schmitz, platts - 2004 - supplier logistics performance measurement indications from a study in the...

Int. J. Production Economics 89 (2004) 231–243

Supplier logistics performance measurement: Indications froma study in the automotive industry

J. Schmitz*, K.W. Platts

Department of Engineering, Centre for Strategy and Performance, Institute for Manufacturing, University of Cambridge,

Cambridge CB2 1RX, UK

Received 15 April 2002; accepted 14 November 2002

Abstract

Managing the supply base is an important but complex issue for automotive manufacturers. One of the instruments

companies use in this context is performance measurement. There is ample work on the practice of performance

measurement within an organisation. However, much less can be found about the practice of supplier performance

measurement. In this paper we offer a brief discussion of the literature on inter-organisational performance

measurement and contrast existing concepts of intra-organisational performance measurement with the concepts of

performance measurement within a supply chain. We then present indications from a study of four vehicle

manufacturers in Europe with regards to their practices of supplier evaluation and present a conceptual framework

identifying the functions of performance measurement in this context.

r 2003 Published by Elsevier Science B.V.

Keywords: Supplier evaluation; Performance measurement; Inter-organisational control; Logistics measures; Automotive industry

1. Introduction

Major OEMs co-operate with hundreds ofdifferent suppliers. For example, one of the vehiclemanufacturers we studied has a database ofaround 3000 supplier sites in Europe. More than1600 are currently supplying the company. Ad-ditionally the company has to deal with around30 000 suppliers of non-production goods: Ran-ging from suppliers of pens and paper, to suppliersof carpet and furniture. The management of thesupply base has been described as a key compe-

tence for a company (Fine et al., 1996). One of thetechniques companies use for this task is perfor-mance measurement. There is a vast amount ofliterature on performance measurement frame-works and systems. However, most of this workis concerned with performance measurement with-in an organisation, e.g. the measurement of theperformance of subsidiaries and departments, or itdeals with issues such as management incentivesand employee appraisal. Research on the practiceof inter-organisational performance measurement,e.g. how companies use performance measurementto manage their relationships and interactions withsuppliers, is rather rare.

In this paper we first discuss basic conceptsof intra- and inter-organisational performance

ARTICLE IN PRESS

*Corresponding author. Tel.: +44-1223-338-192; fax: +44-

1223-338-076.

E-mail address: [email protected] (J. Schmitz).

0925-5273/03/$ - see front matter r 2003 Published by Elsevier Science B.V.

doi:10.1016/S0925-5273(02)00469-3

measurement. We argue that the reasons formeasuring and the way performance measurementand management works, differ largely dependingon the context. To support the implications of ourtheoretical reflections, we present outcomes of anempirical study in the automotive industry. In thisstudy we investigate the extent to which fourautomotive manufacturers use performance mea-surement at the interface to their suppliers in thearea of logistics. We explore the subsequent use oflogistics performance data within the logisticsdepartment and between different functions suchas logistics and purchasing. With this paper weaim to:

* discuss current literature as to what insight itoffers for the analysis and design of supplierperformance measures and measurement sys-tems;

* present empirical insights into the use ofsupplier performance measurement in the areaof logistics in the automotive industry;

* establish a perspective on the functions ofperformance measurement as a framework forthe analysis of inter-organisational performancemeasurement.

2. Performance measurement—a disputable

concept?

Why is it important to look at the underlyingconcepts and the functions of measurement?Indeed, many managers and academics alikeappear to have no doubt that performancemeasurement is necessary and therefore do notseek for any deeper justifications. David Garvin(1993) coined a phrase in the Harvard BusinessReview that has become paradigmatic for thisview: ‘‘If you cannot measure it, you cannotmanage it’’. There is certainly some truth in thisstatement. However, we think that some practi-tioners and academics alike go too far in anuncritical appreciation of performance measure-ment. For example, one director of a leadingpharmaceutical company recently stated:

A performance measurement system, properlystructured and managed, is the missing link

between strategic plans and their total execu-tion. (Anonymous, 2001)

Statements like this are almost a direct inversionof Garvin’s phrase towards the meaning of ‘‘If youcan measure it, you can manage it’’. This, ofcourse, clearly overstates the potential of perfor-mance measurement. Nevertheless it seems to bethe underlying motivation for many performancemeasurement initiatives.

Whereas on the one hand there are the over-excited protagonists of performance measurement,on the other hand there also exist the antagonisticcynics: the managers or employees who believethat performance measurement is a fundamentallyflawed concept. They argue that as soon asobjectives and evaluation methods are defined,managers and employees will find their wayaround, either through gaming, or ‘creativeaccounting’ and fraud. Or that the measurementwill lead to tunnel vision (neglecting other areaswhich are not measured), disinclination on experi-menting, or myopia (see Smith, 1993; Austin,1994).

Both views seem to be extreme: Performancemeasurement is surely not the safe secret tosuccess. However, most managers would probablyfeel very uncomfortable without this instrument.The key to the evaluation of performance mea-surement in our view has to be based first andforemost on identifying the function of theperformance measurement system; and this, again,depends largely on the organisational context, theorganisational culture and management intent. Webelieve that the confusion or disagreement aboutthe sense and benefit of performance measurementstems from the fact that there is dissent on thepurpose of measurement and on the question ofhow performance measurement actually works.

