Logistics Information Management

Performance Indicators in Logistics

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, (1992),"Performance Indicators in Logistics", Logistics Information Management, Vol. 5 Iss 3 pp. 35 - 40
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Garland Chow, Trevor D. Heaver, Lennart E. Henriksson, (1994),"Logistics Performance: Definition and Measurement",
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James S. Keebler, Richard E. Plank, (2009),"Logistics performance measurement in the supply chain: a benchmark",
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 PERFORMANCE INDICATORS IN LOGISTICS 35

F
ew serious studies have attempted to The Control Cycle
analyse exactly how the logistics activity
can be measured as a whole. Management has been defined as the planning, execution
and control of goal-directed activities. Control processes are
implemented in this in the form of control cycles. A
schematic example of a control cycle is shown in Figure 1.
On the one hand, the essential stages of the control cycles
are reflected, and on the other, the conditions that are
necessary for implementation of the control cycle are shown.

Performance The information flows required for logistic control must

take shape in the organization in such a manner that a
consensus is reached over the information flows necessary

Indicators in for a well functioning control cycle. Logistic performance

indicators need, if well applied within the organization, to
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be part of such a control cycle and need linking to the

control processes in the logistic management. The

Logistics principle of a control cycle for controlling a process is

described with reference to a number of stages that have
to be completed. These are respectively:
• Description of the process. Description and
identification of the process for which the control
cycle is representative. This also implies the
indication of the boundaries.
• Data collection. Measurement and registration of
Logistics Information Management. Vol. 5 No. 3. 1992. pp. 35-40 the process data; explicit registration procedures
MCB University Press. 0957-6053 and instruments are necessary.
• Transformation to performance indicators. In this
phase, the results of the measurements are
changed into usable information. In order to obtain
good interpretations, this implies that one relates
the results to norms.
For 25 years leaders in academe and industry have
enthused about logistics as the great integrating corporate
authority, underpinned always by information. Yet, in this
quarter-of-a-century, few serious studies have attempted
to analyse exactly how the logistics activity can be
measured as a whole — its component parts are typically
studied alone.

In October 1985 a seminar was held on "Performance

Indicators in Logistics" by The Netherlands Association
for Logistics Management (NEVEM). A model was
presented whereby performance could be measured, and
over the next few years it was put to the test in several
companies.

Onefindingwas that, while much of the data necessary

for performance measurement existed in companies, the
data needed structuring. During the course of further
study, other aspects emerged which were found to be
important. The results of this ongoing research have now
been collected and published[l].

The research is based on the control cycle, explained as

follows in an excerpt from the book:
 36 LOGISTICS INFORMATION MANAGEMENT 5,3

• Evaluation of performance. Evaluation of The design of a control cyle consists of the establishment
performance indicators takes place by comparing of the above mentioned conditions. The order in which
planned or desired values with the corresponding this is done is as follows:
control boundaries. (1) Define objectives and structure.
• Analysis of the problems. For a good diagnosis,
experience with and insight into the process is (2) Define steering instruments.
required. (3) Make use of knowledge and experience for
• Decision to intervene. From the diagnosis made in problems analysis.
the previous stage, it can be decided whether or
(4) Fix norms and control boundaries.
not to take corrective action. This means that the
data concerning the process have to be such that (5) Define performance indicators.
expected results and costs of intervention allow for
(6) Determine measurement tools.
corrective action.
Actual execution of control activities starts with data The authors then go on to describe exactly what is meant
by performance indicators, using a transformation model
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collection and follows the control cycle clockwise. Before

