A holistic framework for performance measurement in logistics management

Research in Transport and Logistics 2009 Proceedings Doğuş University

A HOLISTIC FRAMEWORK FOR PERFORMANCE MEASUREMENT IN

LOGISTICS MANAGEMENT

Y a sem in C laire E R E N S A L 1

A bstract -The purpose o f this paper is to introduce and describe an approach to performance measurement o f logistics processes. The paper has fo u r main parts. First, an introduction to logistics processes is provided. Then, the key performance indicators o f the logistics processes are outlined. Third, a new improvement oriented performance measurement fram ew ork o f logistics is presented. The originality/value o f this paper is that it uses balanced objective matrix methodology (BOM AX) fo r examining key issues o f logistics performance measurement at multiple levels within the organization. In this manner this article presents a comprehensive fram ew ork in constructing a strategic performance measurement system o f logistic processes. It provides a multi-perspective approach which is more fo cu sed on the alignment o f performance measurement fram ew ork o f logistics process with company strategies and addresses the

consolidation issue o f these multiple viewpoints in a single, consolidated value. Keywords- Performance Measurement, Logistics and Supply Chain Management,

1. IN T R O D U C T IO N

Nowadays logistics is seen as a value-adding process that directly supports the primary goal o f the enterprise, which is to be competitive in terms o f a high level o f customer service, competitive price and quality, and flexibility in response to market demands. During the last decade logistics has gained much attention in increasing efficiency and flexibility o f organizations as logistic costs make up a significant part o f total production costs. The entire logistic process, from the acquisition o f raw materials to the distribution o f end-customer products, makes up a logistic chain consisting o f multiple actors. Logistic activities within an enterprise can be divided into; -feed-forward flow o f goods, including transportation, material handling and transformation (manufacturing, assembly, packaging, etc.);-feed-back flow o f information, including information exchange regarding orders, deliveries, transportation, etc., and ; -management and control, including purchasing, marketing, forecasting, inventory management, planning, sales and after-sales service.

Stevens [11 defines a logistic chain as a system whose constituent parts include suppliers o f materials, production facilities, distribution services and customers, all linked together via the feed-forward flow o f materials and the feed-back flow o f information. All these logistic processes are performed by using resources in the form o f equipment, manpower, facilities and financial assets. In order to have a value-adding logistics process that directly supports the primary goal o f the enterprise, which is competitive, an organization must position its basic strategic elements and core competencies o f logistics process to adjust rapidly to critical changes in the environment. That ability implies that the organization has a measurement system in place for reviewing frequently the strategic performance o f its logistics process. In this respect strategic performance management and measurement is critical to the success o f any organization and needs to reflect the aims and the strategies o f an organization that have been developed to achieve those aims. Through performance measurement systems managers can be able to encapsulate and ‘take hold o f information about strategy, core competencies and future competitive ambitions o f its logistic process in a tangible way. This includes monitoring results, comparing to benchmarks and best practices, evaluating the efficacy and efficiency o f the logistics process, controlling for variances, and making adjustments as necessary. W ith sufficient and carefully selected information provided by performance measurement systems, it becomes possible for companies to understand better what is going on and what is about to happen in logistics. It is important to realize that what is not understood cannot be managed. M anagers need clear, timely and relevant signals from their internal information systems to understand root causes or problems in logistics process, to initiate correction action, and to support decisions at all levels o f the organizations. Therefore a new measurement concept is needed which is consistent and compatible with this process perspective. This study provides new insight into understanding the success and hindering factors o f logistics management. The extensive literature

1 Doğuş University, Faculty of Engineering, Industrial Engineering Department, Acıbadem, Istanbul, Turkey, yerensal@dogus.edu.tr

review and case studies provide academics and managers a macro picture o f the goals, challenges, and strategies for implementing an effective logistics management and performance measurement.

2. T H E P R O C E S S V IE W IN L O G I S T I C S A N D S U P P L Y C H A IN M A N A G E M E N T Process view is one o f the key elements in logistics and supply chain management. According to Christopher [2]: Logistics is a process o f strategically managing the procurement, movement and storage o f materials, parts and finished inventory (and the related information flows) through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost- effective fulfillment o f orders. Andersen [3] has argued that several issues have stressed the logic o f the transition from viewing the company as a num ber o f departments to focusing on the business processes being performed:

__Every process has a customer, and focusing on the process ensures better focus on the customer. The value creation with regard to the end product takes place in horizontal processes.