In order to research supplier performancemeasurement, we have to focus on the funct-ions performance measurement in this contextfulfils and the organisational setting in whichit is placed. As a starting point we brieflysummarise the functions of performance measure-ment as stated in the extant literature on intra-organisational performance measurement. Wethen discuss to what extent supply chain and

ARTICLE IN PRESS

J. Schmitz, K.W. Platts / Int. J. Production Economics 89 (2004) 231–243232

supplier measurement poses questions that differfrom the ones raised by the intra-organisationalliterature. Finally, we present four case studies onsupplier evaluation in the automotive industry inorder to discuss the functions that supplierperformance measurement fulfils in practice.

3. Functions of intra-organisational performance

measurement

There is an extensive amount of normativeliterature on individual performance measures,performance measurement systems and frame-works, as well as the relationship between perfor-mance measurement systems and the environment(e.g. Neely et al., 1995). The literature offersseveral performance measurement frameworks,like Kaplan and Norton’s (1996) Balanced Score-card, the Performance Measurement Matrix(Keegan et al., 1989) or the Performance Pyramid(Cross and Lynch, 1992). Furthermore a numberof checklists, guidelines and evaluation criteria areavailable suggesting principles to be employedwhen designing or evaluating individual metrics aswell as performance measurement systems (e.g.Ghobadian and Ashworth, 1994; Meyer 1994;McMann and Nanni, 1994; Caprice and Sheffi,1994, 1995).

Authors in the field of performance measure-ment have specified several functions that perfor-mance measurement is supposed to fulfil. We listsome of them in Table 1. A few alternativeattempts to categorising functions or purposes ofmeasurement can be found in the literature (e.g.van Drongelen, 1998; Flamholtz, 1996; vonBonsdorff and Andersin, 1995). However, thereis no commonly accepted language or conceptualframework concerning the functions of perfor-mance measurement. As a result of our literaturereview, we grouped the functions mentioned in theliterature into nine categories that we thinkprovide both, a reasonable degree of abstractionto be conceptually generic and useful as well as areasonable degree of detail to be meaningful anddiscriminating.

Interesting enough, there is almost no studywhich examines in detail, whether performance

measurement in reality indeed fulfils all thesefunctions and whether performance measurementsystems in place really work in the ways oftenpresumed by normative literature. Only a fewstudies can be found which are explicit on the useand functions of performance measurement (vanDrongelen, 1998; Kald and Nilsson, 2000). Buteven these are not based on first-hand empiricaldata on the actual practice of performancemeasurement but are based solely on the percep-tions of managers.

4. Performance measurement in the supply chain

context

Relevant work on mechanisms and techniquesfor inter-organisational control, such as in asupply chain context, has primarily been domi-nated by research on the general nature of inter-company relationships and especially the implica-tion of trust (e.g. Lane and Bachmann, 2000;Doney and Cannon, 1997; Sako, 1992; Spekman,1988) or on specific areas of inter-organisationalcollaboration such as in Research and Develop-ment (e.g. Twigg, 1995; Takeishi, 1998). Morerecently the use of management accounting andcontrol techniques in supply chains has beenstudied (e.g. Mouritsen and Hansen, 2000; Sealet al., 1999; Cullen et al., 1999; Ahmed et al., 1997;Berry, 1994). The issue of performance measure-ment has been relatively neglected, though.Although the importance of this topic is widelyacknowledged, there is a clear lack of relevantrespective empirical research. Ahmed et al. (1997)conclude from their literature review of inter-organisational management accounting and con-trol that there are ‘‘significant gaps in theoreticaland empirical knowledge’’.

In their book on Supply Chain Management,Handfield and Nichols (1999) state that ‘‘in effect,performance measurement is the glue that holdsthe complex value-creating system together, direct-ing strategy formulation as well as playing a majorrole in monitoring the implementation of thatstrategy’’. Nonetheless, most research on perfor-mance measurement is only tackling specificindividual parts of supply chain management

ARTICLE IN PRESS

J. Schmitz, K.W. Platts / Int. J. Production Economics 89 (2004) 231–243 233

ARTICLE IN PRESS

Table 1

Functions of performance measurement as stated in the normative literature

Category Functions/purpose of measurement

Strategy formulation and

clarification

Translate vision and strategy in operationalisable objectives and actions (Kaplan and Norton, 1996;

Lingle and Schiemann, 1996)

Clarify strategies (Kaplan and Norton, 1996; Lingle and Schiemann, 1996)

Force specificity and help to surface and resolve hidden disagreements among top management (Lingle

and Schiemann, 1996)

Specify values (Lingle and Schiemann, 1996)

Help to define the goals and performance expectations for organisations (Medori and Steeple, 2000)

Management information Provide management information (von Bonsdorff and Andersin, 1995)

Feedback for management for improved control (Kaydos, 1999)

Provide information for planning and forecasting (Kaydos, 1999)

Identify performance gaps (von Bonsdorff and Andersin, 1995; Kaydos, 1999)

Vertical communication Communicate strategy throughout organisation (Kaplan and Norton, 1996; Neely and Najjar, 2000;

Simons, 1999)

Ensure Clarity of communication of strategy from top to bottom of organisation (Lingle and

Schiemann, 1996)

Communicate clear targets for actions, decisions and improvement activities (Kaplan and Norton,

1996)

Communicate performance expectations (von Bonsdorff and Andersin, 1995)

Clarify responsibilities and objectives (Kaydos, 1999; Simons, 1999)

Give employees certainty about how to contribute (Lingle and Schiemann, 1996; Simons, 1999)