control is possible, all conditions necessary for adequate as the basis. Quoting from the book:
control have to be fulfilled. The actions are those
necessary for implementation of the control cycle.
Satisfying these conditions begins with the structuring of Performance Indicators
the process to be controlled. Looking at the general transformation model may be the
simplest way to understand what is meant by performance
The conditions to be fulfilled are: indicators (see Figure 2). The transformation process in
• The logistics process has to be defined and this Figure embraces the activities concerned with
structured in the direction of the flow of goods transformation of input into output. This may include
(movement of the goods themselves) as well as the production processes, decision processes, development
management structure which is perpendicular to processes, control processes, etc. Data' related to the
the flow of goods. The organization has to be condition of the transformation process are called
structured accordingly (Chapter 2). conditional variables.
• Measurement systems and procedures must be at
Measurement in the general model can take place in three
hand in order to collect at a regular frequency the
categories of process data: inputs, conditional variables and
data necessary for the determination of
outputs. In order to give an insight into the different types
performance indicators (Chapter 6).
of data that are ranked as one category, an example of
• Performance indictors indicating the deviation from quantities from the logistic sector is given (see Table I).
norms must be defined and they must give insight Notice that the inputs, conditional variables and outputs can
the total logistic flow as well as in the different parts almost all be expressed in both financial and physical units.
of the flow. These performance indicators have to However, reporting the process data that are relevant for
reduce the complexity resulting from non- the company is not sufficient to calculate performance
comparable data (Chapter 5). indicators. In order to gain insight into the past performance
• Quantitative norms must be set, with their of the process it is necessary to relate the collected data
corresponding control boundaries (Chapter 4). to norms or other data. Only after the establishment of these
• The decision makers must have enough experience relations performance indicators do emerge.
to evaluate the different signals and make a
diagnosis accordingly (Chapter 3). The conditional variables themselves originate by making
a relation between different data and are therefore by
• It must be clear which steering instruments are
definition performance indicators. The most common
available to intervene in the logistic process. This
signifies that one has to have a thorough knowledge performance indicators also used in this book are:
of one's own specific logistic situation, the most
important steering instruments within it, and their
effects. The division of the authority in the
organization must also relate to the steering
instruments. If a function has been given
responsibility for the realization of a defined task,
this function also needs the appointment of the
authority to use the available steering instruments
according to its own insight in order to fulfil the
task (Chapter 3).
 PERFORMANCE INDICATORS IN LOGISTICS 37

Table I . Example of Quantities from the Logistic Sector • Number of customer orders correctly delivered
in a certain period (number and time) = real
Inputs (I) Conditional variables (T) Output (0) output.
• Number of customer orders planned to be
Material Throughput time Production delivered (number and time) in that period =
Costs Throughput time Sales
norm output.
Personnel Turnover speed Deliveries • Delivery reliability = real output/norm output
Capacity Rejects Turnover (effectiveness).
The performance indicator is expressed as a percentage
(e.g. 95 per cent). A norm with control boundaries could
• Efficiency = norm input/real input. then be 97 per cent ± 2 per cent. Graphically the
performance indicator can be presented as in Figure 4.
• Effectiveness = real output/norm output.
• Process parameter = real conditional variable. (2) The inventory level in the component warehouse
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is defined as follows:
• Productivity = real output/real input.
• Inventory (infinancialterms) at the beginning
• Utilization level = real input/norm input. of the month divided by the supplies in that
These these quantities are represented schematically in month. The performance indicator is now
Figure 3. expressed in months (e.g. two months). The
norm with control boundaries could then be two
Efficiency concerns the efforts, costs and reception of the months ± half-a-month. Graphically this
inputs when employed in the process in relation to the performance indicator can be presented as in
preliminary stated norms (reciprocal occupation rate). Figure 5.
Effectiveness concerns the amount to which the process
realizes the previously stated norms (compared with the From the enumeration of quantities as in Table I it can
actual output). be derived that a large number of performance indicators
can be defined. In this book we want to point out how
Process parameters indicate values which the quantities this can be achieved structurally. As every situation is
have that are considered to be relevant (such as inventory specific we shall present a method that may be used in
level and throughput time).
Productivity reflects the relation between the achieved
result (output) and the means used to obtain this (input).
Two examples of performance indicators are illustrated
below:
(1) Delivery reliability to customers is defined as
follows:
 38 LOGISTICS INFORMATION MANAGEMENT 5,3

