Performance Measurement of Logistics Processes

Bjrn Andersen
a
, Tom Fagerhaug
b

a
Department of Production and Quality Engineering
Norwegian University of Science and Technology
N-7491 Trondheim, Norway
[email protected]

b
SINTEF Industrial Management, Productivity and Project Management
N-7465 Trondheim, Norway
[email protected]



Abstract
The purpose of this paper is to introduce and describe an approach to performance measurement
of logistics processes. The paper has four main parts. First, an introduction to performance
measurement is provided. Then, a performance improvement framework is presented. Third, a
new improvement oriented model is outlined. In order to illustrate the approach, text-based and
number-based measures for three logistical processes are provided. Finally, the suggested
approach is compared with performance measurement and balanced scorecard.

Keywords : Performance Measurement, Performance Improvement, Self-assessment, Logistics









1 PERFORMANCE MEASUREMENT
Productivity in a narrow sense has been measured
for several years. In 1978 an enlarged method, the
POSPAK method, was introduced. This method
indicates specific measures in order to improve the
overall productivity of an enterprise (Sjborg, 1984).
One of the first approaches to performance
measurement was published by Sink and Tuttle
(Sink, 1985, Sink and Tuttle, 1989). The model
claimed that the performance of an organizational
system is a complex interrelationship between
seven criteria. In 1993 Hronec published the book
Vital Signs, where he described how to use
quality, time, and cost performance measurements
to chart the companys future. In 1995 Rolstads
edited the book Performance Management. It
sought to provide the reader with a detailed
overview of the modern enterprise by focusing on
performance evaluation and measurement and
performance improvement techniques. Since 1995
a number of books and papers on performance
measurement and management have been
published.
One example of a performance measurement
system is the TOPP system, which was developed
by SINTEF (Moseng, 1996) in Norway in
partnership with the Norwegian Institute of
Technology (NTH), the Norwegian Federation of
Engineering Industries (TBL), and 56 participating
enterprises. The TOPP system views performance
along three dimensions (Moseng and Bredrup,
1993). These are in illustrated Figure 1.
Efficiency
Changeability
Performance
Effectiveness

Figure 1 Performance measurement (Moseng and
Bredrup, 1993)
1. Effectiveness - satisfaction of customer needs.
2. Efficiency - economic and optimal use of
enterprise resources.
3. Changeability - strategic awareness to handle
changes.
In TOPP a number of performance measures were
developed based on these dimensions.
One example of a recent performance
measurement system is the ENAPS (European
Network for Advanced Performance Studies)
performance measurement system, developed in
the EU financed project ENAPS. This was based on
a number of performance measurement systems
and recent research. The ENAPS business model
is shown in Figure 2 and reflects a future view of a
manufacturing enterprise as it incorporates the end
of life use of products (Andersen, Rolstads, and
Fagerhaug, 1998). Based on this business model,
ENAPS has suggested three levels of hierarchy for
defining performance indicators. Each performance
indicator is a function of two or more performance
measures. The three levels of hierarchy for defining
performance indicators are: Enterprise Level,
Process Level and Function Level. The
performance measures used in calculating these
performance indicators are measured from all over
the enterprise (Andersen et al., 1998).

Supplier Manuf.
Marketing
Assembly Distributor Customer Recycler
Production
Planning &
Control
Design
Service
Provider
Discard
1 2 3
4
Material Flow
Technical Information Flow
Business Information Flow
Key: 1. Reuse
2. Re-manufacture
3. Recycle
4. Discard
Order Fulfilment Customer Service
Product Development
Obtaining Customer
Commitment