Provide basis for rational argumentation with superiors and employees (Kaydos, 1999)

Provide common language for communication (Lingle and Schiemann, 1996)

Horizontal communication Communicate strategy throughout organisation (Kaplan and Norton, 1996; Neely and Najjar, 2000)

Provide common language for communication (Lingle and Schiemann, 1996)

Provide basis for rational argumentation with other departments (Kaydos, 1999)

Clarify responsibilities and objectives (Kaydos, 1999; Simons, 1999)

Decision making and

prioritising

Support decision making (von Bonsdorff and Andersin, 1995; Simons, 1999)

Provide information for resource allocation decisions (Kaydos, 1999)

Quantify efficiency and effectiveness of actions and assess the performance of an organisation as a

whole to assist decision making (Kennerly and Neely, 2000)

Co-ordination and

alignment

Provide alignment of objectives and actions throughout organisation (Kaplan and Norton, 1996; Lingle

and Schiemann, 1996; Kaydos, 1999)

Simplify delegation of actions and decisions while still being in control (Kaydos, 1999; Simons, 1999)

Motivation Motivate employees (von Bonsdorff and Andersin, 1995; Simons, 1999)

Show employees’ contribution to overall organisation’s performance (von Bonsdorff and Andersin,

1995; Simons, 1999)

Provide basis for performance related pay (Kaplan and Norton, 1996; Lingle and Schiemann, 1996)

Motivate employees by making their accomplishments clear (Kaydos, 1999)

Learning Improve knowledge of capabilities (Kaydos, 1999; Simons, 1999)

Improve understanding of business processes (Kaydos, 1999; Simons, 1999)

Challenge strategy (Neely and Najjar, 2000)

Other (or more general

functions)

Focus management attention on critical issues (Kaplan and Norton, 1996; Simons, 1999)

Provide basis for objective evaluation (Kaydos, 1999)

Enable data to be acquired, collated, analysed, interpreted and disseminated (Kennerly and Neely,

2000)


issues. In particular the literature is dealing withperformance measurement in three separate areas:

* Logistics (e.g. Caprice and Sheffi, 1994, 1995;Fawcett and Clinton, 1996; Odette, 2001).

* Total quality management (e.g. Bohoris, 1995;Wilson, 1998; Choi and Rungtusanatham, 1999).

* Purchasing, and in particular supplier selection(e.g. Dickson, 1966; Weber et al., 1991; Wilson,1994; Ellram, 1995, 1999).

Recent textbooks on supply chain managementstate the importance of performance measurementsystems that integrate all these issues of supplychain management. Several authors recommendthe balanced scorecard (BSC) as such a system(e.g. Handfield and Nichols, 1999; Hines et al.,2000). They deal with this issue in a rather cursoryway, though, without much consideration aboutpossibly necessary changes to the BSC frameworkthat have to be considered due to the differencesbetween the intra-organisational management ofcompanies as compared to the management of aninter-firm supply chain.

The most detailed and specific conceptual workon the use of the BSC for Supply Chain Manage-ment, so far, is presented by Brewer and Speh(2000). They introduce a modified BSC frameworkwhich incorporates ‘‘integrated measures’’ in eachof the four perspectives of the BSC to include the‘‘interfunctional’’ and ‘‘partnership’’ perspectives,and thereby ‘‘linking the Balanced Scorecard toSupply Chain Performance’’ (Brewer and Speh,2000). These types of measures are supposed to‘‘show all members how the chain is performing’’and foster ‘‘incentives to work with other membersof the chain’’ (Brewer and Speh, 2000). We thinkthat Brewer and Speh’s framework might wellsupport top management in general SCM con-siderations, e.g. establish the basis for reengineer-ing efforts. However, the basic and central conceptof the BSC as we understand it, is the translationof corporate objectives and measures into targetsand metrics on lower levels, which can be actedupon. Unfortunately, exactly this vital part for thesuccess of the BSC, is left out by Brewer and Speh.One reason for this might be that there is a generaltrade-off between integration and usefulness or

guidance (Caprice and Sheffi, 1994). Measuressuch as ‘‘return on supply chain assets’’ (Brewerand Speh, 2000) might offer a highly integrativepower in a SCM context but are of little or nooperational guidance.

To our knowledge there is no research on anyreal application of an integrated performancemeasurement system for supply chain manage-ment. Rather this area is identified as a gap in theliterature (see also Lambert et al., 1998).

Theories on performance measurement withinan organisation are normally based on a clearunderstanding of the boundaries of the organisa-tion and a commonly shared concept of ahierarchy of objectives and goals for this organisa-tion. One of the reasons why the ‘‘management’’and measurement of supply chains seems to bemore difficult, is that in this context an under-standing of the boundaries of the system to bemeasured and managed is by no means trivial.Also, a major pitfall of any supply chain manage-ment effort stems from the fact that although thesupply chain’s overall performance depends on thejoint performance of all supply chain members,each site is normally managed by an autonomousmanagement team with its own stake- and share-holders, its own missions and objectives. Theseobjectives may not only have little to do with eachother, they oftentimes stay in direct conflict witheach other (Lee and Billington, 1992).

There is no comprehensive theory on inter-organisational performance measurement. None-theless, some authors such as Handfield andNichols (1999) propose criteria for ‘‘effectivesupply chain performance measurement’’:

* Measuring overall supply chain performancerather than only the performance of theindividual chain member.

* One central, overriding focus: Continual im-provement of end-customer service.

