LOGISTICS PERFORMANCE MEASUREMENT AND THE WORLD CLASS LOGISTICS MODEL – PART 1

The development of a good performance monitoring system is fundamental for the management of logistics activities. Performance measurement is one of the most important tools to be used to verify whether the objectives established by the company are being achieved, helping to better apply the resources allocated to logistics. Carrying out this monitoring becomes even more important in the current scenario in which activities related to logistics are being recognized worldwide as highly important for generating value for the customer (see Figure 1).

Figure 1 – Logistics as a competitive advantage

Sources: *Logistics Overview – Logistics Outsourcing in Brazil 2003 – CEL/COPPEAD ** Third-Party Logistics Study Results and Findings 2002; C. John Langley Jr.

Since 1986, researchers at Michigan State University have developed a series of surveys with the aim of identifying common elements in successful companies in their logistics activities. A logistic competency model was then elaborated. In this model, the existence of a structured logistic performance measurement system in the company was indicated as one of the four competencies necessary for a world-class logistic performance.

Traditionally, logistics services are measured by companies in terms of just three variables: product availability rate (eg stockouts), order cycle speed (eg delivery time) and order cycle consistency (eg delays). However, such measurements carried out in isolation can be considered incomplete, and must be accompanied by a series of other activities, analyzes and measurements so that the monitoring system can be considered robust and accompany the systems of companies considered world-class.

THE “WORLD CLASS LOGISTICS” MODEL

The first research published by the Council of Logistic Management that sought to understand the way leading companies in logistics operated validated the hypotheses that the best logistics practices were extremely similar, regardless of industry, position in the distribution channel and size of the company. As a result of the research and its subsequent revision, a model called “The leading edge best practice” was developed in 1992. Later studies sought to understand how some companies put into practice practices capable of serving demanding customers better than their competitors, how they became leaders in operational excellence and also how they translated their performance into competitive advantage and superior value for shareholders. The “World Class Logistic” model was then proposed by The Global Logistics Research Team of Michigan State University (CLM, 1995).

The model, illustrated in Figure 2, highlights the logistics competencies pursued by companies with world-class logistics performance: positioning, integration, agility and measurement. The authors of the model propose that world-class logistics performance would be the result of a high level of performance, or of seeking to better perform the four competencies.

Figure 2 - Model "World Class Logistics"

The first competence is Positioning, that is, the way in which the company competes, the type of service offered, the target consumer group and its comparison with competitors' offers. The second competency is Integration, which deals with what and how to create an excellent logistics operation. Next comes Agility which is the ability to react to changing customer needs in such a way that customers not only remain loyal but also provide opportunities for growth. And finally, the fourth competency is Measurement, a competency that, through evaluation measures, provides a basis for making adjustments in the other three logistical competencies (Positioning, Integration and Agility).

The Measurement competency will be detailed below.

PERFORMANCE MEASUREMENT IN WORLD CLASS COMPANIES

Research carried out by the Michigan group showed that organizations with world-class logistics perceive performance measurement as a critical competence and show greater proficiency than their competitors in this activity.

According to the “World Class Logistics” model, the performance measures (Metrics) employed by world-class companies belong to four areas: (1) customer service/quality, (2) costs, (3) productivity, and (4) ) asset management.

The different Metrics proposed for a good measurement system will be detailed below, as well as examples of performance indicators presented by some of the main authors in the field of logistics.

Metric (1): customer service/quality

A number of authors address the measurement of customer service, establishing important performance indicators to be monitored.

Frazelle (2001) considers that the best indicator to measure customer service is the “percentage of the perfect order” which, operationally, is translated into performance indicators for each of the logistical activities related to order processing, including aspects of availability, correctness of the products delivered, compliance with the agreed deadline, accuracy in billing, documentation, correct packaging, etc.

Pisharodi and Langley (1990), in turn, define the evaluation of customer service as the process of comparing the level of service practiced in the various indicators with the level considered optimal. Tucker (1994) suggests that this comparison be made with an established standard and with the targets imposed for each of the chosen indicators.

The Michigan group also adds that the degree of importance of customer service elements is different for each company, according to the needs of its consumers. In order to carry out a good assessment of customer service, it is necessary to identify that customers have different expectations and do not necessarily want the same service. Therefore, the identification of the optimal service level and the goals to be established must consider these differences.

Figure 3 presents an extensive list of Customer Service performance indicators presented by different authors.