Figure 2 The extended ENAPS business model (Andersen et al., 1998)
2 A FRAMEWORK FOR IMPROVEMENT
Performance measurement plays an important part
in a performance improvement framework. An
example of such a framework is illustrated in Figure
3. This framework is cyclic, and based on the Plan-
Do-Check-Act principle of the Deming wheel.
The first phase in the cycle is self-assessment. The
European Foundation for Quality Management
EFQM (1998) has described self-assessment as a
comprehensive, systematic and regular review of
an organizations activities and results referenced
against a model of business excellence. EFQM
emphasize that the self-assessment process allows
the organization to discern clearly its strengths and
areas in which improvements can be made and
culminates in planned improvement actions which
are then monitored for progress.
Based on the self-assessment, improvement
planning should be performed. Then improvements
should be initiated. As illustrated, a number of tools
can be utilized in order to improve the performance
of organizations, e.g., streamlining, benchmarking,
business process reengineering (BPR), statistical
process control, and root cause analysis.
Through performance measurement, the various
performance level of the business should be
monitored. As shown in the figure, performance
measurement provides input for the improvement
planning, choice of improvement tools, as well as
for the self-assessment process.

PROCESS ORIENTATION
SELF-ASSESSMENT
IMPROVEMENT PLANNING
IMPROVEMENT
Streamlining
B
e
n
c
h
m
a
rk
in
g
B
P
R
Root cause
analysis
PERFORMANCE MEASUREMENT
Time Quality
Productivity Flexibility
Cost
S
ta
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tic
a
l p
ro
c
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s
s

c
o
n
tro
l
Materials
Customers
Suppliers
Research
Product
specs
Designs
Orders
Orders
Needs
Promotions
Products
Product
Development
Mfg.
plant Marketing
Sales
Mfg.
plant
Mfg.
plant
New product ideas
Research and
development
Manufacturing Marketing and
sales

Figure 3 A performance improvement framework Andersen, 1998)
The figure also illustrates that process orientation is
important input in such a framework. Andersen
(1999) has argued that several issues have
stressed the logic of the transition from viewing the
company as a number of departments to focusing
on the business processes being performed:
Every process has a customer, and focusing on
the process ensures better focus on the
customer.
The value creation with regard to the end
product takes place in horizontal processes.
By defining process boundaries and the
customers and suppliers of the processes,
better communication and well-understood
requirements can be achieved.
By managing entire processes that run through
many departments rather than managing
individual departments, the risk of
suboptimization is reduced.
By appointing so-called process owners, who
are responsible for the process, the traditional
fragmentation of responsibility often seen in a
functional organization is avoided.
Managing processes provides a better
foundation for controlling time and resources.
Many of these elements are based on the fact that
every single process has both a supplier and a
customer. What are then business processes? In
this paper Ericssons (1993) business process
definition is chosen:
A chain of logical connected, repetitive
activities that
utilizes the enterprises resources to
refine an object (physical or mental)
for the purpose of achieving specified and
measurable results/products for
internal or external customers.
A main point is that any business process has a
customer, either external or internal. Based on this
definition, almost all activities within a company can
be seen as a business process or part of a
business process, including the processes related
to logistics.

3 A NEW IMPROVEMENT ORIENTED MODEL
There are a number of ways of classifying
business. In the current paper it has been chosen
to use the classification suggested by Fagerhaug
(1999), which is based on a self-assessment
approach. He suggested that the following five
types of processes/structures could be used when
classifying the processes of a business:
Primary processes. The value-adding processes
commonly found in any organization, often
labeled main processes.
Secondary processes. Processes supporting the
execution of the primary processes. These are
often labeled support processes.
Development processes. Processes aimed at
improving the organizations performance, for
instance new product development.
Structural factors. Innate characteristics of the
organization, for instance resources.
Stakeholders. The stakeholders are the parties
that can affect or are affected by the degree of
achievement of an organizations purpose.
Figure 4 shows a business mode based on the five
types of processes/structures (Fagerhaug, 1999).

Customers Suppliers
New product development
Supplier base
development
Production technology
development
H
u
m
a
n

r
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(
S
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)
M
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a
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e
Competitors
External
reference through
benchmarking
Shareholders/owners Society
Procurement and
inbound logistics
Manufacturing Outbound logistics
After sales
service
Continuous improvement
Organizational
architecture
Organizational
culture
Leadership Strategy Resources
Financial result
Societal satisfaction
Customer
satisfaction
Supplier
satisfaction
Employees
Employee
satisfaction
S
t
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c
t
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f
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O
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p
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Strategic planning
Primary processes
Secondary processes
Development processes
Structural factors
Stakeholders
R
e
s
o
u
r
c
e
m
a
n
a
g
e
m
e
n
t
Sales
Marketing
Invoicing and payment

