CHAPTER 7: LOGISTICS PERFORMANCE
DIMENSIONS
• Financial Performance Measure
• Productivity Performance Measure
• Quality Performance Measure
• Service level Performance Measure
• Customer satisfaction Performance Measure
• Cycle time Performance Measure
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Learning Outcomes
• Up on completing this chapter, you will be able to understand:
• Financial Performance Measure in logistics
• Productivity Performance Measure in logistics
• Quality Performance Measure in logistics
• Service level Performance Measure in logistics
• Customer satisfaction Performance Measure in logistics
• Cycle time Performance Measure in logistics
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Introduction
• Creating competitive advantage through high-performance logistics
requires integrated measurement systems. The old adage, “If you
don’t measure it, you can’t manage it,” holds true for logistical
activities both internal to an organization and externally with supply
chain Partners
• A logistics KPI or metric is a performance measurement that is
used by logistics managers to track, visualize and optimize all
relevant logistics processes in an efficient and transparent way.
• Effective measurement systems must be constructed to accomplish
the three objectives such as monitoring, controlling, and
directing logistical operations.
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Cont…
• Monitoring is accomplished by the establishment of appropriate
metrics to track system performance for reporting to management.
For example, typically metrics are developed and data gathered to
report basic service performance related to fill rates and on-time
deliveries and for logistics costs such as transportation and
warehousing.
• Controlling is accomplished by having appropriate standards of
performance relative to the established metrics to indicate when the
logistics system requires modification or attention. For example, if fill
rates fall below standards, logistics managers must identify the
causes and make adjustments to bring the process back into
compliance.
• The third objective, directing, is related to employee motivation and
reward for performance.
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Cont…
• An overriding objective of superior logistical performance is to improve
shareholder value. The Balanced Scorecard is a framework for performance
measurement with 4 dimensions
• The customer perspective focuses on how customers perceive a company and,
therefore, must include customer opinions. In a logistics context, metrics related
to this perspective generally include assessment of logistics service, quality, and
satisfaction.
• The internal operations perspective asks what must be done internally and
typically incorporates metrics related to process quality (damage rates, errors,
etc.) as well as measurement of efficiency and productivity.
• The innovation and learning perspective is future oriented and focuses on
process improvement as well as efforts related to human resources, which are
generally considered the driver of improvements in any organization.
Benchmarking may also be an aspect of the innovation and learning perspective.
• Finally, the financial perspective reflects the fact that financial success must be
achieved in every organization. Succeeding in the other three perspectives is not
adequate if the organization fails to improve profitability and return on investment,
thus increasing shareholder value.
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Cont…
• While many different classifications of logistics functional
measures exist, research over a period of years suggests five
categories: (1) cost, (2) customer service, (3) quality, (4)
productivity, and (5) asset management
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Financial Performance Measure
• Logistics Performance is Best Measured by Actual Costs
The most direct indicator of performance is the real cost incurred in
operations.
Integrated logistics consists of five interrelated areas: order processing,
inventory, transportation, warehousing & materials handling, and facility
network.
• Total Logistics Cost = Sum of All Area Costs
Also known as "total landed cost.“
Includes all performance and administrative costs across the five key logistics
areas.
• Major Challenge
Limited Ability to Measure Total Cost
Recent research shows few organizations can accurately capture the
necessary data to calculate true total logistics cost.
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Financial Performance Measure…
• Challenges in Integrated Logistics
Variations across organizations in defining integrated logistics,
combined with lack of readily available data, create implementation
difficulties.
Senior-Level Cost Monitoring
Senior management must closely track total logistics costs and monitor
individual functional costs to enable effective diagnosis and control.
Activity-Level Cost Detail
Functional cost data should be further refined to measure specific
activities (e.g., order picking and loading in warehousing) for greater
precision.
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Financial Performance Measure…
Common Cost Reporting Methods
Logistics costs are typically monitored and reported as a percentage of
sales or as cost per unit of volume, such as transportation costs
expressed as a percentage of dollar sales or dollars per order
delivered.
Warehouse and Activity-Level Metrics
Warehouse costs are often reported as a percentage of sales, with
specific activity costs (e.g., picking cost per item or loading cost per
order) tracked and compared to historical data or standards to identify
needs for corrective action.
Variety of Potential Metrics
The wide range of logistics activities (from order entry to unloading
vehicles) and volume measures (sales dollars, orders, or product
weight) allows for a large number of possible cost metrics.
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Financial Performance Measure…
• Other measures that require measurement of logistics cost,
such as direct product profitability, customer profitability,
and cost of service failures.
