 shows the orderof importance of delivery performance measures.Quality of delivered goods is first in importance,followed by on time delivery of goods andflexibility of service systems to meet customerneeds. These three measures are highly important.Note that there is very little difference in the ratingof quality of delivered goods and on time deliver ofgoods. Here again, we believe that these three arerelated to the perceived customer value of theproduct, the top ranking strategic planning measure.Providing the customer with a qualityproduct in a timely fashion, and maintainingcustomer satisfaction with a service system designedto flexibly respond to customer needs arekey in producing value for the customer.The effectiveness of the enterprise distributionTable 5Importance of delivery performance measuresAssessmentHighly importantModeratelyimportantLess importantDelivery performancemetricsQuality of deliveredgoodsOn time delivery ofgoodsFlexibility of servicesystems to meetcustomer needsEffectiveness ofenterprise distributionplanning scheduleEffectiveness of deliveryinvoice methodsNumber of faultlessdelivery notes invoicedPercentage of urgentdeliveriesInformation richness incarrying out deliveryPercentage of finishedgoods in transitDelivery reliabilityperformancePercentagerating12.3412.2011.4310.3110.2310.059.328.767.767.70
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A framework for supply chain performance measurement

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