__By defining process boundaries and the customers and suppliers o f the processes, better communication and well-understood requirements can be achieved.

__By managing entire processes that run through many departments rather than managing individual departments, the risk o f sub optimization is reduced.

__By appointing so-called process owners, who are responsible for the process, the traditional fragmentation o f responsibility often seen in a functional organization is avoided.

__Managing processes provides a better foundation for controlling time and resources.

Many o f these elements are based on the fact that every single process has both a supplier and a customer. A main point is that any business process has a customer, either external or internal. Based on this definition, almost all activities within a company can be seen as a business process or part o f a business process, including the processes related to logistics. Performance measurement o f logistics describes the feedback or information on logistics activities with respect to meeting customer expectations and strategic objectives. Performance measurement systems should answer two simple questions [4]

a. Are functions and departments doing the right things? b. Are they doing them well?

Performance measures are used to measure and improve the efficiency and the quality o f the logistics processes, and identify opportunities for progressive improvements in logistics process performance. Traditional measures, however, are usually ineffective barometers o f performance because they do not isolate non-value-added costs. In addition, most measures overlook key non-financial performance indicators [4].Performance measures are classified in several ways in the literature. W hen describing and measuring the performance level in a business process, a number o f parameters might be used. It is pivotal to employ a balanced set o f measures in order to understand the performance o f the process and be able to identify improvement areas. Typical dimensions for describing and measuring performance are [5]:

__Qualitative and quantitative measures. __‘H ard’ versus ‘soft’ measures.

__Financial versus non-financial measures. Result versus process measures.

__Measures defined by their purpose (result, diagnostic, and competence). __Efficiency, effectiveness, and changeability.

The six classic measures (cost, time, quality, flexibility, environment, and ethics).

All areas should be considered when developing performance measures. It should be emphasized that these dimensions overlap. In order to diagnose the ‘health status’ o f an organization one should ideally employ a balanced combination o f measures. Fagerhaug [5] has developed a criteria sheet. The sheet provides the name and a short description o f the process/structure, as well as a number o f text-based and number-based measures belonging to each o f the five categories mentioned above. Based on this criteria sheet the author of this paper would argue that a num ber o f measures could be used to enhance the performance o f the logistics processes (Table 1). As listed in Table 1, several concrete measures are introduced to show how logistics process performance can be measured in practice. It should be emphasized that the measures are examples rather than a final set.

Research in Transport and Logistics 2009 Proceedings Doğuş University

operational management at the work shop level. Measures can be used mainly on three levels. Firstly, logistics companies can analyze general environment and their own performance at company level. These measures are global in nature, covering a wide scope o f activities. Global measures provide top management with a sense of whether strategic objectives are being achieved. They are monitored month-to month or quarter-to-quarter. In a sense they keep management in touch with the outside world. Secondly, they can measure individual projects' performance. Finally, they can focus on processes and departments. These types o f measures are more specific to the internal workflow. They represent day-to-day measures o f operating effectiveness and efficiency [4]. It is better for a small company to pick only a couple o f measures and start with them. This means that they can find out the current performance and improvement potential o f the firm.

3. T H E I N T E G R A T IO N O F O B J E C T I V E M A T R IX (O M A X ): A N A P P R O A C H IN D E T E R M I N I N G T H E P A R T I A L A N D O V E R A L L P E R F O R M A N C E IN D E X E S O F

L O G I S T I C S P R O C E S S - T H E B A L A N C E D O M A X (B O M A X )