Figure 4 A business model (Fagerhaug, 1999)
When describing and measuring the performance
level in a business process, a number of
parameters might be used. It is pivotal to employ a
balanced set of measures in order to understand
the performance of the process and be able to
identify improvement areas. Typical dimensions for
describing and measuring performance are
(Fagerhaug, 1999):
Qualitative and quantitative measures.
Hard versus soft measures.
Financial versus non-financial measures.
Result versus process measures.
Measures defined by their purpose (result,
diagnostic, and competence).
Efficiency, effectiveness, and changeablity.
The six classic measures (cost, time, quality,
flexibility, environment, and ethics).
All areas should be considered when developing
performance measures. It should be emphasized
that these dimensions overlap. In order to diagnose
the health status of an organization one should
ideally employ a balanced combination of
measures.
Fagerhaug (1999) divided the criteria for each
business process into two main dimensions;
measures defined according to purpose (result
measure, diagnostic measure, and competence
measure), and whether they are qualitative or
quantitative. The reason is that the measures
defined according to purpose indicate different time
periods. The result measures indicate something
about the past and partly about the present. The
diagnostic measures say something about probable
evolution in the short run, as well as something
about the present. Competence measures indicate
something about possible future development.
Three by two categories would add up to six
categories. However, qualitative result measures
are infrequent, and thus the following five areas are
selected:
Quantitative result measures.
Qualitative diagnostic measures.
Quantitative diagnostic measures.
Qualitative competence measures.
Quantitative competence measures.
For each of the 28 processes/structures,
Fagerhaug (1999) has developed a criteria sheet.
The sheet provides the name and a short
description of the process/structure, as well as a
number of text-based and number-based measures
belonging to each of the five categories mentioned
above. It should be emphasized that the measures
are examples rather than a final set.
The authors of this paper would argue that a
number of these processes/structures could be
used to enhance the performance of the business
logistics processes. One could argue that the
business should keep all five dimensions (types of
processes/structures) in mind when seeking to
improve their performance, e.g., that stakeholders
also should be taken into consideration when
focusing on primary processes.
In order to illustrate the suggested approach, text-
based and number-based measures for three
logistical processes can be found on the
consecutive pages. The choice of the three
processes/structures was based done to illustrate
different aspects of the approach. Table 1 shows
the primary process Procurement and inbound
logistics. Table 2 illustrates the development
process supplier based development. While the first
is a more operative process, the latter is aimed a
improving the organizations performance in the
supplier related area. Table 3 depicts the
stakeholder Customers. While the different types of
processes have a number of different dimensions,
the stakeholders are more limited, e.g.,
competence measures for customers are of little
value for the organization.
The three sheets are enclosed as examples of the
approach. Detailed description of the approach,
including all 28 processes/structures can be found
in Fagerhaug (1999).

PRIMARY PROCESSES
A1 Procurement and inbound logistics
Procurement consists of all the activities related to obtaining products or services to a production unit, to a service provider, or to a trading partners stock, while inbound
logistics concerns the associated flow of information and goods up until the product or service has reached the organization.

Specific measures for the process
Result measures Diagnostic measures Competence measures
Q
u
a
l
i
t
a
t
i
v
e

Use a flow chart or another visualization technique to describe
the flow in the chosen process. Keep focus on the main flow of
products/services, and on the associated information flow.
Describe the process customers and suppliers, as well as
important external conditions.
Describe how it is assumed that the process will be done 5
years into the future. Keep focus on the differences from the
current process.
Describe how it is secured that the process is continuously
developing, and how creativity/innovation is maintained.
Describe the process ability to adjust to external conditions.
Describe the organizations strategy for training and
continuous education for those engaged in the process.
Describe how the organization monitors similar processes in
other organizations.
Q
u
a
n
t
i
t
a
t
i
v
e

Total costs incurred
through performing
the procurement and
inbound logistics
activities as a
percentage of the
overall turnover.
Percentage
increase/decrease in
price as against price
for comparable
products or services.

