Improving Performance Measurement in Supply Chains
Performance measurement has been a topic of discussion in the last decades for both academicians and practitioners. In the 1990s, performance measurement suffered a huge transformation soon after some movements from academia and corporations commenced analyzing the existing lack of an effective way to measure performance, pushing for a new approach to evaluate organizational achievements.
The supply chain in the 90s
Since then, academics and practitioners have managed to develop better performance measurement methods, which brought a relevant revolution for performance measurement theory and practice.
Among these, the stand out was the Balanced Scorecard – the BSC, a strategic performance measurement system that allowed you to link strategic objectives with their respective measurements, by way of four main perspectives – Learning & Growth, Business Process, Customers, and Financial, creating a clear rationale for a bottom-up cause-and-effect relationship.
In the same vein as the growth of networking for businesses in the 1990s, when the concept of developed supply chains emerged, companies had to start measuring not only their exclusive threshold operations, but also their extensive downstream and upstream processes, including those with suppliers, retailers, and final customers.
In order to fulfill this objective, new approaches of performance measurement systems for supply chains began being discussed and implemented, which also included updating those already used for organizational performance measurements.
Modern-day supply chain challenges
As it is now widely-known, the COVID-19 pandemic has had a massive impact on supply chains. Disruptions have occurred in several industries, from healthcare and manufacturing, to finances and services. This has painfully highlighted that our supply chains were not resilient enough to avoid such disruptions.
Many factors may have influenced these supply chains’ vulnerabilities, including the supply chain strategy design and its planning and control. It is more than likely that performance measurement systems in these cases were not able to provide sufficient visibility on how deficient the supply chains’ strategies were in terms of their reaction time resilience to the threats generated by the pandemic’s effects.
Despite the visibility and transparency that the digital technologies of the Industry 4.0 age (e.g. Internet of Things, Blockchain) may bring to supply chain processes – technologies that focus on managing large amounts of data (i.e. the use of Big Data Analytics approach), Performance Measurement must nonetheless undergo a breakthrough transformation, as the environment around it has experienced sudden and significant changes.
The post-pandemic period requires new ways of measuring performance in supply chains. Digital technologies may certainly offer assistance, effectively supporting this transformation, but beyond that, performance measurement must be redesigned with a strategic risk-based approach that fundamentally transforms all of the measurement perspectives that supply chains have.
It must provide a clear view of how resilient a supply chain is in the face of an imminent threat, being able to highlight the pre-, current, and post-disruption trend status.
Moreover, it should be able to successfully support a supply chain’s decision-makers when they want to enact contingency actions, especially those concerning the main supply chain processes, such as sourcing, manufacturing, and delivery.
For instance, the performance measurement system must contain lead and lag indicators, depicting how a supplier’s base and retailers are at the moment of imminent disruption and how they will be able to jointly respond to the disruption’s effects.
Key Performance Indicators – KPIs, such as inventory levels in the downstream, upstream supply chain flows, readiness and effectiveness of joint contingency plans with suppliers and retailers, and level of disruption in supply chain entities may be useful indicators to effectively measure supply chain response in unexpected situations.
Furthermore, manufacturing and distribution processes must be measured in terms of their responsiveness to emergency situations (e.g. # Time to deliver unplanned orders, flexibility of mix and volume production to sudden demand variations, flexibility of goods delivery route changes).
In that sense, demand has to be properly evaluated and understood, considering aspects of current and upcoming customers’ behaviors amid the potentially rupturing event (e.g. KPIs as % Demand variation, $ Estimated demand).
The measurement of financial capacity is also paramount to evaluating not only how capable the organization is in terms of managing cash-flow and investments to keep its supply chain going, but also how performant its supply chain is in terms of operational costs and revenue contribution.
In order to evaluate the financial impact of disruptive situations to the supply chain, KPIs such as # Cash-to-cash cycle time and $ Value-added margin during the critical period, % Return on investments made for contingency initiatives and $ Extra operational costs may help supply chain specialists develop a better decision-making process.
With all things considered, I believe that ultimately, the most important aspect, beyond simply adopting KPIs, is the supply chain leadership’s willingness to consider adopting a robust framework around which they can structure their performance measurement system during an exceptional period.
It has to come from a strategic point of view, with a clear cause-and-effect relationship outlined. For this purpose, the well-known frameworks such as the BSC and Performance Prism may be considered, with the due adaptations required for the new business environment.
The reality of it all is that this pandemic has generated an unprecedented level of deliberation and consideration amongst academics & practitioners alike. Performance measurement is no longer just “nice-to-have”. It must be a topic of deep consideration for the supply chain audience, in order to pursue a more effective management style that can withstand sudden and impactful events, such as 2020’s COVID-19.
About the author
Guilherme F. Frederico is a Professor of Operations, Supply Chain and Project Management at the Federal University of Paraná – UFPR – School of Management, Curitiba, Brazil. He is also Professor and Researcher at Information Management MSc, Ph.D. programs, and a Master’s Program in Business Administration in this same university.
He holds a Ph.D. in Industrial Engineering from the Federal University of São Carlos – UFSCar. His B.Eng (Civil Engineering) and MSc in Industrial Engineering were obtained from São Paulo State University – UNESP. Prof. Frederico has been working in collaboration with the Centre for Supply Chain Improvement from the University of Derby – UK as a Visiting Professor and affiliated Researcher.Image sources: