Improving supply chain performance management: A ...

1 Improving supply chain performance management : A systematic approach toanalyzing iterative KPI accomplishmentJian Caia, Xiangdong Liub, , Zhihui Xiaob, Jin LiubaPIER Institute, College of Engineering, Guanghua School of management , Peking University, Beijing, PR ChinabDepartment of management Science and Information Systems, Guanghua School of management , Peking University, Beijing, PR Chinaabstractarticle infoArticle history:Received 5 August 2007 Received in revised form 19 July 2008 Accepted 18 September 2008 Available online 27 September 2008 Keywords: performance improvementSupply chain managementKey performance indicator (KPI)KPI accomplishmentKPI cost transformation matrix (PCTM) Improving supply chain performance has become one of the critical issues for gaining competitiveadvantages for companies. This paper proposes a framework using a systematic approach to Improving theiterative key performance indicators (KPIs) accomplishment in a supply chain context.

2 The proposedframework quantitatively analyzes the interdependent relationships among a set of KPIs. It can identifycrucial KPI accomplishment costs and propose performance improvement strategies for decision-makers in asupply chain . A scenario of a large retail company is also discussed to explain the application of Copyright 2008 Published by Elsevier All rights IntroductionIn the context of a dynamic supply chain , continuously improvingperformance has become a critical issue for most suppliers, manu-facturers, and the related retailers to gain and sustain practice, supply chain based companies ( , Dell, Wal-Mart,Samsung, Toyota, Lenovo, Gome, etc.) have used different performancemanagement tools to support their supplychain strategies. Monitoringand improvement of performance of a supply chain has become anincreasingly complex task.

3 A complex performance managementsystem includes many management processes, such as identifyingmeasures, defining targets, planning, communication, monitoring,reporting and feedback. These processes have been embedded in mostinformation system solutions, such as i2, SAP, Oracle EPM, etc. Thesesystem solutions measure and monitor key performance indicators(KPIs) which are crucial for optimizing supply chain measurement is critical for companies to improvesupply chains' effectiveness and efficiency[3,22]. Decision-makers insupply chains usually focus on developing measurement metrics forevaluating performance [3,12]. In practice, once the supply chainperformance measures are developed adequately, managers have toidentifythe criticalKPIsthat needto , it is difficulttofigure out the intricate relationships among different KPIs and theorder of priorities for accomplishment of individual KPIs.

4 As a matter offact, determination of priorities within a given set of KPIs has become abottleneck for many companies in their endeavors for Improving theirsupply chain management (SCM). As these problems have receivedrelatively less attention in previous research[22],significant gapsremain between practical needs and their effective solutions. To addressthese issues, our research proposes a systematic approach that helpsanalyze and select the right KPI groups and strategies for theiraccomplishment, for improved supply chain rest of this paper is organized as follows. InSection 2,wearticulatethe challenges of supply chain performance improvement both in theoryand in 3presents the proposed framework for analysis ofsupply chain performance management , and a systematic approach toassigning priorities to different KPIs, based on the cost of iterativeimprovement of each 4discusses an illustrative application ofthis methodology in supply chain management by a large retail ,Section 5gives conclusions and discusses limitations, unsolvedproblems and possible directions for future The challenges of supply chain performance managementImproving supply chain performance is a continuous process thatrequires both an analytical performance measurement system, and amechanism to initiate steps for realizing KPI goals.

5 Herein we call themechanism to achieve KPI goals as KPI accomplishment , whichconnects planning and execution, and builds steps for realization ofperformance goals into routine daily work. To measure supply chainDecision Support Systems 46 (2009) 512 521 Corresponding author. Department of management Science and InformationSystems, Guanghua School of management , Room 207, Building 1, Changchunyuan,Peking University, Beijing 100871, PR China. Tel.: +86 10 6274 Liu).0167-9236/$ see front matter. Crown Copyright 2008 Published by Elsevier All rights lists available atScienceDirectDecision Support Systemsjournal homepage: ,thereareasetofvariablesthatcapturetheim pactofactualworking of supply chains on revenues and costs of the whole system[21]. These variables as drivers of supply chain performance are alwaysderived from supply chain management practices[21].