Turnover of inventory.



Average delivery time from suppliers.
Average purchase value from each supplier.
Ratio bought from suppliers that the organization has frame
agreements with.
Incoming delivery quality.
Incoming delivery completeness.
Incoming delivery timeliness.
Dependability of the most important suppliers.
Number of suppliers.
Total value of inventory.

Are there any other measures that describe how well the process
is performing? These might be measures dealing with time,
quality, cost, flexibility, environment, the process itself, the
results of the process, soft measures, etc. List these and their
values.
Describe relevant quantitative competence measures, such as:
Resources used on internal training of personnel working in
the process [% of overall turnover].
Resources used on external training of personnel working in
the process [% of overall turnover].
Ratio of the work in the process which is conducted in teams
[average percentage of the day spent working in teams].
Investments in systems and resources for procurement and
inbound logistics [percentage of overall turnover. List values
for last 3 years].


Table 1 Procurement and inbound logistics (Fagerhaug, 1999)




DEVELOPMENT PROCESSES
C3 Supplier base development
Supplier base development covers all efforts to develop relationship to existing suppliers and obtain new suppliers.

Specific measures for the process
Result measures Diagnostic measures Competence measures
Q
u
a
l
i
t
a
t
i
v
e

Use a flow chart or another visualization technique to describe
the flow in the chosen process. Keep focus on the main flow of
products/services, and on the associated information flow.
Describe the process customers and suppliers, as well as
important external conditions.

Describe how it is assumed that the process will be done 5
years into the future. Keep focus on the differences from the
current process.
Describe how it is secured that the process is continuously
developing, and how creativity/innovation is maintained.
Describe the process ability to adjust to external conditions.
Describe the organizations strategy for training and
continuous education for those engaged in the process.
Describe how the organization monitors similar processes in
other organizations.
Q
u
a
n
t
i
t
a
t
i
v
e

Number of suppliers.









Supplier turnover.
Ratio of supplier assessment [number of suppliers which the
organization has assessed divided by total number of
suppliers].
Ratio of assessment of new suppliers.
Frequency of mapping of the supplier market.
Frequency of meeting with suppliers.
Extent of active use of supplier data.

Are there any other measures that describe how well the process
is performing? These might be measures dealing with time,
quality, cost, flexibility, environment, the process itself, the
results of the process, soft measures, etc. List these and their
values.
Describe relevant quantitative competence measures, such as:
Resources used on internal training of personnel working in
the process [% of overall turnover].
Resources used on external training of personnel working in
the process [% of overall turnover].
Ratio of the work in the process which is conducted in teams
[average percentage of the day spent working in teams].
Investments in systems and resources for supplier based
development [percentage of overall turnover. List values for
last 3 years].

Table 2 Supplier base development (Fagerhaug, 1999)


STAKEHOLDERS
E5 Customers

Describe the organizations customers, as well as the major interfaces between the customers and the organization. Assess the following areas:

Number of customers.
Turnover.
Dependability of most important customers.
Possible substitute customers (meaning customers that might buy the organizations products or services if the original customers cease doing so).
Demanding customers.
The customers division into market segments (geographical).
Are the customers mainly consumers or professional customers.
The customers purchasing power.
The customers expectations from the organization.
The customers requirements from the organization.
The customers contributions to the organization.
The customers ability to meet future changes (adaptability).

