Performance Measurement

Synopsis Introduction and importance of performance measurement Characteristics of an ideal performance evaluation system Objectives of developing and implementing performance measurement systems in logistics Perspective measurement a. Activity based measures b. Process based measures Performance measurement a. Internal performance b. External performance Logistics reports Performance audit Classification of performance measurement Perfect order.

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Performance Measurement

10 Marks Questions: Q1. Define performance measurement and explain its importance and its objectives in detail? (Can be asked for 5 Marks as well) Performance Measurement is a measurement of the performance of the logistical function. It is a review of the various logistical activities carried out by the organization. Performance measurement can be termed as an audit of logistical performance, tracing the effectiveness and efficiency of the logistical activities of the organization. It is done to improve the level of logistical competency and to gain competitive advantage in business. Timely performance measurement helps to raise the level of customer service and identify weak areas of performance. In spite of the increased focus on logistics by most companies, the gap is widening between logistics cost leaders and laggards. Logistics leaders are unlocking the value of the enterprise across the value chain. To achieve better customer service at reduced costs, organizations are increasingly adopting the two levers of process improvement and technological breakthrough in track-and-trace, improved control systems and IT innovations such as cloud platforms. To fully realize the benefits from these initiatives and move toward an era of continuous improvement in their operations, organizations will also need to realign their logistics performance measurement strategies.

Did you know? DHL says that -through Performance Measurement they: -Engage operational teams in the review of daily process metrics. -Provide visibility to the processes in need of attention. -Understand the voice of the customer.
Objectives of Performance Measurement:
A. Monitoring 1. Surveying the service level and logistical cost components so that the same can be

periodically reported to the management.

2. This is a process of tracking the history of logistics system in place and letting the

management and customers know about the same. 3. The typical monitoring measures include service level and cost components. 4. Cash flow monitoring will help the firm to identify its expenses and incomes.
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5. There are various logistical costs like transportation, packaging and material handling. A

constant watch on these will help the organization to estimate for future logistical operations.
B. Controlling 1. 2. 3. 4.

This objective of performance measurement helps the organization to curtail unwanted expenses and only incur those expenses, which will help the firm meet, its goals. The measures used for controlling are to track ongoing performance along with refining a logistics process in case of any deviations keeping in mind the set standards. Reporting needs to be well developed so that the cause can be identified at the occurrence level itself. For example: a firm can estimate on a contingency fund if it has accurate data on expenses caused on damages in transit.

C. Directing 1. 2. 3.

These are measures designed to motivate the personnel. The principle is better the performance, more is the pay. Higher levels of productivity can be achieved if the warehouse of transportation personnel are identified and based on performance.

Q2. Explain internal and external performance measurement in detail?

Performance measurement

Internal performance
Cost Customer Service Productivity measure Asset measurement

External performance

Customer Perception Measurement

Best Practice Benchmarking

Quality Time
Performance Measurement

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Internal performance measurement Internal performance measurement basically focuses on the comparing of activities process to previous operations.
Example: A firm may compare the customer service with last years performance as well as this years goal or target.

Internal logistics performance measures are classified in to the following g categories: 1. Cost: The most direct reflection of logistics performance is the actual cost incurred to accomplish specific objectives. Logistics cost performance is normally measured in terms of total amount of rupees spent, or in terms of cost per unit etc. Logistics cost is popularly used to measure the logistical performance of the firm.

2. Customer Service: Customer service indicates a firms ability to meet customer expectations. Service level are common customer service measures, some of the customer service commonly used are Fill rate, stock outs, on-time delivery, back orders, customer feedback, sales force feedback, customer surveys.

3. Productivity measures: Productivity is a relationship (usually a ratio or an index) between output (goods and / services) produced and input. Conceptually there are 3 basic productivity measures If all the inputs and outputs in a given system are included in the calculation of the value of productivity it is called as total factor static productivity ratio. If outputs and inputs in a system compare static productivity ratios from one period to another period, we get what called a dynamic productivity. Output 2011 / input 2011 Output 2010 / input 2010 The third measure of productivity is the surrogate productivity measure. Surrogate productivity measures take into account such factors not normally included in productivity calculations but connected with the concept. Ex: customer satisfaction, profit, effectiveness, equality, efficiency etc.
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4. Asset measurement Asset measurement focuses on the utilization of capital investments in various facilities and equipment. The investments are basically done to achieve the logistics goals fixed by the company. The measure focuses on how fast liquid asset such as inventory turnover as well as how well the fixed assets generates return on investment. Commonly used measures return on net assets, return on investment etc.

5. Quality Perfect order is treated as a concept for assessing the quality of logistics. Features of a perfect order are complete delivery of all items requested, OTD with a mutually acceptable tolerance (of one day), complete and correct documentation, product faultlessly installed. Obstacles in achieving perfect order are order entry errors, Incomplete information, damaged shipment, invoice error

6. Time Time is an important measure of logistics performance related to effectiveness. Some of the measures in the category are order fulfillment lead-time and variability response time, on-time product shipment/delivery and forecasting/planning cycle time.