* Allow managers not only to identify but also toeliminate causes of supply chain operationalproblems.

More specific demands on supply chain perfor-mance measurement are presented by otherauthors. According to them supply chain

ARTICLE IN PRESS


performance measurement systems should includemeasures on:

* changes in both the average volume of inven-tory held and frequency of inventory turnsacross the supply chain (Fawcett and Clinton,1996);

* adaptability of the supply chain as a whole tomeet emergent customer needs (Bello andGilliland, 1997; Naylor et al., 1999);

* the extent to which supply chain relationshipsare based on mutual trust (Fawcett andClinton, 1996).

Unfortunately, most authors generally do notpresent empirical studies to support their norma-tive statements. Furthermore, it is questionablehow the requirements for ‘‘supply chain perfor-mance measurement’’ should be implemented.Basically there are two open questions: The firstquestion deals with finding appropriate measures,which accurately measure supply chain or valuechain efficiency and effectiveness. This question istackled by mainstream literature.

The second, and for this article more important,question, is: What are appropriate ways toimplement measures? A performance measurementsystem should always be seen in the context ofthe overall ‘‘performance management system’’(Otley, 1999). To determine accurate measures forsupply chain performance is different from know-ing what measures are best to implement in asupply chain. Performance measures do not onlyhave to reflect performance in an accurate way,they also have to be implemented in a way thattakes into account the motivational issues ofperformance management. Also, a company inthe middle of the supply chain might view theirimmediate customers as end customers. Is itreasonable, then, to suggest that these companiesshould employ measures that reflect ‘‘overallsupply chain performance’’? Trying to increaseoverall supply chain performance does not neces-sarily mean to improve performance in terms ofthis company’s (financial) objectives. Using overallsupply chain performance measures as requestedby Handfield and Nichols (1999) or Brewer andSpeh (2000), seems only to be reasonable if:

* for each company in the supply chain, thisparticular chain is of sufficient priority;

* there are appropriate levels of trust and co-operation in the supply chain;

* processes are in place to share the profits or costsavings that come from increasing overallsupply chain performance.

This is not necessarily the case in practice.

5. Indications from the empirical study

In order to explore the complexity of perfor-mance measurement in the supply chain contextwe present insights into the practice of perfor-mance measurement at four automotive compa-nies. The aim of our research is to identify rolesand functions of performance measurement as amanagement control mechanism and tool insupply chain management in the automotiveindustry. In this paper we focus on its use at thevehicle manufacturer as the dominant partner inthe supply chain. We investigate its role in terms ofcommunication and co-ordination between vehiclemanufacturer and its first tier suppliers. Thecompanies we studied, used a whole range ofdifferent performance measurements: Qualityaudits and ratings, product and process FMEA,total cost analysis, strategic vendor categorisationetc. In this paper we purposefully emphasise oneparticular area of measurement: the ongoingmeasurement of the logistics performance ofsuppliers. Within this relatively constrained field,we investigate differences in the practice ofperformance measurement at each of the compa-nies and explore whether these may be explainedthrough different functions that are fulfilled bymeasurement or through idiosyncrasies of thepower structure and culture within the organisa-tions.

5.1. Methodology

Four major vehicle manufacturers were studiedusing questionnaires as well as semi-structuredinterviews during site-visits. For every companythe European logistics director and three to five

ARTICLE IN PRESS


additional managers and analysts from the pur-chasing and logistics departments at their Eur-opean headquarters and at one of their Germanplants were interviewed. The companies provideddocuments on quality management, supplier selec-tion and evaluation procedures etc. as well asactual supplier ratings and exemplary correspon-dence with suppliers. Additionally, a more detailedstudy was undertaken at Company A over theperiod of more than one and a half years involvingdirect observation of meetings in the logisticsdepartment, between logistics and purchasingmanagers and between Company A’s representa-tives and supplier representatives. Due to limita-tions in space, we can only present an overview ofthe performance measurement systems at each ofthe four companies in Table 2.

5.2. Research findings

Although the basic activities at all companiesare similar—after all, they are in the sameindustry, dealing with the same or similar suppli-ers, using very similar processes—the measure-ment process at the companies showed somedifferences. Although the criteria at all companiesbear resemblance, the form in which they areevaluated differed: Company A is the mostcentralised and bureaucratic company in thisstudy. It also has the most formalised supplierrating system and the most advanced informationsystem to support performance evaluation. Com-pany A strives to establish performance measure-ment as a main tool for communication withsuppliers and control of the supply base. Supplierratings are produced on a monthly basis and areused in order to catch the attention of the suppliersand to initiate action by threatening them withdowngrading. This use of performance measure-ment as an instrument of threat towards suppliersfollows a perceived lack of power over thesuppliers. As one logistics manager in CompanyA stated:

The purchasing guys are the important peoplefor the suppliers. They sign the contracts anddecide who is in the business and who is not. Intheir view, we are just doing the operative stuff.

[y] Logistics performance measurement as partof the Quality Management system hasstrengthened the logistics position, though.Now logistical issues determine one officialcriterion for purchasing decisions. [y] How-ever, we believe, that the highest priority forpurchasing is still cost.

It is interesting to note that the impact of thelogistics rating on purchasing decisions is indeedvery limited. One purchasing manager stated thatshe did not know of any case in which a preferredsupplier was not chosen because of its logisticsrating. Nevertheless suppliers take the perfor-mance rating serious and can be threatened withthe prospect of being downgraded. For example,when Company A had to conduct a containercount and needed suppliers’ collaboration, theysimply sent out letters with the remark:

Due to the importance of the subject matterplease be informed that non-availability of yourresponse with us on 19th February will lead to10 demerit points.

Suppliers which did not react to this (around40%!) were called up by some of the analystsmentioning the potential downgrading. Right afterthe call they received a fax stating:

Urgent! please reply! Please complete theattached Fax-Form and return it within thenext 30minutes! (Too late answers will lead tofurther demerit points.)

The reaction to letters and phone calls like thiswas normally very prompt. Hence, in the eyes ofCompany A, the logistics department that origin-ally had only quite limited influence on suppliers,received a very powerful lever to influencesuppliers by implementing an integrated supplierperformance measurement system that—at leastofficially—links logistics performance to the pur-chasing decision.

Although officially Company A is supposed tofollow-up on every under-performing supplier,request detailed improvement plans, and offertechnical assistance, Fig. 1 shows that less than athird of the suppliers actually receive this kind ofassistance in their improvement programs. The

ARTICLE IN PRESS


ARTIC

LEIN

PRES

STable 2

Summary of case studies

Company A Company B Company C Company D

Evlauation criteria 1. Communication systems (25

points)

2. Up-to schedule shipping

performance (25 points)

3. Reaction to problems (15

points)

4. Overshipment (10 points)

5. Record maintenance by

supplier (15 points)

6. Other supplier performance

(10 points)

1. Schedule Adherence

2. Early Warnings (e.g. material

shortfall without prior advice)

3. Reliability (e.g. response to

faxes, questionnaires, etc.)

4. Flexibility (e.g. reaction to

increase or decreases of

requirements)

5. EDI (meets all EDI

requirements)

1. Adherence to delivery dates

(20%)

2. Adherence to delivery

quantities (20%)

3. Delivery flexibility (e.g.

reaction to change) (15%)

4. Pilot lot logistics (e.g.

adherence to dates and

quantities) (10%)

5. Operative logistical

transaction (e.g. labels,

documents) (10%)

6. Communication (e.g. time to

react) (20%)

7. Innovation (willing to engage

in new logistics concepts)

(5%)

1. Degree of EDI

integration

(information systems)–

15%

2. Supplier process (e.g.

delivery

documentation;

packaging adherence;

deliver condition

during production run-

in)—25%

3. Delivery discrepancies

(e.g. delivery sequence;

under-/over-deliveries;

emergency

deliveries)—40%

4. Communication

behaviour (e.g.

information follow-up;

responsibility and

competence)—20%

Rating method Weighted scoring (additivemodel)

Worst rating of any single criteriaequals overall score (conjunctivemodel)

Weighted scoring (additivemodel)

Weighted scoring (additivemodel)

Scale 0 (worst) to 100 points (best) 1 (best) to 5 (worst) A (best) to C (unsatisfactory) 1 (worst) to 10 (best)

Frequency of evaluation Monthly Once per year and in cases ofserious under-performance

Initial rating; then mainly in casesof serious under-performance

Once per year and in casesof serious under-performance

Level of formality High. High degree of reliance onquantitative data, guidelines andrules

High to medium. Formalguidelines. Based to great extenton subjectivity/experience

Medium. Some formal guidelines.To a great extent basedsubjectivity/experience

Medium. Some formalguidelines. Based onformal performancedocuments and subjectiveexperience

Actions o80 for 6 month: Qualitycertificate (QC) suspended. Nonew orders

‘‘4’’: Initiating of improvementprocess. If no improvementvisible, then:

C: No new orders. If noimprovement within 3 month,purchasing is requested to look

>9: Letter ofcommendation

J.

Sch

mitz,

K.W

.P

latts

/In

t.J

.P

rod

uctio

nE

con

om

ics8

9(

20

04

)2

31

–2

43

238

same is true for Company C. Company B, on theother hand offers assistance to almost everysupplier that is under-performing. However,Company B is very reluctant to rate suppliers as‘‘unsatisfactory’’ in the first place and does nothave such strict guidelines and fixed procedures inits rating process as for example Company A.Company D is somewhere in the middle. It regardsalmost ten percent of its supply base as unsatis-factory (although only around 1% are regarded asserious under-performers). It manages to offermost of them technical assistance, though. Com-pany D is the most decentralised company in ourstudy. Logistics personnel at the plant is respon-sible for supplier follow-up and supplier technicalassistance. They developed a whole range ofperformance measurement tools with which theywork on a daily basis. Problems are mostlyaddressed with suppliers as soon as they occur.An additional vehicle to communicate with sup-pliers and to highlight under-performance isthrough a system of administrative charges:Company D charges individual suppliers withadministrative cost occurred at the logisticsdepartment due to suppliers’ underperformance.After initial resistance, this procedure has nowbecome fully accepted by suppliers. The monthlysupplier performance rating is mainly seen as asupport tool.

Whereas the initiative to develop supplierperformance measures at Companies A and Dcame mainly from the logistics departments, theinitiative to develop a comprehensive supplierevaluation tool in Companies B and C camefrom the purchasing department in the beginningof the 1990s, when the companies tried to cutcost but wanted to maintain quality. Thesecompanies seem to use performance measurementless enthusiastically, mainly as a reporting andexception management tool. This would explainwhy both companies have considerably fewersuppliers rated ‘‘unsatisfactory’’ (less than 5%).Companies A and D, on the other hand try touse performance measurement as an instrumentfor their day-to-day work and use it in orderto frequently interact with the suppliers. They usethe whole range of supplier ratings and donot show any reluctance to downgrading

ARTICLE IN PRESSTable

2(c

onti

nu

ed)

CompanyA

CompanyB

CompanyC

CompanyD

forreplacement

o80for12month:Loss

ofQC.

Re-sourcing

‘‘5’’:Findreplacement

o7.5:Contact

supplier,

discuss

problem

areas,and

ifnecessary,initiate

improvem

entprogramme

Consistency

ofactions

Medium

tolow.Notenough

personnel

tofollow-uponunder-

perform

ance

Seemingly

high.Butvery

reluctantto

downgradesuppliers

infirstplace

Medium

High.Follow-upon

under-perform

ance

done

onplantlevel

Introduction

Samecriteria

since

1996

Samecriteria

since

1993

1989(samecriteria

since

1993)

1999(beforehand:No

standardised

system

)

Initiator

Centrallogistics

department,QM

Centralpurchasingdepartment,

QM

Centralpurchasingdepartment,

QM

Plantlogistics,purchasing,

QM

Centralisationoflogistics

activities

High.Centraldepartment

involved

inmost

logistics

issues

(incl.Supplier

follow-up)

Highto

medium.Plantis

responsible

formost

logistics

issues.PM

administeredcentrally

Medium.Supplier

training&

PM

developmentdonebycentral

department

Low.Plantresponsible

for

alm

ost

alllogistics

issues,

incl.Supplier

trainingand

auditing


suppliers (around 10% of suppliers are rated asunsatisfactory).

5.3. Functions of supplier performance

measurement

To conclude the discussion of our case studieswe summarise main functions of supplier perfor-mance measurement in Table 3. The frameworkwe propose is based on the literature review onintra-organisational performance measurementpresented in Table 1.

We would like to emphasise two aspects ofsupplier performance measurement in particular:

1. Supplier performance measurement is primarilyused as a communication tool—communicationbetween the OEM and its supplier or betweenindividual departments.

2. The performance measurement system caninfluence the power structure or at least theperceived power, authority and influence struc-ture between individual departments of theOEM as well as between individual employeesof the OEM and the supply base.

6. Conclusion and future work

Supplier performance measurement appears tobe an important tool in the automotive industry.

All vehicle manufacturers that were contacted forthis study, invested considerable manpower andmanagement resources in establishing new orimproving and standardising existing measures.The academic literature offers only few empiricallyconsolidated findings that offer guidance on thekind of measures to choose and the form of theperformance measurement and management pro-cess that should be implemented in the inter-organisational context. Mainstream literature em-phasises the use of ‘‘integrative’’ measures and themeasurement of ‘‘overall supply chain perfor-mance’’. We discussed in this paper potentialproblems that are linked to such holistic ap-proaches. Also we found that the companies wecontacted for our case studies were more interestedin performance measurement that helps them inthe management of their supply base and in thecommunication between suppliers and the OEMor between different departments of the OEM thanin highly integrative and holistic supply chainmeasurement systems that cover the whole supplychain.

For the understanding of the practice of supplierperformance measurement we found it importantnot only to see the OEM as one homogeneousentity but to take into account the differentinterest groups and power structures within theorganisation. Individual departments that interactwith suppliers such as logistics and purchasing,are in interaction with each other as well. They are

ARTICLE IN PRESS

a) Percentage of suppliers with good,satisfactory, and unsatisfactory rating

b) Percentage of suppliers with unsatisfactoryrating that receive technical assistancefrom OEM

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

A B C D

good satisfactory unsatisfactory

0%

10%

20%30%

40%

50%

60%

70%80%

90%

100%

A B C D

Fig. 1. Supply base performance at the four companies in 2000 (percentage of suppliers defined by company as satisfactory or

unsatisfactory).


in a struggle for authority, influence and powerwithin their own organisation as well as in theircontacts to suppliers. We believe that the con-ceptual framework of functions of performancemeasurement that we present in Table 3 supports abetter understanding of these aspects.

Although we are aware of the limitations of astudy with only four companies, we found in ourresearch, that the establishment of supplier eva-luation led to improved supplier performance. Allcompanies reported that with the introduction ofperformance measurement, the supplier perfor-mance increased. After the initial improvement,supplier performance became stagnant—on ahigher level—after about 1 or 2 years. However,we do not have the data to make a statementwhether this could be explained similarly to the‘‘Hawthorne effect’’ or whether the companiesshowed actual learning and continuous improve-ment activities. We believe that the issues of

benefit of performance measurement and returnof investment on performance measurement in-itiatives offer opportunities for future research.

Expectations about the effects of performancemeasurement are high. The range of functions thatperformance measurement is supposed to fulfil isvast. However, our study suggests that the use ofperformance measurement in the context of supplychain management poses a range of new questions.Although on the face of it, all companies in ourstudy had quite complex and sophisticated suppli-er evaluation schemes, the use of the performancemeasurement and management systems in place, tosome extent appears to be rather ambiguous.Companies seem to be still in a testing phase, tofind the most suitable measures and measurementsystem, and to establish the appropriate manage-ment processes that support continuous improve-ment and control of the supply chain. With thisstudy we hope to contribute to these thoughts by

ARTICLE IN PRESS

Table 3

Functions of supplier logistics performance measurement as identified in the case studies (the most eminent functions are highlighted

and the companies at which the function was most distinguished are indicated)