selecting performance indicators. For clarification we (1) Validity. The measured value must represent the
conclude this book with a number of practical examples. real inventory level. For example a measurement
of the total inventory level will be invalid if the
The ensuing chapters look at the structure of logistics, warehouse inventory and the pipeline inventory are
steering instruments, setting norms, determining not measured simultaneously.
performance indicators, measurement tools, working with
performance indicators, production organization and (2) Covering potential. When a performance indicator
performance indicators, and the logistic input-output model. aims to describe the total inventory, one may not
omit to take, e.g. the pipeline inventory or
We are reminded in chapter six, on measurement tools, of subassemblies into consideration.
the purpose behind all this information-gathering activity (3) • Comparability. The units for indicating the inventory
— points which are often lost on the boffins who get carried level are not comparable if on one occasion the
away with the flashing bright lights!: inventory level is expressed in days, and on another,
in financial terms or number of products.
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Requirements for Data Collection and (4) Accuracy. The value determined for an inventory
Processing level must be so accurate and reliable that any
exceeding of the control boundaries is always
The following requirements can be made with respect to detectable. Precautions have to be taken especially
data collection and processing: if an accumulation of errors is possible. With respect
(1) Validity. Measurements must reflect actual to inventories, reliability of the recorded data is
performance. This requires a good definition of the particularly important. Not only do unreliable data
performance indicators (Chapter 5), the lead to wrong decisions, but they also lead to
measurement points and the measurements from misinterpretation of the performance indicators.
which they originate. Also the time span over which
the measurement data are valid has to be known. (5) Utility. If a certain (part of the) inventory level is
not adjustable, or very difficult to adjust (e.g. it is
(2) Covering potential. Measurements must completely outside the responsibility area), then it makes no
cover the definition of the performance indicators. sense to take measurements for that responsibility
The more completely the measurements of the area.
process quantities are represented, the better
these quantities can be evaluated. (6) Profitability. At least the costs of the installation
and maintenance of an inventory level measurement
(3) Comparability. Measurements are to be comparable system will have to be regained (in the total chain).
in dimension throughout the organization and over
subsequent points in time (premise 4, Chapter 5). The final chapter concentrates on the logistic input-output
model, which formed the nucleus of the working group's
(4) Accuracy. Sufficient precision and reliability is 1984 seminar and its subsequent research. It arose from
required of the measurements. For example, the the realization that: "all logistics activities in a company
taking of samples for inventory reliability must be need to contribute to the realization of the company's
representative of the real situation besides being objectives". This realization, of course, is not new but how
an accurate measurement. difficult it is to define, measure and provide that
"contribution" in the face of often conflicting departmental
(5) Utility. A decision maker must benefit from the
objectives and agendae. Hence, the model, described thus:
measurements done (which is the object of this
book).
(6) Compatibility. If a measurement system links up Introduction to the Model
well with the existing data organization, it will be
easier to implement. This existing data organization The logistic input-output model is a schematic
will also influence the choice between manual or representation of reality, with an operational character,
automated measurement (Section 6.5). which is expressed in:

(7) Profitability. The benefits of the measurements • The possibility to analyse the logistic activities with
must exceed the costs. the help of the model and their influence on the
corporate objectives.
NB: Beware of striving for too much precision (too detailed • The possibility to increase insight into the
and expensive!).
coherence of the logistic activities by means of the
model.
How the above-mentioned requirements affect the
performance indicators can be illustrated with an example Concretely, this means that the model has the following
about the inventory level: functional specification:
 PERFORMANCE INDICATORS IN LOGISTICS 39

• The different logistic activities and their relations

are included.
• The different levels in the organization are
considered separately.
• Both physical and financial elements are included.
• The model can be utilized as both a calculation and
a simulation model.
None of the models, so far available, satisfied all of these
requirements, although certainly a number of elements
recur. By combining a number of elements of the models
considered, it appeared possible to construct a model for
logistic applications that satisfies all these functional
specifications. Two examples used in this way are:
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• The Du Pont model (Appendix 4): this shows the

coherence of a number of financial variables
together forming the return on investment.
• The logistic process chain: in this model the
activities are presented in relation to the physical
flow of goods.