Productivity in a narrow sense has been measured for several years. In 1978 an enlarged method, the POSPAK method, was introduced. This method indicates specific measures in order to improve the overall productivity o f an enterprise [6]. One o f the first approaches to performance measurement was published by Sink and Tuttle [7]. The model claimed that the performance o f an organizational system is a complex interrelationship between seven criteria. In 1993 Hronec [8] published the book ‘Vital Signs’, where he described how to use quality, time, and cost performance measurements to chart the company’s future. In 1995 Rolstadas [9] edited the book ‘Performance M anagement’. It sought to provide the reader with a detailed overview o f the modern enterprise by focusing on performance evaluation and measurement and performance improvement techniques. Since 1995 a number o f books and papers on performance measurement and management have been published. An example o f one o f these published materials is the so called BOMAX performance measurement system, which was developed by the researcher self [10]. Through performance measurement, the various performance level o f the business should be monitored. Based on this business model, BOMAX has suggested three levels o f hierarchy for defining performance indicators. Each performance indicator is a function o f two or more performance measures. The three levels o f hierarchy for defining performance indicators are: ‘Enterprise Level’, ‘Process Level’ and ‘Functional Level’. BOMAX emphasize that the self-assessment process allows the organization to discern clearly its strengths and areas in which improvements can be made and culminates in planned improvement actions which are then monitored for progress. Based on the self-assessment, improvement planning should be performed and initiated. As shown in the figure, performance measurement provides input for the improvement planning, choice o f improvement tools, as well as for the self-assessment process. As it was mentioned the chapter before, there is needed a method o f indexing performance measures, and calculating an overall, multi-factor, performance index. Several techniques are available for this purpose. The thesis o f this article is that the BSC [11] and OMAX [12]. Philosophies complement each other quite effectively. BOMAX is one o f the few techniques capable o f integrating the whole gamut o f strategic measures into a single coherent summary as a consolidated value. Had OMAX alone been used, a manager would have trouble making tradeoffs among alternative strategic objectives. In contrast, had the BSC alone been used, the connection between financial and non- financial criteria would have been less robust. By integrating both OMAX and the BSC, the organizations could be able to create synergies which overcame the weaknesses o f the individual methodologies. By combining the strengths o f the two, we end up with a stronger, more robust framework with increased predictive power, the so-called ‘Balanced Objective M atrix (BOM AX).’ Through BOMAX method performance measures are normalized and an overall, multi-factor performance index is calculated. An index is a composite num ber that is created by mathematically combining several individual measures. While concentrating ju st on only one strategic performance index simplifying the decision making o f managers and avoiding the confusion caused by dealing with many performance indicators at once which usually yields only a vague general perception. The single number resulting from the BOMAX will tell management if the organization’s strategic performance qualifies as excellent, unsatisfactory or ju st mediocre. This single index is the indicator o f how well the organization is doing against the preset target or evaluated along with other measures. The four main components o f BOMAX are: the performance measures o f each o f the logistics processes (the scaled KPI) (Mi), the weights (wi), the performance scale (Li), and the performance index (PIi).

Logist ics P rocesses BS C P e rspect ives –Ke y P e rform a nce I n di cators (K P I) Learni ng-Gr o w th Internal P rocess Custom er S a ti sfacti o n F in anc ial M L1 , …… …. . M Ln M P1 , ……… .. M Pn M C1 , ……… .. M Cn M F 1………. . M Fn reh ousin g ei v ing, put -a y , eni s h m ent, le-c ount ing, k ing, pa ck ing, ippi ng, k it ti ng, urns M L1 Com m itm ent /S ta ff M P1 P a ck aged p c s/ year M C1 Fai lurl ess ness ( fai lure rat e) M F1 P e rs . Cost s/ c o m m itm M P2 Ut iliz at ion o f loading s u rf ac e (% ) M C2 Po lite n e ss M F2 P e rs .c o s ts /V ol u m e , unit , val M P3 Ut iliz at ion o f loading s p a c e ( % ) M C3 R e lia b ility M F3 Cons truct ion and op .c o s ts/ M L2 M a n-f a c ilit ie s rela ti on (ergono m y , envi ronm ent , p rot e c ti on) M P4 V o l. loaded i n /out/ S ta ff M C4 Ad v isin g M F4 M anagi ng c o s ts/ c o m m itm M L3 O p ti m um c om b in at io n o f j o bs ( tas k s ) and f ac ili ti es M P5 P a ck aged p c s/ st aff M C5 Q u ic k r e sp o n se o n co m p la in ts M F5 Tot a l m an.c o st s/ to ta l w a rehous M P6 Handl ed vol u m e /S ta ff M C6 Dam age events/ to ta l ac ti vi ti es M F6 S tor., pack ., handl ., c o st s/ vol val u e M P7 Handl ed vol um e /y ear M P8 P h ys ic al perf o rm an c e ti m e /P roc e s s ing t im e y s, sa fe ty -ck , cy c le -sto c k, it -s to ck , egi c -st o c k, eni s h m ent y, ign m ent -ck M L4 O p ti m um c om b in at io n o f j o bs ( tas k s ) and f ac ili ti es M P9 A v .i nvent ory (vol u m e, val ue) M C7 Res torabi lit y (av. res tori n g ti m e , t o tal brea k -dow n ti m e ) M F7 P e rs . Cost s/c o m m itm M L5 M P10 C o mmit me n t Sta ff A v .s to rage t im e (day, hour, m inut e) M C8 Po lite n e ss M F8 P e rs .c o s ts / V o lu m e , uni t, val u e M P11 $ Y ø Q YHQW RU\ HI ILF LHQ F\ GD\  m inut e) M C9 R e lia b ility M F9 Cons truct ion and op .c o s ts /Y M P12 Rot at ion f requeny /y ear M C10 Ad v isin g M F10 In te re s t/ V o lu m e , uni t, val u e M P13 C o mmit m e n ts/ year M C11 Q u ic k r e sp o n se o n co m p la in ts M F11 T o ta l sto r.&in v .co st s/ to ta l lo M P14 A v erage t im e of c o m m .(hour, m inut e) a ti on ing, rout ing ,

