Publication: SAM Advanced Management Journal
Publication Date: 22-MAR-05
Format: Online - approximately 6568 words
Delivery: Immediate Online Access
Author: Pohlen, Terrance L. ; Coleman, B. Jay
Article Excerpt
Most firms know that the performance of their supply chain partners directly affects their own performance, and vice versa. Nevertheless, most analytical tools are focused internally. By combining dyadic economic value added analysis (EVA) with activity-based costing (ABC), it is possible to analyze operations decisions so they can be aligned with supply chain objectives. This novel framework allows managers to trace the financial and nonfinancial effects of decisions, even those affecting the shop floor, on their own operations and those of their supply chain partners. These partners must be persuaded to perform a similar analysis. While the analysis has some shortcomings, it should help assure that decisions will result in the highest value-added for the end customer and superior competitive positions for the firms involved.
Introduction
Firms cannot exist in isolation and must rely on other firms to perform a complex chain of interdependent activities from source-of-supply to the end-user. One company rarely controls an entire supply chain, and success depends on how well the combined capabilities of these firms can be integrated to achieve a competitive market-place advantage (Cook, DeBree, and Feroleto, 2001). Managers must extend their "line of sight" to understand system-wide performance and the contribution of each firm (Lummus and Vokurka, 1999). They subsequently need to develop measures for on meeting end-user requirements and aligning firm behavior with supply chain objectives. The ability to develop such measures is a major challenge to supply chain management (Pohlen, 2003).
Performance measures are critical to the success of the supply chain (Deloitte, 1999). Companies can no longer focus on optimizing their own operations to the exclusion of their suppliers' and customers' operations (Lummus, Vokurka, and Alber, 1999). By tying manufacturing and supply chain activities to performance outcomes, operations managers and senior executives can make more informed decisions regarding the allocation of scarce resources and the initiatives and partners that are best for the overall supply chain. Managers across an entire supply chain must collaborate to improve performance and obtain the greatest mutual benefit. Performance measures are needed to keep the trading partners aligned with the enterprise-wide goals so supply chain performance can be optimized.
Effective supply chain management requires measures capable of capturing inter-firm performance (van Hoek, 1998) and integrating the results to depict overall supply chain performance (McAdam and McCormack, 2001). Performance must be measured simultaneously across multiple firms, and the measures must demonstrate how each firm's behavior affects the others and the value delivered to the end-user. Supply chain performance measures must translate nonfinancial performance into financial terms and shareholder value (Ellram and Liu, 2002). Supply chain management will affect more than costs, and managers must be able to sell the value created to senior executives, trading partners, and shareholders. Although most managers acknowledge the importance of designing metrics and rewards, they lack an adequate framework for developing suitable performance measures (Kallio, 2000, Simatupang and Sridharan, 2002).
Few firms have measures capable of capturing performance across multiple companies (Keebler, 1999, Lambert and Pohlen, 2001, Lee and Billington, 1992, McAdam and McCormack, 2001, and Simatupang and Sridharan, 2002), and most are not satisfied with the measures they currently use for supply chain performance (Deloitte, 1999). In many instances, the measures identified as supply chain metrics are actually measures of internal operations or logistics performance (Lambert and Pohlen, 2001). Other approaches, such as the total cost of ownership (TCO) or the supply chain operations reference (SCOR) model, measure the effect of suppliers or other trading partners on performance within the firm. They do not measure performance across multiple firms or the overall supply chain.
In an effort to address this shortcoming, we apply a general framework introduced by Lambert and Pohlen (2001) to show how operations performance can be evaluated with a multi-firm, supply chain perspective. The framework can help operations managers achieve supply chain objectives such as "increased shareholder value" and "improved customer service" by providing a concrete roadmap. The focus is on increasing shareholder value for each firm in the supply chain by establishing within-company and cross-company links between actions (i.e., prospective value drivers) and profits. Senior executives can use the framework to determine whether operational-level actions did, indeed, create value, to demonstrate what requires measurement, to focus attention, and to align behavior within each firm with supply chain objectives. The framework differs from other approaches by simultaneously measuring and analyzing interfirm performance and linking operational performance measures directly to the drivers of shareholder value.
Applying the Framework
The framework employs a dyadic economic value added (EVA) analysis and activity-based costing (ABC). The dyadic EVA analysis 1) evaluates how process changes simultaneously drive value in each firm, and 2) develops measures that align operations performance with supply chain objectives. ABC determines what drives costs and performance (Krumwiede and Roth, 1997, Buckingham and Loomba, 2001) and also translates nonfinancial performance into activity costs and financial measures. EVA and ABC enable managers to optimize and better coordinate the performance of activities across the entire supply chain (Dekker and Van Goor). The framework was adapted for an operational environment by developing five steps, each of which is performed by operations management personnel:
* Establish strategic objectives for the supply chain.
* Map the firms composing the supply chain.
* Examine operational decisions (i.e., potential value creators) using a dyadic EVA analysis.
* Translate process objectives into costs and operational performance measures using ABC.
* Measure and extend analysis to other trading partners.
1. Establish strategic objectives for the supply chain
The corporate strategy of the firm demonstrating the greatest leadership and power provides the most likely starting point for establishing supply chain objectives. Operations managers should look first at strategy when setting objectives and determining what to measure (Neely et al, 2000; Keegan et al, 1989; and Wisner and Fawcett, 1991). The corporate strategy reflects management's choices and trade-offs in its drive to achieve a unique competitive position and maximize shareholder value (Rappaport, 1987). Supply chain strategy flows directly from corporate strategy and the selected target markets by determining the configuration of the processes and companies that best meet end-user requirements and...
NOTE: All illustrations and photos have been removed from this article.
More articles from
SAM Advanced Management Journal
ADA's reasonable accommodation: myth or reality., 22-SEP-07
Corporate social responsibility: an exploratory study in the United Arab Emirates., 22-SEP-07
Improving organizations by coaching individual development using the resource-based business strategy., 22-SEP-07
Looking for additional articles?
Click here to search our database of over 3 million articles.
Looking for more in-depth information on this industry?
Click here to search our complete database of Industry & Market reports by text, subject, publication name or publication date.
About Goliath
Whether you're looking for sales prospects, competitive information, company analysis or best practices in managing your organization, Goliath can help you meet your business needs.
Our extensive business information databases empower business professionals with both the breadth and depth of credible, authoritative information they need to support their business goals. Whether it be strategic planning, sales prospecting, company research or defining management best practices - Goliath is your leading source for accurate information. |
