Use the right measurements
William C. Copacino -- Logistics Management, 9/1/2002
The concepts of integrated logistics and supply chain management have been well publicized for decades now. Even the concept of extended supply chain management has been around for 15-plus years. (I initially wrote about it in 1983 and was involved with its application at several companies in the mid-1980s.) In addition, the substantial benefits of an integrated approach to logistics and supply chain management have been well documented and are widely recognized.
Why is it, then, that they have been applied so sporadically?
I think a major contributing factor to this failure is the use of poorly conceived performance measures. I am sure most of you have seen such measures and live with them every day.
Too many companies still rely on anachronistic functional performance measures. They use measures such as aggregate transportation costs, cost per mile, and cost per case for warehouse handling as their primary metrics. Some companies even operate with dozens of detailed "micro-metrics" that measure the productivity of every conceivable activity and sub-activity across all functional areas.
Most managers with whom I work realize that the measurement systems their companies use encourage the wrong behavior. For example, a company might well be able to reduce its total operating cost and delivery cycle time by shifting shipments from rail to motor freight. But the transportation manager has no incentive to make that shift because his or her performance evaluation is based on the size of the total transportation bill.
Companies use functional metrics because they provide a simple way to organize and assign accountability for performance. Micro-metrics, moreover, can be useful in identifying opportunities for productivity improvement. Without broader, "process-oriented" management frameworks and metrics, however, companies inevitably will sub-optimize individual functions and will miss the greater opportunity to optimize overall costs and service performance.
I strongly recommend that companies establish "owners" for key supply chain processes and use process-oriented metrics as their principal performance measures. This not only encourages individual functions to work in teams, but it also encourages the optimization of key supply chain activities. Functional measures still have a role to play, but they are secondary and are most useful for generating specific, narrowly focused improvement ideas. These can be evaluated as part of an overall performance improvement initiative.
I realize that the process-oriented approach can be more complex than using functional measures. But it's long past time to institute this management approach, as we have wasted millions of dollars by not moving more rapidly to integrated logistics and supply chain management models. Simply put, too many managers are being pushed to do the wrong things because their companies insist on using inappropriate and outdated performance metrics. Those same companies are missing opportunities to make integrated supply chain management a key differentiator and a competitive advantage.
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