Are there any other measures that describe the organizations customers, as well as the major interfaces between the customers and the organization? These might
be measures dealing with time, quality, cost, flexibility, environment, etc. List these and their values.
Table 3 Customers (Fagerhaug, 1999)
4 COMPARISON
What are then the differences and similarities
between the described approach, which is based
on a self-assessment foundation, and tools like
performance measurement and balanced
scorecard?
4.1 Comparison of performance
measurement and self-assessment for
business excellence
What is the difference between a traditional
measurement system and self-assessment?
Because of the many definitions and meanings of
self-assessment, this difference is not altogether
evident, but some differences are (Bredrup, 1995):
When to measure. In the traditional
measurement system the measurement is
continuous. In self-assessment the measuring
is done at certain times, with an interval
between the measurements.
Focus. A traditional measurement system
measures in detail within one or more
departments or processes. Self-assessment is,
however, more focused on a somewhat
superior and holistic image of the company.
Use. Data from the traditional measurement
system are used in the day-to-day control and
measurement of improvements. Self-
assessment is, nevertheless, used in a greater
degree to define more long-term focus areas
for improvement and for strategic decision
support.
Philosophy
Both methods focus on assessing the current state
of the organization or parts of it. Both methods are
aim at improving the organization.
Self-assessment for business excellence is a
method that can be employed at certain intervals,
for instance annually, while performance
measurement is usually a continuous process.
However, one performance measurement may also
be used for short periods of time. An example is a
group of employees in a travel agency who wants to
improve their performance. By measuring key
characteristics of their processes for a limited time
they might learn enough to initiate minor
improvement efforts.
Process or approach
Traditional performance measurement systems are
more focused on the results than the processes.
Imai (1986) labeled these Process-Oriented Criteria
(P criteria) and Result-Oriented Criteria (R criteria).
R criteria are the easiest to measure, and focus on
areas that traditionally have been addressed in
USA. Here we can draw a parallel to Deming
(1986), who had Management based on highly
visible performance measures as one of his five
deadly diseases. Fellers (1992) supported
Demings work and advocated a process view. In
self-assessment for business excellence the focus
is both on the results as well as the processes.
A major difference between traditional performance
measurement and self-assessment for business
excellence is the type of data collected and used: In
performance measurement the data are mostly
quantitative and focused on operational issues. In
self-assessment for business excellence the data
are both qualitative and quantitative, and they have
a longer time perspective than those used in
performance measurement.
The data collected in a traditional performance
measurement system are thus of limited value in
the self-assessment process. A similar conclusion
is reached if one looks at the performance
dimensions from Harrington (1991) and TOPP
(Moseng and Bredrup, 1993) illustrated in Figure 1.
The traditional performance measurement system
is mostly centered on the efficiency part of this
cube, while self-assessment for business
excellence has to take all dimensions into account,
in addition to focus on a higher level.
Many of the same tools can be applied when using
both methods, for instance tools for collection,
analyzing, and presenting data.
Organizational and detailing level
Both self-assessment for business excellence and
performance measurement are holistic-focused
methods. Depending on how they are applied, both
concepts are more or less focused on
improvement.
In self-assessment employee participation is vital.
This is not equally important in performance
measurement, especially if the performance
measurement system is implemented and fully
operational.
4.2 Comparison of balanced scorecard and
self-assessment for business excellence
Philosophy
Both methods aim at assessing the current state of
the organization or parts of it. Balanced scorecard
is, however, monitoring the organization
continuously, while self-assessment can be applied
at certain intervals, for instance annually. The
improvement focus is more evident in self-
assessment than in balanced scorecard, as
determining areas for improvement is a major part
of self-assessment.
Process or approach
Both methods make use of a reference model, and
in self-assessment a business excellence model is
used. In balanced scorecard the model which is
compared against consists of four areas (Kaplan
and Norton, 1996).
Balanced scorecard is a continuous process, as
opposed to self-assessment that can be utilized at
certain intervals.
The organizations should collect data and analyze
them in order to understand their own operations.
The data collecting in self-assessment for business
excellence consist of both qualitative as well as
quantitative data. In balanced scorecard only
quantitative data are collected.
Organizational and detailing level
Both self-assessment and balanced scorecard are
holistic-focused methods. The main focus,
however, differs. Self-assessment emphasizes
improvement, while balanced scorecard is focused
on status. One could label it a state-of-the-art
performance measurement tool, incorporating both
financial and non-financial measures. Employee
participation is thus not as pivotal to balanced
scorecard as it is to self-assessment.

5 CONCLUSIONS
This paper has sought to give an introduction to a
new approach for measuring and improving
performance of logistics processes. In order to
describe the approach, an introduction has been
given to performance measurement. An
performance improvement framework has also
been introduced. In addition, the approach has
been compared with performance measurement
and balanced scorecard. We would argue that the
use of the approach would enhance the
performance of logistics processes.

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