ing and ing, s

ourci ng, ti ng and ent, m en t M L5 C o mmit m e n t / s ta ff M P15 Tr. ed vol u m e/ Sta ff M C12 Res torabi lit y (av. res tori n g ti m e , to tal brea k -dow n ti m e ) M F12 To ta l tr . C o st s /to ta l lo g .co st s M P16 No of t rans ports / year M C13 Po lite n e ss M F13 T r. c os ts /v o lum e, t k m , k m M P17 Ton km /V ehi cl e and year M C14 R e lia b ility M F14 Tr .co s t/ ti me &v e h icle M P18 A v .V o l. Trans port/ A v .t im e. T rans port M C15 Truc ki ng& tr a c ing M F15 T r. c o s ts /c o m m itm ent M P19 A v erage di s tan c e ( k m ) M C16 Q u ic k r e sp o n se o n co m p la in ts M P20 U tiliz a tio n o f v e h icle s (% ) r e la te d to ti m e , l oad c apaci ty and tkm M C17 Dam age events/ to ta l ac ti vi ti es M P21 E rror del iv ery/ to ta l del iv ery co mmit m e n ts T able 1: Key P erf orm a n ce Meas u res of L o g is tics P roces s in resp ect to B

Research in Transport and Logistics 2009 Proceedings Doğuş University

The top row o f the m atrix includes the KPI which are assessed by BSC approach and defined for each BSC perspectives. The perspectives and their abbreviations are Learning and Growth (L); Finance (F); Customer-Citizen (C) and Internal Process (I). In BOMAX methodology dissimilar measures can be compared, and combined to produce an overall-global performance index. In order to be able to compare dissimilar measures, to see the inter-relationships between them, it is possible to index the measures scores, and so convert them to the same scale. The middle section holds eleven rows with different outcomes for the specific performance measures. These rows are ranked or scaled from zero to ten. The index scale is created by establishing a target value for each performance measure based on their current performance. The bottom o f the target range is defined as the minimum level that can be permitted. Matching the levels o f performances with the level o f the rows in a way that an outcome o f ten will be the most desirable and zero the least desirable and typical outcomes o f each indicator are aligned with a score o f three. The initial baseline called the ‘as is’ performance level for each performance measure is determined and assigned to level 3. The scaling should be conducted in the way that grade 10 could be achieved with excellent performance at least in five years time horizon. That means the time horizon should be defined in BOMAX very carefully and can typically be about a year or less for short-term goals or spans several years for long-term goals. The possible outcomes-the intermediate values- o f the performance measures are found in the body o f the m atrix and are calculated for scores between these ranges (Li). The objective o f these arrangements prevents the awarding of high grades to mediocre or normal performance, and embraces the notion o f stretching the work force to a superior performance and betterment o f the system. Ranks in the m atrix’s body should be clearly marked so they do not provide a margin o f doubt when assigning a score. The bottom o f the matrix weights the categories for the aggregation process. For each BSC perspective measures on BOMAX weighted according to their importance that is felt would create the biggest challenge in terms o f achieving the strategic targets. These weights are determined by management and add up to one hundred. The score in each column is multiplied by the weight, producing a final number or ‘index’ that represents the ‘grade’ o f the strategic activities for that specific period (PIi). Performance indexes are not an exact measure o f achievement but rather provide an indication o f business performance. To be useful, performance indexes must exhibit certain characteristics: appropriateness, relevance, accuracy, timeliness, completeness and comprehensiveness. W hen indexes begin to move outside the threshold limits, the performance measurement system can alert management, who then attempt to diagnose the problem and address its causes. The development o f performance indexes is not an end in itself but rather one part o f a structure o f governance and accountability. They can indicate whether strategic planning has been undertaken and is well focused on the reason for the organization existing. This method o f monitoring the strategic measures enables to identify the current levels o f strategic performance, and where action is needed to improve them. It will provide feedback o f the effects o f the actions, and ensure that the strategic performance continually improves. The BOMAX can be interpreted separately in three different ways: each performance measure as an unit, the performance sub­ index as an index o f a BSC perspective and lastly as a sum up measure off all BSC categories pulled together in one final index as departmental and company level (Figure 1). BOMAX provide insight into different departments or levels o f analysis. M ost help desks have various sub sections like front desk and solution providers, etc., which all contributing to overall success o f a help desk. The proposed framework, allow managers to do ju st that. To gauge exactly how well a section in a help desk is performing the overall performance index will allow the managers to capture and report specific data points from each section within the organization providing a ‘snapshot’ o f performance. Performance Index o f each Logistics Process (PPI) o f each in respect o f BSC perspectives at period t (Eq.1);