EXTERNAL PERFORMANCE MEASURES The two concepts for the above measures are customers perception and bench marking. The following are the two focus areas of performance measures. 1. Customer perception measurement: Customer perception is measured by carrying out surveys sponsored by the organization interested in measurement or by the industry. Information surveyed is about the firms and competitions performance in specific areas. Generally, information generated by these surveys is customers perception of availability of firms products, performance cycle, time, information availability, etc.

2. Best practice benchmarking Benchmarking is also important from the point of view of performance measurement.
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Manufacturers, wholesalers, retailers are using the practice of benchmarking in areas such as asset management, productivity, customer service, quality, warehousing, transportation, etc. This technique helps the managers to find out how well the organization performs a specific task. The benchmarking organization would focus on the organization structure, facilities and equipment as well as inter organizational relationships.

Firms normally use combinations of three benchmarking methods: i. First they use published logistics data, which is available from consultants, periodicals and university researchers. The second method is to benchmark privately, against non-competitive firms in ones own related industry. The third method consists of an alliance or organizations that systematically share benchmark data on a regular basis. The alliances require more effort to maintain but usually provide substantially better information than the preceding two methods.

ii.

iii.

5 Marks Questions:
Q1. Explain the characteristics of an ideal performance evaluation system?

1.

Top management: A well-developed evaluation process is the one that has the support of the top administration within the organization and is viewed fair and productive by all who participate in it.

2. 3.

Criteria: Know the criteria by which the logistics activities will be evaluated. Responsible: Employee performing activities must know who is responsible for evaluating their performance.

4.

Monitoring: Well developed plans and well implemented plans for monitoring the evaluation system.

5.

Easy to understand: The measure should convey at a glance what is the measuring and how is it derived.
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6.

Mutual understanding: A good measure should be mutually understood by all the key process participants.

7. 8. 9.

Encompass: It should encompass all the inputs and outputs. Multidimensional: A good measure should be multidimensional and visible. Consistency: The metrics must be consistent with the overall corporate strategy.

10. Customers: The metrics must focus on the customer needs, expectation and requirements. 11. Focus on process: There should be more focus on improving firstly the process and then the function. 12. Precision: There should be a precise cost measurement. 13. Technology could be used to enhance efficient performance management.

Q2. Explain the two types of Perspective Management? There are 2 types of measure: activity based and performance based 1. Activity based Measures: These measures focus on individual tasks required to process orders e.g. customer orders entered etc. The objective of these measures is to record the level of productivity e.g. an order taker who is judged on the number of calls per hour may be rated high with respect to the activity based measure but may do poorly in overall satisfaction process because they fail to take time to listen carefully to customers. While these measures focus on efficiency and effectiveness of primary work efforts they do not usually measure the performance of the overall process of satisfying customers.

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Performance Measurement

2. Process based Measures: These measures consider the customer satisfaction delivered by the supply chain. They examine total performance cycle time or total service to measure the total effectiveness of all activities. The perfect order is an increasingly common process measure. Q3. State the classification of performance measurement and define it? Performance measurement helps in ensuring the proper utilization of resources and comparing performance in relation to plans internally and enables benchmarking. Performance measures can be classified as follows:

Function based or activity based and process based performance measures Output related measures and process related performance measures Internal and external performance measures

The experience obtained by managers from quality measurement of manufactured products has resulted in the realization that improvements in quality can be achieved by during the process rather than the output. A. Function based and activity based performance measures: Function based measures are metrics that measure performance of the activities within function. These are measures like warehouse space utilization, transportation costs, obsolete inventory and documentation accuracy, which are related to functional areas. Functionally oriented measures fail to consider the cross functional nature of logistics management, and so, can lead to functional optimization and overall logistics suboptimization.

For example, the perfect order process metric measures the percentage of customer orders that are flawlessly fulfilled. This metric measures the effectiveness of the order fulfillment process, crossing the boundaries of functions.

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Performance Measurement

B. Output-related and process-related performance measures: The experience obtained by managers from quality measurement of manufactured products has resulted in the realization that improvements in quality can be achieved by measuring the process rather than the output. Logistics is basically a process resulting in customer satisfaction. In order to ensure that the output of customer satisfaction is ultimately achieved, it is necessary to

Examples of output related measures are order cycle time and product availability.
monitor and control the process by measuring the logistics variables in the process that ultimately effect customer satisfaction. However, the output also needs to be measured to ensure that the process being measured is resulting in the desired output. Internal and external performance measures: Internal performance measures are related to measurement of activities and processes internal to the form by focusing on historical performance and goal comparisons. Thus, actual logistical cost and customer service during this period can be compared to the previous periods actual performance and goals set for this period. External performance measures focuses on metrics concerned with customer perceptions and benchmarking against the competition. This classification of logistical performance measures shall be utilized to understand the various performance measures, which can be utilized in practice. Q4. Explain what do you mean by a perfect order? (Can be asked for 3 marks as well) Logistic performance measurement has been a continuing challenge for all organizations for many reasons. First, logistics is process oriented rather than functional. Second, logistics service performance encompasses multiple outputs (e.g. Order fills, on time delivery) that are related. Failure in any one measure results in failure of all over logistics service. Third, many different organizations are involved in delivering logistics service.

