In a process-orientated company, many of these new performance indicators used in benchmarking and elsewhere are non-financial. That is, they will focus management’s attention upon the truly critical areas of performance — i.e. those that drive profitability and align the business unit with its strategic goals. In the case of marketing logistics, we might expect to see metrics that capture such things as customer satisfaction, flexibility and employee commitment. Management meetings should therefore begin their agenda not with the financial review — that will come later — but with a review of non-financial performance indicators. These will necessarily differ between organisations, but may include:
- Customer satisfaction
- Customer retention
- Brand preference
- Dealer satisfaction
- Service performance
- Flexibility
- Set-up times
- Commonality of components and materials
- Throughput times
- Percentage value-added time
- People commitment
- Employee turnover
- Suggestions submitted and implemented
- Internal service climate and culture
- Training and development index.
The whole notion of adopting broad-based performance measurement systems was brought to the fore by writers Kaplan and Norton, who popularised the concept of a ‘Balanced Scorecard‘ for measuring business unit performance. Their scorecard used multiple measures from four perspectives — financial, customer, internal business processes, and learning and growth — to provide a balanced picture of current operating performance as well as the drivers of future performance. Well-worn financial measures (such as inventory turns or day’s sales outstanding) are single-firm, internally focused indications of past performance, whereas well-chosen non-financial measures can be forward and outward looking. They indicate forthcoming performance and future direction, and incorporate external perspectives — not least those of customers — into the system.
The balanced scorecard approach, although designed to provide a performance measurement system for single business units, has since been embraced as a model for the implementation of much more ambitious supply chain integration programmes. The ECR scorecard was devised as an enabling tool, to provide companies in all parts of the supply chain and of any size with a means of answering ‘how well are we doing?’. Its creators were at pains to point out that it offered a point of reference; it would not generate business or customer and supply chain improvements on its own. It would, however, identify areas for potential improvement both internally and externally — i.e. between trading partners.
The scorecard covers demand and supply side implementation measures, and it promotes the use of ABC as an appropriate cost accounting system.
ABC accounting and aspects of demand management have already been covered, and aspects of product supply and replenishment were covered in previous ones. There are, however, other aspects of supplier management, such as supplier selection and development that we have not yet visited. In an integrated supply chain context they warrant managerial attention.
Just as businesses have become more adept at setting internal or customer-focused performance improvement measures, the larger and more influential ones have also become more actively involved in applying the same tools and techniques to monitor the performance of their suppliers.
The concept of supplier development proposes that it is in the best interests of the customer to take a proactive approach to the establishment of mutually beneficial — though not necessarily equitable — relationships with suppliers. In other words, customers should actively seek ways in which they can work together with suppliers to reduce the total costs of ownership. They should do so whilst constantly seeking to enhance their own differentiation through means such as improved quality, innovative design and unique technologies, all of which will be strongly influenced by supplier involvement.
Supplier development programmes, largely based on the Toyota Production System, are commonplace in the car industry, where the notion of managing a cohort of first-tier suppliers as an extension of the manufacturer’s enterprise is widely accepted. The ‘extended enterprise‘ model has since been adopted in other manufacturing sectors with high engineering content, such as aerospace. Versions of the extended enterprise can also be found in the apparel industry, where companies like Benetton and Marks & Spencer have historically maintained close working relationships with dedicated suppliers. Here demanding customers — in this instance the large retailers — look to preferred suppliers to align with their processes while undertaking rigorous quality improvement and cost-reduction programmes. In this way a ’seamless’ pipeline can be created, which not only makes for greater efficiency through reduced paperwork, lower inventory and faster response, but also creates an environment in which the search for continual cost reduction and value enhancement becomes a priority.
Supplier development programmes, like most other aspects of supply chain integration programmes, are resource intensive. Such collaborations demand close working relationships with a few leading suppliers, whose ongoing performance is carefully monitored and benchmarked according to appropriate KPIs. The KPIs will vary between businesses and industries, but are likely to include aspects of quality, cost and delivery, as well as partnership management criteria.
A willingness on both sides to work co-operatively for long-term mutual gain is a prerequisite for any supplier management programme. The likelihood is that establishing such programmes for the first time will require a fundamental shift in attitudes on both sides. This should not be taken to mean that partnership working implies a weakening in the desire to improve performance — indeed, successful partnerships in the supply chain tend to be based very much on hard commercial realities. When they become commercially unviable, possibly as a result of changes in the market place or the competitive environment, the likelihood is that they will be dissolved.
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