Figure 3 – Examples of Customer Service Indicators

Metric (2): costs

In general, organizations control individual costs (isolated analysis of each cost), and only those with world-class logistical performance monitor the total cost required to serve customers (CLM, 1995). Total cost analysis requires that all costs relevant to the operation be measured and management must recognize the existence of trade-offs, understanding that it is often necessary to maintain a sub-optimal position in one or more logistical activities for the system to as a whole can operate at optimum efficiency.

Another approach that can generate more accurate costing information is activity-based costing (ABC). Using this method, companies can determine the cost of fulfilling an order or serving a specific customer. This type of information allows managers to assess the impact of potential changes in the service provided and provides information for the development of segmentation strategies (CLM, 1995). The Michigan researchers showed that world-class companies are leaders in applying the ABC methodology. As a general rule, they state that the more sophisticated a company's logistics, the more likely it is to employ the methodology.

Figure 4 shows a list of cost indicators and the authors who present them.

Figure 4 – Examples of Cost Indicators

Metric (3): Productivity

Productivity measurements are typically modeled to monitor systems that convert inputs into outputs through the application of work.

For Bowersox and Closs (2001) productivity can be measured at both the macro and micro levels. Macro-level measurement refers to performance indicators for the total facilities of a group's operations. Among these measures, operating expenses can be cited on the total value of goods processed or on the total value of goods received or even on the total value of goods dispatched. At the micro level, the metrics are those directly related to a given operation: number of pallets handled per hour, number of units picked or packed per hour, or number of orders processed per hour, among others.

Figure 5 presents examples of productivity performance indicators.

Figure 5 - Examples of Productivity Indicators

Metric (4): Asset management

The management of assets and logistics infrastructure should not only identify the cheapest way for each activity, but seek a system that is oriented towards the overall performance of the business. The Michigan Group suggests that the management of logistical assets be carried out by monitoring the following measures:

• Stock level: quantity of material actually existing in stock and available for use.

• Inventory turnover: a very common indicator, calculated as the ratio of the cost of annual sales to the average investment in inventory in the same period (Ballou, 1992). In general, it is considered that as long as there is no difference in the level of stock availability, the higher the turnover, the better. However, it is necessary to analyze whether the increase in turnover does not affect the total cost by increasing it (Lambert and Stock, 1993).

• Stock obsolescence: is the cost of each unit that needs to be discarded or can no longer be sold at the regular price. It is calculated as the difference between the original cost and its residual value (Lambert and Stock, 1993).

• Return on Equity (ROE): is the measure of the shareholders' return on investment during the year. It is calculated as the ratio of net income obtained in the year to the company's equity. Stocks are assets, so gains or losses made on them affect the return on assets and consequently the return on equity for shareholders.

• Return on investment (ROI): is a measure that relates the profits from an investment to the magnitude of the same (Speh and Novack, 1995). The capital restriction for new investments makes companies seek to maximize the return on capital employed (Lima, 2003).

• Classification of inventory using the ABC curve: The ABC curve starts from the observation that in many companies, 80% of sales are generated by 20% of the products. In this type of management, products must be grouped according to their sales volume, the 20% most sold are called A items, the next 30% B items and the remaining C items. differently, for example, A-rated products should have higher availability.

Lambert and Stock (1992) also recommend the use of return on assets (ROA), stating that this would be the best individual measure for corporate performance, as it shows profitability in relation to the value of assets employed.

Examples of asset management indicators are shown in Figure 6.

Figure 6 – Examples of Asset Management Indicators

CONCLUSION

The World Class Logistics model presents the logistical competencies to be pursued by organizations that seek to achieve a logistical performance equivalent to that of world-class companies. Among the necessary skills, this article highlighted the need for an effective Performance Measurement system, capable of evaluating the logistics performance of companies.

Logistic performance must be measured under different dimensions and, for that purpose, indicators must be used that capture, if not all, the most important dimensions that provide managers with both a short and long-term vision and that are capable of reflecting the main objectives of company's performance. According to the model presented, among the Metrics to be used, there must be indicators of customer service, productivity, cost, and asset management.

In addition to monitoring the Metrics, the World Class Logistics model also proposes that it is necessary to adopt some analysis Perspectives, as well as a Management system that allows for greater efficiency in the measurement of performance in the company (see Figure 7). These two aspects will be addressed in Part 2 of this article, to be published in this journal in the future.

Figure 7 – Relevant Aspects in an Effective Performance Measurement System

BIBLIOGRAPHY

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Authors: Maria Fernanda Hijjar, Marina Helena Gervásio and Kleber Figueiredo