Strategy formulation and

clarification

Not an identified priority at any of the companies

Management information Provide information on supply base for management [A,B,C,D]

Communication with suppliers Communicate dissatisfaction with supplier’s performance [A,B,C,D]

Provide basis for rational argumentation between OEM and suppliers [A,D]

Increase authority/power of OEM’s employees in their dealings with suppliers [A,D]

Clarify and communicate performance expectations to supplier [A,B,C,D]

Communication between

departments

Communicate supply base performance to purchasing department [A,B,C,D]

Decision making and prioritising Prioritise supplier improvement activities [A,D]

Focus management attention on critical suppliers [A,D]

Support decision making in supplier selection [A,B,C,D]

Support decision making for design of logistical system (transport mode, inventory etc.) [A]

Co-ordination and alignment Increase the overall importance of logistics for purchasing decisions [A,B,C,D]

Provide more balanced criteria for purchasing decision [A,B,C,D]

Motivation of suppliers Instrument to threaten supplier in order to catch their attention or initiate action [A,C,D, to less

extent at B]

Learning Continuous improvement [explicitly aimed for only at company D]

Other (or more general functions) Provide documental evidence on historical performance for negotiations and discussion [A,D]


reflecting on the underlying concepts and basicpurposes of measurement.

In this paper we investigated the use of supplierperformance measurement primarily in the logis-tics context and only from the OEMs perspective.Future studies should therefore aim to, first, takeinto consideration the suppliers’ perspective on theevaluation process, and second, include a broaderview of supplier evaluation, e.g. place moreconsideration on the purchasing or product devel-opment perspective. Another interesting aspect isthe view of the performance measurement chain—the connection between objectives, measures andactions from the OEM, through the 1st tiersupplier to the suppliers’ supplier. We think thatqualitative, case-based studies provide the bestroute to this and propose the perspective on thefunctions of performance measurement as asensible framework for the empirical analysis ofperformance measurement and management sys-tems in industry.

References

Ahmed, M., Berry, A., Cullen, J.C., Dunlop, A., Seal, W.B.,

1997. The consequences of inter-firm supply chains for

management accounting—towards a research agenda.

Working Paper presented at the 4th International Systems

Conference, Sheffield Hallam University.

Anonymous, 2001. Supplier Performance Metrics that Really

Make a Difference, Supplier Selection & Management

Report 1 (9), 1–4.

Austin, R.D., 1994. Theories of Measurement and Dysfunction

in Organizations, PhD thesis. Carnegie Mellon University.

Bello, D.C., Gilliland, D.I., 1997. The effects of output

controls, process controls and flexibility on export channel

performance. Journal of Marketing 61 (4), 22.

Berry, A.J., 1994. Spanning traditional boundaries—organiza-

tion and control of embedded operations. Leadership and

Organisational Development Journal 25 (1), 4–210.

Bohoris, G.A., 1995. A comparative assessment of some major

quality awards. The International Journal of Quality and

Reliability Management 12 (9), 30–43.

Brewer, P.C., Speh, T.W., 2000. Using the balanced scorecard

to measure supply chain performance. Journal of Business

Logistics 21 (1), 75–94.

Caprice, C., Sheffi, Y., 1994. A review and evaluation of

logistics metrics. International Journal of Logistics Manage-

ment 5 (2), 11–28.

Caprice, C., Sheffi, Y., 1995. A review and evaluation of

logistics performance measurement systems. International

Journal of Logistics Management 6 (1), 61–74.

Choi, T.Y., Rungtusanatham, M., 1999. Comparison of quality

management practices—across the supply chain and in-

dustries. Journal of Supply Chain Management 35 (1),

20–27.

Cross, K.F., Lynch, R.L., 1992. For good measure. CMA

Magazine 66, 20–23.

Cullen, J., Berry, A.J., Seal, W., Dunlop, A., 1999. Interfirm

supply chains—the contribution of management account-

ing. Management Accounting 77 (6), 30–32.

Dickson, G., 1966. An analysis of vendor selection systems and

decisions. Journal of Purchasing 2, 28–41.

Doney, P.M., Cannon, J.P., 1997. An examination of the nature

of trust in buyer–seller relationships. Journal of Marketing

61 (2), 35–51.

Ellram, L.M., 1995. Total cost of ownership—an analysis

approach for purchasing. International Journal of Physical

Distribution and Logistics Management 25 (8), 4–23.

Ellram, L.M., 1999. The supplier selection decision in strategic

partnerships. International Journal of Purchasing and

Materials Management 26 (4), 8–14.

Fawcett, S.E., Clinton, S.R., 1996. Enhancing logistics perfor-

mance to improve the competitiveness of manufacturing

organizations. Production and Inventory Management

Journal 37 (1), 40–46.

Fine, C.H., Whitney, D.E., 1996. Is the make–buy decision

process a core competence? IMVP Working Paper MIT,

Cambridge, MA.

Flamholtz, E., 1996. Effective organizational control—a frame-

work, applications, and implications. European Manage-

ment Journal 14 (6), 596–611.

Garvin, D.A., 1993. Building a learning organization. Harvard

Business Review 71 (4), 78–81.

Ghobadian, A., Ashworth, J., 1994. Performance measurement

in local government—concepts and practice. International

Journal of Operations and Production Management 14 (5),

35–51.

Handfield, R.B., Nichols, E.L., 1999. Introduction to Supply

Chain Management. Prentice Hall, Upper Saddle River,

NJ.