• Most firms recognize the importance of these measures but
currently lack the information necessary to accurately assess
these costs.
• Accurate measurement in these critical dimensions requires a
level of sophistication in accounting data that has just recently
become available.
• Activity-based costing is discussed later in this chapter as a
means to more accurately assess the cost related directly to
customers and products.
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Productivity Performance Measure
• The relationship between output of goods, work completed, and/or
services produced and quantities of inputs or resources utilized to
produce the output is productivity. If a system has clearly measurable
outputs and identifiable, measurable inputs that can be matched to the
appropriate outputs, productivity measurement is quite routine.
• Generally, logistics executives are very concerned with measuring the
productivity of labor. While the labor input can be quantified in many ways,
the most typical manner is by labor expense, labor hours, or number of
individual employees.
• Thus, typical labor productivity measures in transportation include units
shipped or delivered per employee, labor dollar, and labor hour.
• Warehouse labor productivity may be measured by units received, picked,
and/or stored per employee, dollar, or hour.
• Similar measures can be developed for other activities, such as order
entry and order processing. It is also common for managers to set goals
for productivity improvement and compare actual performance to goal, or
at the very least to prior year performance.
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Quality Performance Measure
• Performance relative to service reliability is generally reflected
in an organization’s measurement of logistics quality.
• Many of the quality metrics are designed to monitor the
effectiveness of individual activities, while others are focused on
the overall logistics function. Accuracy of work performance
in such activities as order entry, warehouse picking, and
document preparation is typically tracked by computing the
ratio of the total number of times the activity is performed
correctly to the total number of times it is performed. For
example, picking accuracy of 99.5 percent indicates that 99.5
out of every 100 times, the correct items were picked in the
warehouse
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Quality Performance Measure…
• Overall quality performance can also be measured in a variety
of ways. Typical measures include damage frequency, which
is computed as the ratio of the number of damaged units to
the total number of units. While damage frequency can be
measured at several points in the logistics process, such as
warehouse damage, loading damage, and transportation
damage, it frequently is not detected until customers receive
shipments or even some point in time after receipt.
• Therefore, many organizations also monitor the number of
customer returns of damaged or defective goods. It is also
common to measure customer claims and refunds on
adjustments.
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Quality Performance Measure…
• Other important indicators of quality performance relate to
information. Many organizations specifically measure their
ability to provide information by noting those instances when
information is not available on request (availability of
information upon request).
• It is also common to track instances when inaccurate
information is discovered (information inaccuracy). For
example, when physical counts of merchandise inventory
differ from the inventory status as reported in the database,
the information system must be updated to reflect actual
operating status.
• Additionally, the occurrence of information inaccuracy should be
recorded for future action.
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Service level Performance Measure
• The elements of basic logistics service were identified as
availability, operational performance, and service reliability.
• An effective basic service platform requires specific metrics for
assessing performance in each dimension.
• Availability is typically reflected by an organization’s fill rate. It
is critical to note, however, that fill rate may be measured in a
variety of ways:
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Service level Performance Measure …
• Item fill rate = Number of items delivered to customers
• Number of items ordered by customers
• Line fill rate= Number of purchase order lines delivered complete to customers
• Number of purchase order lines ordered by customers
• Value fill rate= Total dollar value delivered to customers
• Total dollar value of customer orders
• Order fill rate = Number of orders delivered complete
• Number of customer orders
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Service level Performance Measure …
• Clearly, the order fill rate, also known as orders shipped
complete, is the most stringent measure of a firm’s performance
relative to product availability. In this metric, an order that is
missing only one item on one line is considered to be
incomplete.
• It is also common for companies to track specifically the
number of stock outs encountered and number of back
orders generated during a time period as indicators of
availability.
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Service level Performance Measure …
• Operational performance deals with time and is typically measured
by average order cycle time, consistency of order cycle time, and/or
on-time deliveries.
• Average order cycle time is typically computed as the average number of
days, or other units of time, elapsed between order receipt and delivery to
customers.
• Order cycle consistency is measured over a large number of order cycles
and compares actual with planned performance. For example, suppose
average order cycle time is five days. If 20 percent were completed in two
days and 30 percent in eight days, there is great inconsistency around the
average.
• On-time delivery- In situations where delivery dates or times are specified by
customers, the most stringent measure of order cycle capability is on-time
delivery, the percentage of times the customer’s delivery requirements
are actually met.
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Cycle time Performance Measure
• Time is literally money in the logistics sector. Quicker transit,
loading, and unloading times translate into greater asset
utilization, which translates into greater leveraging of the
corporation’s capital.
