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Logistics encompasses a complex set of activities which require a collection of metrics to adequately measure performance. Chow et al. (1994) were probably the first to attempt to define supply chain (logistics) performance and they presented some measures for measuring logistics performance. Since then, most of the literature on logistics performance appears to focus on models and frameworks (Clarke and Gourdin, 1991; Mentzer and Konrad, 1991; Rao and Grenoble, 1991; Hubbard, 1992) and on managing different aspects of logistics (Larson, 1994).
Sink and his colleagues have defined seven dimensions in order to capture their conception of "what performance means": they are effectiveness, efficiency, quality, productivity, quality of work life, innovation and profitability/budgetability [International Journal of Logistics Management].
Given the lack of any universally definition for performance in the organizational literature, it should not be surprising that extant literature offers many ideas about the dimension that ought to be incorporated into a conceptualization of "logistics performance". One of the best examples is the framework presented by Rhea and Shrock, where physical distribution effectiveness is defined as "the extent to which distribution programmes satisfy customers" [International Journal of Logistics Management, 5, p. 3]
While measuring logistics performance, a comprehensive strategy of measurement is necessary for the successful planning, realization and control of the different activities which comprise the business logistics function ( Andersson et al. (1989). As Thor (1994, pp. 13-28) correctly advocates, there should be a whole family of measures. This is a balanced collection of four to six performance measures, usually including productivity, quality and customer satisfaction, which together furnish an all-inclusive view of results but, individually, also provide a diagnostic value. Developing such an approach, Mentzer and Firman (1994) claim that the management and control of logistics performance entails four broad aspects:
Information systems to collect and report performance measures
Efficient performance measures
Productivity within the performance scenario can be seen as a measurement of resource utilization, including the time element. The productivity philosophy and its improvement has been a high priority, in the first instance, in manufacturing, then in marketing, and later in physical distribution and materials management. Thus, the time is now ripe to focus on the whole logistics process. It is the shape of the organization's physical manifestations which is largely influenced by the nature of the values, beliefs and underlying assumptions of logistics management (Ericsson (1990, pp. 42-49).
Quantitative metrics of supply chain performance can be classified into two broad categories: Non-financial and financial. In fact, in the late 1880s financial measures were mainly focused such as return on investment (Christopher, 1992; Schermerhorn et al.,, 2000). However as the second progressed during 1980s, the world market changed and companies began to lose market share to overseas competitors who were able to provide higher-quality products with lower costs and more diversity. To re- capture the competitive edge, companies not only directed their strategic focus from low-cost production to quality, flexibility and short lead time, as non-financial measures. (Bower & Hout, 1988; Rushton & Oxley, 1989; Stewart, 1995)
Logistics performance measures can be categorized into two categories such as qualitative and quantitative measures. Qualitative measures include such as customer satisfaction and product quality etc., and quantitative measures include such as order-to-delivery lead time, supply chain response time, flexibility, resource utilization, delivery performance, etc.
It has been suggested that the critical elements that form the basis of logistics management are time, distance and money. Some utilization, productivity and effectiveness metrics used in the logistics management are:
Actual input/norm input
Area of warehouse occupied/ total area
Actual output/actual input
Ton-miles delivered/cost incurred
No of orders processed/ no of hours of labor
Actual output/norm output
No of shipment on-time/no of shipment sent
They are used to track the use of input resources in process. In logistics, input could be characterized as financial, physical assets or inventory. Utilization metrics include the following:
Purchase price variance
Distribution cost as percentage of sales
Variance of transportation cost from budget
Non financial resources measures
Static metrics (capture level of inventory expressed in physical, financial or other terms)
Flow metrics (capture speed of inventory as it flows through the system over a period of time)
Partial productivity measures (SFP-single factor productivity ratios )
Total factor productivity measurement
Financial productivity measurement (ROI-return on investment )( (Frameworx, 2005)
Order fill rates( order filled /orders requested
Line item fill rates( total line items not filled / shipped in time per period
Damage rates (line items damaged per order)
Order cycle time (elapsed time between receiving request and delivering order)
Delivery or transit time (elapsed time between readying order for shipment and delivery order)( DfT, 2004)
On-time ( orders shipped on time or orders received by customer on time )
Perfect deliveries (orders received by customers with no logistics service fullness)
Importance of performance metrics:
Implementing performance measures is a key to optimizing the supply chain. That reflects the entire process, rather than the individual components that make up the process. Managers can obtain a better picture of the process by focusing on the entire supply chain, rather than its individual parts. This is vital to emphasize the vital importance of the logistics process to the rest of the company and how logistics can affect the financial stability of the organization as a whole. (Rick J Blasgen, 2007)
The effectiveness of supply chain of a company heavily affects its profitability and survival. Surprisingly few companies appear to have effective measures of each business process within the supply chain or information systems which readily produce the data necessary to drive improvement forward. Within the supply chain, logistics are considered to be the link between production/purchasing and marketing. Controlling logistics performance is a major concern for management. This is mainly because of the constantly changing environment and unforeseen events which may affect forecast performance levels. (Anonymous 1997)
Three major reasons for measuring logistics performance:
Reduce their operating costs
Drive their revenue growth
Enhance their shareholder value
By using the latest logistics performance indicators Dell has successfully become the dominant market player in the personal computer industry. It derives its growth because of mass customization, efficient supply chain management and reduced delivery time.
In the era of global supply chains and mass customization, Dell has maintained close linkage of logistics. Dell's performance measurement, manufacturing, logistics and shipping and strategies make it possible to customize computers for individual consumers at a low cost.
It has successfully implemented low cost strategy through its efficient manufacturing operations, better supply chain management, reduced cycle time and direct sales model. orders are directly taken from its customers; either on phone or online. Thus, this reduces the cost of intermediaries that would otherwise add up to the total cost of PC for the customer. Dell also saves time on processing orders that other companies normally incur in their sales and distribution system by having latest performance measurement tools. Moreover, dell is able to get a clearer indication of market trends by directly dealing with customers. A two-to-three point cost advantage is also obtained by delaying assembly until a customer's order is received (King, 2005).
Three or four days' finished inventory is kept on hand versus 30 to 45 days' worth at some competitors. Parts inventory is replenished as often as every 90 minutes. an additional four or five points cost edge is brought by supply chain efficiencies derived from lean inventory management.(William Hoffman, 2005)
In today's severe competitive market place, product or service differentiation separates the winners from the losers.
Mostly, the service differentiation is achieved by managing the logistics process efficiently and effectively. To achieve excellence in logistics, successful firms have to ensure that the firm's business strategy is aligned with the key logistics processes and they are measured against predetermined performance objective
The approach that a firm takes in establishing logistics measurements system does not matters a lot as the real value come when the information is acted upon to align the effectiveness and efficiency of the logistics process performance to value the customers. The role 3PL can have in your success is dependent on when you start measuring your logistics performance (james S. Keebler and David A. Durtsche 2007).