Hines, P., Lamming, R., Jones, D., Cousins, P., Rich, N., 2000.

Value Stream Management—Strategy and Excellence in the

Supply Chain. Financial Times Prentice Hall, Harlow,

England.

Kald, M., Nilsson, F., 2000. Performance measurement at

Nordic companies. European Management Journal 18 (1),

113–127.

Kaplan, R.S., Norton, D.P., 1996. The Balanced Scorecard—

Translating Strategy into Action. HBS Press, Boston, MA.

Kaydos, W.J., 1999. Operational Performance Measurement—

Increasing Total Productivity. St. Lucie Press, Boca Raton,

FL.

Keegan, D.P., Eiler, R.G., Jones, C.R., 1989. Are your

performance measures obsolete? Management Accounting

70 (12), 45–50.

Kennerly, M., Neely, A., 2000. A framework of the factors

affecting the evolution of performance measurement sys-

tems. In: Dierdonck, R., van Vereecke, A. (Eds.), Opera-

ARTICLE IN PRESS


tions Management. Papers from the 7th International

Conference of the EUROMA, June 4–7. Ghent, Belgium,

pp. 322–329.

Lambert, D.M., Cooper, M.C., Pagh, J.D., 1998. Supply chain

management—implementation issues and research oppor-

tunities. International Journal of Logistics Management 9

(2), 1–19.

Lane, C., Bachmann, R. (Eds.), 2000. Trust Within and

Between Organizations. Oxford University Press, Oxford.

Lee, H.L., Billington, C., 1992. Managing supply chain

inventory—pitfalls and opportunities. Sloan Management

Review 33 (3), 65–73.

Lingle, J.H., Schiemann, W.A., 1996. From balanced scorecard

to strategic gauges: Is measurement worth it? Management

Review 85 (3), 56–61.

McMann, P., Nanni, A.J., 1994. Is your company really

measuring performance? Management Accounting 76 (5),

55–58.

Medori, D., Steeple, D., 2000. A framework for auditing and

enhancing performance measurement systems. International

Journal of Operations and Production Management 20 (5),

520–533.

Meyer, C., 1994. How the right measures help teams excel.

Harvard Business Review 72 (3), 95–101.

Mouritsen, J., Hansen, A., 2000. Inter-organisational manage-

ment controls and the fabrication of inter-organisational

flows of knowledge, resources and products. Papers from

the 7th International Conference of the EUROMA. Ghent,

Belgium, pp. 439–446.

Naylor, J.B., Naim, M.M., Berry, D., 1999. Leagility—

integrating the lean and agile manufacturing paradigms in

the total supply chain. International Journal of Production

Economics 62 (1/2), 107–118.

Neely, A., Najjar, M.A., 2000. Challenging strategy through

measurement. In: Dierdonck, R., van Vereecke, A. (Eds.),

Operations Management. Papers from the 7th International

Conference of the EUROMA, June 4–7. Ghent, Belgium,

pp. 447–454.

Neely, A.D., Gregory, M.J., Platts, K.W., 1995. Performance

measurement system design—a literature review and re-

search agenda. International Journal of Operations and

Production Management 15 (4), 80–116.

ODETTE, 2001. Logistics Evaluation—A Guide to

Logistics Improvement, Version 2, Release 2, Organisation

for Data Exchange by Teletransmission in Europe,

London.

Otley, D., 1999. Performance management: A framework for

management control systems research. Management Ac-

counting Research 10 (4), 363–382.

Sako, M., 1992. Prices, Quality and Trust. Cambridge

University Press, Cambridge.

Seal, W., Cullen, J., Dunlop, A., Berry, T., Ahmed, M., 1999.

Enacting a European supply chain—a case study on the role

of management accounting. Management Accounting Re-

search 10 (3), 303–322.

Smith, P., 1993. Outcome-related performance indicators and

organizational control in the public sector. British Journal

of Management 4 (3), 135–151.

Simons, R., 1999. Performance Measurement and Control

Systems for Implementing Strategy—Text and Cases.

Prentice-Hall, Upper Saddle River, NJ.

Spekman, R.E., 1988. Strategic supplier selection—understand-

ing long-term buyer relationships. Business Horizons 31 (4),

75–81.

Takeishi, A. 1998. Strategic Management of Supplier

Involvement in Automotive Product Development. PhD

Thesis, Sloan School of Management, MIT, Cambridge,

MA.

Twigg, D., 1995. Design Chain Management—Inter-organisa-

tional Coordination of Product Development in the UK

Automotive Industry, PhD Thesis, Warwick Business

School, Coventry.

von Bonsdorff, C., Andersin, H.E., 1995. Supporting the

business process management paradigm by means of

performance measurements. Proceedings of the CE95

Conference Concurrent Engineering: A Global Perspective.

McLean, VA, 1995.

van Drongelen, K.I.C., 1998. Different performance measure-

ment procedures for different purposes. Papers from the

First International Conference on Performance Measure-

ment, 14–17 July. Centre for Business Performance,

University of Cambridge, pp. 584–591.

Weber, C.A., Current, J.R., Benton, W.C., 1991. Vendor

selection criteria and methods. European Journal of

Operational Research 50 (1), 2–18.

Wilson, E.J., 1994. The relative importance of supplier selection

criteria—a review and update. International Journal of

Purchasing and Materials Management 30 (3), 35–42.

ARTICLE IN PRESS


schmitz, platts - 2004 - supplier logistics performance measurement indications from a study in the...

Documents