• Cycle time metrics are the most natural indicators of
transportation performance, for instance.
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Cycle time Performance Measure …
• Some of the most popular cycle time indicators for transportation include
• In-transit time (ITT): Point-to-point in-transit times by driver, carrier,
lane, and location.
• In-transit time variability: Point-to-point in-transit time variability by
driver, carrier, land, and location.
• Vehicle load/unload time: Vehicle loading and unloading times at each
pickup/delivery location by driver, carrier, lane, and location.
• Detention time: Time spent waiting for loading or unloading at a
pickup/delivery location due to dock congestion and/or delays caused by
the shipper or consignee.
• Delayed in traffic time: The time spent idling or at reduced speed due
to traffic congestion for each driver, carrier, lane, and pickup/delivery
location.
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Asset Management
• Utilization of capital investments in facilities and equipment as well as
working capital invested in inventory is the concern of asset management.
• Logistics facilities, equipment, and inventory can represent a substantial
segment of a firm’s assets. For example, in the case of wholesalers,
inventory frequently exceeds 80% of total capital. Asset management
metrics focus on how well logistics managers utilize the capital invested in
operations.
• Facilities and equipment are frequently measured in terms of capacity
utilization, or the percentage of total capacity used. For example, if a
warehouse is capable of shipping 10,000 cases per day, but ships only
8,000, capacity utilization is only 80%. It is also common to measure
equipment utilization in terms of time.
• Logistics managers are typically concerned with the number or
percentage of hours that equipment is not utilized, which is measured
as equipment downtime. Downtime can be applied to transportation,
warehouse, and materials handling equipment. These measures
indicate the effective or ineffective utilization of capital asset investment.
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Asset Management…
• Asset management measurement also focuses on inventory. Inventory
turnover rate is the most common measure of performance. Throughout
the text, improved inventory turnover has been stressed as a critical focus
of logistical management. It is important to understand how firms
specifically measure inventory turnover rate. In fact, three specific
metrics exist, each of which is used by different types of firms:
• Inventory turnover = Cost of goods sold during a time period
• Average inventory valued at cost during the time period
• Inventory turnover = Sales revenue during a time period
• Average inventory valued at selling price during time period
• Inventory turnover = Units sold during a time period
• Average unit inventory during the time period
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Asset Management…
• The vast majority of firms use the first to calculate inventory turnover
rate. Some retail organizations use the second. In fact, either of the
two ratios should yield approximately the same result. Any
differences in the two calculations would result from changes in the
amount of gross margin (the difference between sales and cost of
goods sold) during the time period.
• The third approach, using units rather than dollars, is particularly
applicable to products whose cost or selling prices change
significantly during a relatively short time. For example,
inventory turnover of gasoline, which changes in cost and price
almost daily, would most appropriately be measured by computing
units of gasoline sold and units of inventory rather than dollars of any
kind.
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Asset Management…
• As a final note on computation of turnover, it is critical that average
inventory be determined by using as many data points as possible. For
example, suppose a company had no inventory at the beginning of the
year, bought and held a large quantity for 11 months, then sold all
inventory before end of year. Using only the beginning and ending
inventory positions, average inventory would be zero and turnover infinite.
Clearly, this would be misleading to management.
• Inventory turnover is often considered a “backward-looking” measure
because it looks at the company’s performance in managing inventory
during a previous time period, such as the previous year. Another common
way that companies think about their inventory measurement is in terms of
days of supply, which is considered a “forward-looking” measure.
• Days of supply (also called days of sales or days of inventory) is the
number of days of business operations that can be supported with the
inventory on hand, given that no more inventory is bought or produced.
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Asset Management…
• Of major interest to senior executives is return on assets and return on
investment.
• Most organizations have substantially improved their functional measurement
systems over the past 10 years.
• The number of specific metrics has increased, and the quality of information has
improved. Much of the improvement in information quality can be attributed to
improved technology.
• Years ago measurement of on-time delivery typically did not actually monitor
delivery receipt by the customer.
• Most firms had no mechanism to capture information concerning when customers
received orders. Instead, they typically measured on-time shipment by discerning
if the order was shipped on time. It was assumed that if shipments left the
supplier’s facility “on time,” then they also arrived at customer facilities “on time.”
• Thus, the transportation delivery aspect of the order cycle was ignored. Today,
using Electronic Data Interchange (EDI) linkages, satellite, and Internet tracking,
many organizations monitor whether orders actually arrive at the customer
location on time.