Z

L

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W

+ Z

L

•

W

+ Z

L

*

W

+

Z

L

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y - v y - v j - i =1, . . .n i =1,. . .n i =1, . . .n i=1,. . .n ...(1)

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i l l

i= 1 ,... n num ber o f m easures, j= 1 ,...m num ber o f logistics processes M i=Perform ance m easures Li = Perform ance scales o f Mi xijj=The current values o f m easures(M i) wi= w eights o f m easures

£ wr-100%

Performance Measure Actual value 10 9 8 7 6 5 4 3 2 1 0 Level W eight E w i= 100% Performance V alue FIGURE 1: T

CRITICAL SUCCESS FACTORS (C S F ,,...C SF,N)

Learning& G rowth Internal Process Custom er Finance

M li MLn M p! Mpn M ci MCn M fi M Fn Xli XLn XP1 XPn Xci Xon Xii Xln L10 L9 L8 L7 L6 L5 L4 L3 L2 Li L0 LL1 LLn LP1 LPn LC1 LCn LI1 LIn

Wli WLn Wpi WPn WC1 Wen WI1 Win

LL1-wL1 LL1-WLn LP1-WP1 LPn-WPn LC1-WC1 LCn-WCn LI1-WI1 LIn-WIn

HE DEPARTMENTAL BOMAX OF A HELP DESK 4. C O N C L U S IO N

This paper has sought to give an introduction to a new approach for measuring and improving performance o f logistics processes. In order to describe the approach, an introduction has been given to performance measurement. A performance improvement framework has also been introduced. This method can be employed at certain intervals, for instance annually may also be used for short periods o f time. The developed performance measurement systems are both focused on the results and the processes o f logistics. We would argue that the use o f the approach would enhance the performance o f logistics processes.

References

(1) Stevens (1989). G.C. Integrating the supply chain. International Journal of Physical Distribution and Materials Management 19 8 (1989), pp. 3-8.

(2) Christopher, (1992) Logistics and Supply Chain Management-Strategies for Reducing Costs and Improving Services, Pitman, London, 1992.

(3) Andersen, B., (1999), Business Process Improvement Handbook (ASQ Quality Press, Milwaukee, USA).

(4) Lynch C.(1991) Measure Up!- Yardsticks for Continuous Improvement, Blackwell Business, Oxford.

(5) Fagerhaug, T., (1998), Practical Productivity Measurement, Proceedings from 10th Working Seminar on Production Economics,Innsbruck/Igls,Austria.

(6) Sj0borg, E.R., (1984), Totalproduktivitet etter POSPAK-metoden (Bedrifts0konomisk Forlag, Oslo, Norway).

(7) Sink, D.S. and Tuttle, T.C., (1989), Planning and Measurement in Your Organization of the Future (Industrial Engineering and Management Press, Norcross, USA). SJ0BORG, E.R., 1984, Totalproduktivitet etter

(8) Hronec, S.M., (1993), Vital Sign. Using Quality, Time, and Performance Measurements to Chart Your Company’s Future (AMACOM/American Management Association, New York, USA).

(9) Rolstadas, A. (1995), Performance Management: A Business Process Benchmarking Approach (Chapman & Hall, London, United Kingdom).

(10) Erensal, Y.C. (2007) ‘Designing a Corporate Strategic Performance M easurem ent System: A Conceptual Fram ework with a Holistic A p p ro a ch ’ ed., Erkollar, A., Enterprise & Business Management : A Handbook for Educators, Consulters and Practitioners 1. Aufl.. - Marburg : Tectum Press, Marburg, 94-116

(11) Kaplan, R.S., Norton, D.P., (2001). The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment. H arvard Business School Press, Boston, MA. 32 (4), pp.38-55.