Measure for measure

Traditional accounting measures fall short when it comes to evaluating supply chain activities.Here are some better bets.

By James Aaron Cooke -- Logistics Management, 7/1/1999

Professor Dale S. Rogers thinks what logistics managers really need is a dashboard gauge for measuring supply chain performance--something like the fuel gauge that tells a driver how much gas is left in the tank. "You don't have to look through green-barred paper to figure out how much gasoline you have," says Rogers, who serves as the director of the University of Nevada's Center for Logistics Management in Reno. "So why should you have to look at a spreadsheet to find out how your supply chain is performing?"

Rogers hopes that Web browser technology eventually will create an at-a-glance gauge. In the meantime, he and others in the logistics field are challenging the measures currently used to assess supply chain activity. "Effective supply chain measures are missing," he reports. "For many managers, the measures are not appropriate."

Many companies today are using measures that don't reflect the 21st century, Rogers contends. In fact, he believes that numerous problems that surface in large corporations arise from managers' attempts to use accounting systems developed in the 18th century to assess the performance of today's supply chain. Traditional financial measures, for example, rate warehouses by assessing the value and amount of inventory held. "But warehouses are not just designed to store product," Rogers says. "They're set up to move product quickly. You want to measure a warehouse as a product replenishment facility."

Furthermore, traditional accounting systems tend to measure variance from a standard, he notes. This forces companies to suboptimize performance; in other words, companies measure parts of the supply chain rather than the entire process. Businesses, for example, typically grade the manufacturing operation on cost of production rather than measuring the supply chain's ability to manufacture and deliver a product to a customer. The problem of suboptimization is further compounded when one trading partner in an extended supply chain lowers its costs at the expense of another trading partner.

Rogers says companies have failed to grasp that measurements themselves have "life cycles" and that old yardsticks don't apply to supply chain management. He believes that the business community must develop a new set of metrics for evaluating the supply chain's effectiveness in delivering value to a customer.

10 Dimensions of Service Quality

What should these new supply chain metrics measure? The quality of customer service, answers Rogers. Specifically, he recommends that managers consider developing metrics based on the 10 dimensions of service quality identified by Valerie Zeithaml, A. "Parsu" Parasuraman, and Leonard Berry in their book Delivering Quality Service. What follows is a discussion of those 10 elements.

- Tangibles. The first factor a company should evaluate is the appearance of its facilities, equipment, personnel, and even its marketing brochures. Rogers suggests that companies develop a grading scale for evaluating appearance and then conduct a survey to see where their operations fall short. A manager rating a warehouse's appearance, for example, might subtract points for material left in the aisles or for sloppily dressed personnel.

- Reliability. The second service quality criterion reflects a company's ability to keep its promises. A logistics operation could measure whether it fills orders correctly and whether its carriers keep their delivery appointments with customers.

- Responsiveness. A company's willingness to help customers and provide prompt service constitutes the third dimension of service quality. Time is the variable that should be measured here. Rogers suggests that a company measure how quickly it fills and ships orders, or how quickly its customer-service personnel pick up the phone.

- Competence. Competence refers to employees' mastery of the skills and knowledge required to perform specified services. Rogers notes that companies too often mistakenly assume that their managers and workers have the knowledge and skills to do their jobs. They would do better to require both workers and managers to hold certification in certain areas and then keep tabs on whether they obtain those certifications.

- Courtesy. The fifth criterion rates the politeness, respect, consideration, and friendliness the company's contact personnel show to customers. Although Rogers concedes that this dimension of service quality can prove difficult to calibrate, he suggests that companies try keeping track of complaints or adopt the phone company's policy of having a supervisor monitor conversations between its employees and customers.

- Credibility. The sixth area to monitor is the business's credibility--how well it delivers on promises to customers. Rogers says that companies can assess performance in this area by measuring whether they meet delivery dates or service dates. "Unlike some of the other service dimensions," he notes, "this one's fairly easy to calculate."

- Security. Security--freedom from danger, risk, and conflict--makes up the seventh service-quality dimension. To grade performance in this area, companies should look at the amount of pilferage and other losses they experience. As part of this exercise, Rogers says, companies should make an effort to identify anything in their distribution operations that might adversely affect a customer's business.

- Access. The eighth dimension of service quality consists of approachability and ease of contact with members of the organization. Companies should measure how quickly a customer can find a customer-service representative when he or she contacts the organization. "When someone tries to find the senior guy or just a live voice, can they do it?" Rogers asks. "Put yourself in the customer's shoes when there's a breakdown in service."

- Communication. The ninth standard for evaluation centers on communication--a commitment to keeping customers informed in language they can understand and listening to them. "As you move into a partnership or alliance with a trading partner, you have to keep everyone informed," Rogers says. Because quality of communication is difficult to gauge, he suggests that companies measure the frequency of communication with customers.

- Understanding the customer. The final service-quality element is how well the company understands its customers. Companies need to ask themselves whether they truly know their customers' needs, Roger says. He suggests conducting a survey of customers that asks them to name their five most important issues. The business then should test its own managers and ask them whether they can name the same five issues their customers identified.

Metrics to Define Success

As difficult as the task might be, Rogers believes that businesses will have to find ways to incorporate some of the metrics listed above into their supply chain measurement programs. "Measurements around the supply chain are critical," he says. "If you look at competition today, it's supply chain vs. supply chain. Companies will have to find or develop metrics for the supply chain if they are to succeed."