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Performance Measurement

Fourth, customer perceptions of logistics performance many times differ from those of the provider. To address this challenges some firms or organizations are beginning to implement the concept of perfect order. Although the concept of performance order is not new, adoption and measurement has grown in the recent years. For years firms have been measuring their fulfillment processes using such measures like order accuracy, on time delivery, damage rates, etc. When all the order processing activities are performed in the most efficient manner and optimum manner keeping in mind complete customer satisfaction, it is termed as perfect order.

The perfect order concept attempts to more directly capture customer satisfaction by tying multiple measures to facilitate a single order. If any one or more measures are not achieved according to customer specifications, the order is considered to be not perfect The most common definition is that an order is perfect if it is: 1. On time 2. Complete 3. Damage free 4. Correctly documented The perfect order measure calculates the error free rate of each stage of a Purchase order. This measure should capture every step in the order life. It measures two errors per order line. For almost all errors that occur, a corrective credit is issued. It is through an analysis of these credits that you derive your metric. Most systems require a reason code to be used while entering a credit. Tracking these reason codes and assigning them to a category allows you to group them for perfect order measure. Example: Activity Order entry accuracy % of Accuracy 99.50

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Performance Measurement

Warehouse pick accuracy Delivered on time Shipped without damage Invoiced correctly

99.20 99.00 96.00 99.80

Therefore, perfect order measure is 99.50% * 99.20%* 99.00%*96.00%*99.80% = 94.04% Q5. Write a short note on Performance Audit? (Can be asked for 3 marks as well) There are three ways of judging logistics service:

The subject views of the customer and others. Relevant quantifiable measurement such as tones delivered or customers visited. Comparisons with past or other performance.

These methods are widely used, but they can never really give a reliable picture. Logistics are so closely integrated with other operations and outside influences that it cannot be viewed in isolation. If deliveries are arriving late at customers, it certainly might be because of poor logistics, but it might also be because demand has suddenly increased and production is not meeting demand or road works are causing congestion, or ferry operators are on strike or a whole range of other factors that logistic managers cannot control or even influence. As logistics provide the final link between customers, it often gets the blame or faults in other parts of the system. Within each organization the aim of logistics is to contribute as fully as possible to achieving the mission and corporate strategy. In other terms, logistics should be judged by how well it achieves the aims of this plan. Simply put- there is alternate process for measuring performance that: Analyses the mission corporate, business and functional strategies from logistics perspective

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Performance Measurement

Use these analysis to set the overall objectives Establish a detailed logistics plan including standard and performance targets Monitors actual performance over time and compares this with the plants Analysis the differences, identifies the reasons, explains them and looks for ways of improving performance

Adjusts operations revises plans and takes any other action necessarily.

Q6. Write short note on logistics report?

Logistical Reports.

Status Report

Trend Report

Ad hoc Report

Diagnostic Report

Position Paper

Policy Report

Logistical Reporting System Unless information available is reported in proper format, logistics information is not useful. Normally 3 types of reports are generated, these are required in all functional areas of logistics to ensure compliance with operational plan objectives.

1) Status Report These provide information about some aspects of logistics operation. One of the most common is stock status report. The details in such reports will depend on the firms policies and the extent of the firms computerization.
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2) Trend Report Normally used by senior managers (those above the line managers). The information provided in these is selective compared to the status reports. These reports help the management to take corrective actions. An example of such a report is warehouse wise stock-out level for a particular item at the month end for the last 6 months. 3) Ad Hoc Report These can be created at any level of logistical administration and for a variety of reasons. Most of them are developed to provide details on specific areas of performance. a) One type is Diagnostic Report- provides details on a specific phase of operation- e.g. details of current back orders and subsequent corrective actions. b) Second type can be Position Paper- given a current or anticipated problem, these reports outline the course of action and probable consequences. The final type of Ad Hoc Report is concerned is with policy modification- these are normally initiated from the chief executive

Fill in the blanks:

1. Benchmarking is defined as continuous measurement of the companys output,

processes and practices against the standards of the competitors and other companies.
2. Performance measurement is necessary to evaluate whether the logistics activities are

efficient and effective.

3. Productivity of a system is the ratio of the output produced to the resource of inputs

utilized for producing the output.

4. Time is an important measure of logistic performance related to effectiveness. 5. Monitoring measures are the process of tracking the history of the logistics system and

letting the management and customers know about the same.

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Performance Measurement

University Questions:

Q1.Discuss classification of internal performance measures. (10mrks)-nov10. Q2. Explain importance of external performance. (10marks)-mar11 Q3.What are the areas covered by external performance management in logistics?(3 Marks) Nov 2011 Q4. What logistical activities are parts of Manufacturing support performance cycle ? (3 Marks) March 2012

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Performance Measurement