Performance Measurement

Measurement is important, as it helps ensure the progress of business plans and the success of new investment decisions. Performance measurement describes the feedback on operations that is usually associated with behaviors that impacts customer satisfactions, strategic decisions and supply chain performance (Bhagwat &

Sharma, 2007).Traditionally, companies evaluated performance based largely on the financial performance of the corporations, which is not directly tied to business operational efficiency and effectiveness. Purely financial-based performance measures are more often harmful (Eccles, 1991). As such, the traditional (financial) accounting principles that were widely applied do not always tell the complete story and are often very historically oriented.

Deficiencies in these traditional accounting methods for measuring performance of an ongoing investment has further emphasized the importance of the use of non-financial measures to manage performance proactively. Moreover, it is imperative that companies align their performance measures to the strategic objectives of the underlying system of the business (e.g. supply chain). Supply chain partners, however, adopt different supply chain strategies depends on the set of competencies required in a dynamic environment and their different positions in a supply chain. The impact of new business plans or investment decisions on the supply chain thus varies based on how effectively the operations execute against these supply chain strategies at different levels. Companies can generally refer to the three different stages of their

organizational development (Lapide, 2000) when determining the types of measures that they need to focus on, including:

1. Functional Excellence

Most companies in the early days focused on their performance measurement on achieving functional excellence. It is a stage in which development of excellence is necessary within each of its operating units. In this stage, a company is recommended to use metrics that are focused on individual functional units.

2. Enterprise-Wide Integration

This is a stage in which a company starts to establish cross-functional process integration to facilitate and drive an overall improvement in a supply chain. As such, metrics for the company in this stage should be directed to realize cross-functional activities rather than individual tasks.

3. Extended Enterprise Integration

As the importance of collaborative management in a supply chain becomes more apparent today, companies are motivated to increase the level of integration to extended enterprise-wide degree. Extended enterprise integration is a stage in which a company establish excellence not only within the enterprise but also across extended enterprises. That being said, a company needs to adopt metrics that will focus on external cross-enterprise collaboration in this stage.

Good metric in measuring the performance of a business plan or new investment decisions is critical for efficient and effective measurements. Most importantly, the measurement process should be linked and aligned to operational excellence including supply chain objectives and activities. This helps to ensure that resources are appropriately applied so that company can closely monitor whether or not desired strategic result is happening.

2.4.1 Measuring the performance of a supply chain (The GSCF Model)

There are a variety of widely employed model for supply chain performance assessment. These models help establish a framework linked to performance measurement that can communicate and align supply chain strategy across the

organization. One of the widely used and prevalently accepted framework is the one developed by the Global Supply-Chain Forum (GSCF)¹. It is essentially a process reference model for supply chain management to measure supply chain performance.

An effective supply chain management requires an end-to-end integration of key business processes within and across the network of business partners that comprise the supply chain (Lambert, 2008). Many organizations today aspire to achieve the necessary integration to drive performance improvement. However, it can hardly be realized since most executives do not fully understand the key business processes and the linkages necessary to integrate them.

The GSCF framework provides the linkages required to facilitate the integration among supply chain entities and identifies eight business processes that need to be managed and integrated. The eight business processes are both cross-functional and cross-enterprise processes, which mainly include Customer Relationship Management, Supplier Relationship Management, Customer Service Management, Order Fulfillment, Manufacturing Flow Management, Product Development and Commercialization, and Returns Management. A cross-functional team is created in each process and is assigned to manage it. The cross-functional team is made up of representatives from every business function within the firm, including those from sales and marketing, research and development, logistics, production, purchasing and finance. Each process is further broken down into a sequence of strategic sub-processes, so as to provide a detailed overview for implementation of the framework.

1 GSCF is a forum directed by Dr. Douglas M. Lambert that consists primarily of leading

Figure 2-6 Depiction of the GSCF Framework Source: Lambert, Guinipero, & Ridenhower, (1998)

Of the eight processes, customer relationship management (CRM) and supplier relationship management (SRM) are the essential linkages that provide a crucial link to external companies within the supply chain network. The remaining six processes are coordinated through the linkages.

The GSCF framework focuses on the integration of processes across various partners in a supply chain. The concept is that cross-functional and cross-firm involvement is very important, in which all functions that are involved in the delivery of a product or service must work together. As such, proper coordination mechanisms across various functions are essential to achieve effective and efficient supply chain. Organizations are also required to continuously develop and maintain close relationships with their key customers and suppliers to enhance integration in a supply chain. All in all, the model suggests that integrated and collaborative supply chain yield good results in improved productivity, reduced cost, reduced inventory levels, and better demand planning.