6 After identifyingKPIs, managers have to achieve improvement in them, throughcontinuous planning, monitoring and execution. According to theresults of selected KPIs' accomplishment, managers may create currentreports onKPIs, this performance management cycle, there are manychallenges, bothin performance measurement, and its Intricate performance measures in a supply chainMany metrics used in supply chain performance evaluation havebeen designed to measure operational performance , evaluateimproved effectiveness, and examine strategic alignment of thewhole supply chain management [3]. Individual measures of supplychain performance have usually been classified into four categories:quality[3,22], time[4,22], cost[4,12],flexibility[1,3]. Furthermore,they have also been grouped by quality and quantity, cost and non-cost, strategic/operational/tactical focus, and supply chain processes[12,22].

7 However, since many measurement systems lacked strategyalignment, a balanced approach and systemic thinking[3,8], they haddifficulty in systematically identifying the most appropriate address this problem, some researchers have used BalancedScorecard (BSC) and Activity Based Costing (ABC) methods to evaluatesupply chain performance [16]. Other researchers have also proposedsimilar balanced frameworks, such as performance MeasurementMatrix, results-determinants framework, performance pyramid, etc.[19]. From a process perspective, the supply chain OperationsReference (SCOR) model has been developed to facilitate constructionof a systematic supply chain performance measurement and improve-ment tool; it has often been recognized as a systematic approach foridentifying, evaluating and monitoring supply chain performance [17].In the SCOR model, a balanced performance measurement system atmultiple levels, coveringfive core supply chain processes ( Plan,Source, Make, Deliver, and Return), was developed[4,13,17].

8 However, measurement models ( extended BSC and SCOR) forsupply chain performance evaluation have their limitations. First, thereare too many individual measures being used in the supplychain example, Shepherd and Gunter[22]have summarized 39, 22, 35, 28and 8 single supply chain performance indicators related to cost, time,quality (or reliability),flexibility and innovativeness respectively. Thoughthese measures offer valuable information for decision-making, selectingand trading off so many measures to obtain effective and crucialimprovement strategies is a difficult task for different supply chainparticipants. Second, these models do not provide definite cause effectrelationships among numerous (and hierarchical) individual existing models ( , BSC) do illustrate the cause-and-effectrelationships between different goal-related KPIs[18], they are inade-quate for quantitative analysis of the intricate intertwined BSC and SCOR models generally assume that KPIs areuncoupled.

9 These approaches could describe business operations well,and serve as a good communication tool, but they are not effective inimproving overall performance by accomplishing the critical KPIs. Formany managers, who try to allocate resources efficiently and achievemultiple supply chain performance goals, this becomes the Determination of importance of performance measuresDetermination of importance of individual performance measuresis another challenge for decision-makers in SCM. Specifically, there aretwo difficult issues managers face while implementing a well-builtperformance measurement system. First, since many measurementsystems are static ( not dynamic), they often lag behind theconstantly varying contexts in supply chains. Once the measurementsystems have been established, they are rooted, and remainunchanged, for a long time.

10 But in the dynamic supply chainenvironment, some measures actually getoutdatedand yet remainentrenched, especially the preset KPIs. Second, few measurementsystems have a systematic method for prioritizing the measures[19]and, therefore, many companies have difficulties infiguring out waysof adapting their continuously changing strategic objectives andmeeting the requirements of the dynamic decision-making environ-ment. It is critical for performance measurement systems and relatedcriteria to be updated and evaluated constantly[3,22].Recently, some decision-making tools have been used to solveproblemsof performancemetrics' trade-off by weighingtheimportanceof different KPIs. One of them is use of the Analytic Hierarchy Process(AHP) approach, as a quantitative decision-making tool for linking thescorecard's KPIs to the overall mission, objectives, and strategies[13,16].