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Measuring Customer Relationships
• Basic logistical service performance is necessary but is not sufficient
for firms that are truly committed to logistical excellence.
• Today, many firms have focused increased attention on alternative
methods of measuring their ability to meet customer requirements.
• As a result, an additional set of metrics is required for companies
that strive to move beyond measuring basic customer service.
Measurement of perfect orders, absolute performance, and customer
satisfaction are three such approaches.
• Customer success, the ultimate in customer relationships, has no
specific metrics but remains the goal for firms committed to SCM.
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Perfect Orders
• The perfect order concept was an indicator of an organization’s
commitment to zero-defect logistics.
• Delivery of perfect orders is the ultimate measure of quality in logistics
operations. A perfect order measures the effectiveness of the firm’s overall
integrated logistical performance rather than individual functions.
• It measures whether an order proceeds flawlessly through every step—
order entry, credit clearance, inventory availability, accurate picking, on-
time delivery, correct invoicing, and payment without deductions—of the
order management process without fault, be it expediting, exception
processing, or manual intervention.
• In fact, as many as 20 different logistics service elements may impact a
perfect order. From a measurement perspective, perfect order
performance is computed as the ratio of perfect orders during a given time
period to the total number of orders completed during that period
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Perfect Order Performance…
• Research has estimated that the return to companies that provide
high levels of perfect order fulfillment can be substantial.
• Improving perfect order performance by 3 percent can result in a 1
percent increase in profits.
• In reality, measuring perfect order performance is not a simple task.
Depending on which items are included in the perfect order, multiple
information systems within a firm may need to be integrated and
linked to the original purchase order.
• The American Productivity and Quality Center (APQC) includes
four elements in its definition of perfect order performance: percent
of orders delivered on time, percent of orders complete, percent of
orders damage free, and percent of orders with accurate
documentation.
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Absolute Performance
• Most basic service and quality measures, and even perfect order
measures, are aggregated over many orders and over a period of time.
• The problem some executives report with these on-average, over-time
measures is that they tend to cover the organization’s real impact on its
customer base. They feel that such measures can actually result in a
feeling of complacency within the firm and that it is more appropriate to
track absolute performance as close to real time as possible.
• The absolute approach provides a better indication of how a firm’s
logistical performance really impacts customers. For example, managers
may feel that 99.5 percent on-time delivery represents excellent
performance. As an executive of a large delivery company said, “To us,
99.5 percent on-time delivery would mean that on a typical day, over 5000
customers received late orders. We can’t feel good about having that kind
of impact on that many customers.” This firm, and many other companies
seeking to achieve maximum impact in the market, monitors absolute rates
of failure and success as well as the more typical ratio and percentage
metrics.
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Customer satisfaction Performance Measure
• As mentioned at the beginning of this chapter, measuring
customer perceptions and opinions is fundamental in a
balanced scorecard. All of the internally generated statistics
related to basic service, perfect order, or absolute performance
may be internal indicators of customer accommodation, but to
quantify satisfaction requires monitoring, measuring, and
collecting information from the customer.
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Customer satisfaction Performance Measure …
• Typical satisfaction measurement requires careful investigation of
customer expectations, requirements, and perceptions of firm
performance related to all aspects of logistics operations.
• For example, the typical survey measures customer expectations
and performance perceptions regarding availability, order cycle time,
information availability, order accuracy, problem resolution, and other
aspects of logistics quality. It is useful to gather information
concerning customers’ overall feelings of satisfaction in addition to
their assessment of specific logistics activities.
• Additional questions may be included to capture customer
perceptions of competitor performance.
• Only through collecting data from customers can real satisfaction be
assessed!
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Determining Appropriate Metrics
• Thus far, many different performance metrics have been described, but no framework for
determining the appropriate metrics or for prioritizing the need for specific metrics has
been offered.
• In fact, several different frameworks have been proposed in the logistics literature. A
particularly useful framework has been offered by Griffis, Goldsby, Cooper, and Closs.
• They propose a framework built on three dimensions: (1) competitive basis, (2)
measurement focus, and (3) measurement frequency.
• Competitive basis is a dimension reflecting a fundamental strategic choice between
responsive logistics and efficient logistics performance. They note that performance
favoring responsiveness likely comes at the expense of efficiency.
• The measurement focus dimension represents the needs of the organization along a
continuum ranging from operational metrics to those that provide strategic direction.
• The third dimension, measurement frequency, suggests that some metrics are needed
frequently to monitor day-to-day performance, while others may be consulted less
frequently for the purpose of diagnosing performance problems.
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