respect to time delays, trends and cash flows. As such,

Description the decrease of lead time at constant output will imply
General a decrease of the input, and also the future cash outflow.
In Figure 6 (Figure 32 in the original) the logistic-input
output is presented schematically. On the horizontal axis Minimally, the following relations have to be included in
the most important elements of the Du Pont model are the logistic input-output model:
presented, which are: • The output of a block in the physical delivery flow
• Capital invested (goods, capital assets). has to be the input of a subsequent block in the
physical purchase flow. Modification of the output
• Operational costs (depreciation, labour, buildings, of a block influences the model.
personnel, other).
• Cash flow. • The physical flow, expressed in physical and
financial data, and the operational costs and capital
For an adequate analysis of the entire process, the physical invested columns need to be mutually consistent
flow is added on the horizontal axis, divided into purchasing according to the following calculation:
and delivery activities. On the vertical axis the horizontal
structure of the process under consideration is presented. Delivery financial = Purchase financial +
For example (Figure 6, Figure 32 in the original): supplier, Operational benefits - Mutation capital invested
purchasing, warehoue, production, customer. The process in goods (ending. - beginning).
considered and thus the schematic presentation is situation The cash flow column can, if desired, be itemized to
dependent, as described in Chapter 2. receipts and expenses. But considering that these coincide
with the columns for the physical flow, this is not really
necessary.
Elaboration
In order to elaborate the logistic input-output model, the
different blocks have to be filled in with both physical and Further Possibilities
financial terms. Each block consists of a combination of If so desired, the logistic input-output model can be made
horizontal and vertical factors (e.g. operational costs more complex by addition of more relations. This also
warehouse). With respect to the physical and financial units implies that the model is a better reflection of reality.
the combination could be, e.g.:
• 100 hours of labour = $2,500. Another method to obtain better facilities for analysis with
• 10 tons of goods = $10,000. the model is to enlarge the number of columns by division
of the various items. For example, an item "investment
The logistic input-output model is likewise filled in for a mutations" could be included and the operational costs
certain period (day, week, month, year). By defining two column could be split into separate columns forfixedand
or more periods consecutively, analyses can be made with variable costs.
 40 LOGISTICS INFORMATION MANAGEMENT 5,3

By horizontal intersection of a process level, relations can For a complete representation of the company, it is
be established between the physicalflowand the matching necessary to include the data for those departments not
operational costs and capital invested. Especially between considered in the process as one block under "others
physical units and operational costs, relations can be company". In this block also the items "allocated" as
established in the following two ways: identified in the budgets are to be included. With this
division, simulation becomes feasible, because all variable
• Calculation of the necessary means based on the costs vary with quantities, and the fixed costs remain
nature and size of the expected physical flow and the unchanged or drop out entirely (if the activity is
performance norms proposed (e.g. hours/ piece). eliminated). In order to fill in the columns, belonging to
• Calculation of the performance realized based on the the physical flows, the following can be stated:
real physical flow and the real means utilized.
• The process must be indicated with all branches
This implies that the logistic input-output model can also (e.g. work put out to contract, service deliveries).
be applied for normative calculation based on performance
norms. • The flows have to be indicated in quantitites and
price equivalents.
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Inditations for Filling in theLogisticInput-Output • Operations have to be indicated in quantities,

Model capacities and price equivalents. For example, 1,000
To conclude this section, we shall give some indications for hours with a value of $25,000, 10 tons of goods with
the completion of the logistic input-output model. In order a value of $10,000.
to fill in the operational costs and invested capital columns,
the existing data from the budgets and balance sheets can The remainder of the chapter provides worked examples.
be taken over. This will ensure that the data in the model Useful appendices provide further insight into indicators.
coincide with the method applied in the company. The
budgets for the departments are to be split into the following In summary, this is a gem of a book — just 100 pages
items: but packed with wisdom and practical application. Reading
it and using the structures presented will do much to
• Fixed costs of the department. These are to be
benefit the practice of logistics as a whole.
formulated and included in the logistic input-output
model as one block.
• Variable costs of the department. These include
those costs that are directly related to the activity Reference
level. They are calculated normatively on basis of
1. NEVEM Workgroup, Performance Indicators in Logistics,
performance norms, or included as real costs, after IFS Ltd and Springer-Verlag. Copies of the book may be
which perfomance can be calculated. ordered from IFS Ltd, Wolseley Business Park,
• Allocated overheads. Kempston, Bedford MK42 7PW.
 This article has been cited by:

1. Claudine A. Soosay, Ross L. Chapman. 2006. An empirical examination of performance measurement for managing
continuous innovation in logistics. Knowledge and Process Management 13:10.1002/kpm.v13:3, 192-205. [CrossRef]
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