Supply chain performance measurement systems

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Problems and challenges of supply chain perfor-mance measurement

The following chapter reveals problems and challenges of supply chain performance measurement. In order to do that, relevant literature is reviewed and analyzed. The chapter discusses five main issues: supply chain in-formation sharing, learning, relationships, complexity and flexibility. These issues are described and later produce the basis for the empirical survey carried out for this thesis. The chapter ends with a critical evalua-tion of the problems and challenges complicating the supply chain performance measurement. Thereby the ful-fillment of the second sub-purpose of the thesis is ensured.

Supply chain information sharing

Uncertainty in supply chains is observed quite often, since perfect information about the entire chain cannot be secured. Most participants have perfect information about them-selves, but uncertainties arise due to lack of information about others. In order to reduce uncertainties, supply chain participants should collect information about others. The basis for information sharing is that others are willing to share information, leading to a situation where each member in a supply chain has more information about others. Information sharing would improve the entire system’s performance, because each supply chain partici-pant can improve its performance (Yu, Yan, & Cheng, 2001).
To be able to respond and quickly process information throughout an organization or a supply chain, companies have invested large sums of money in information technologies. It can be found that managers are seeking to improve operational and competitive perfor-mance by developing more efficient and effective information sharing capabilities. Most of the information sharing theories and practical approaches focus on the technological as-pects of information sharing (Fawcett, Osterhaus, Magnan, Brau, & McCarter, 2007). Still many companies are not content with the returns on their investments (Jap & Mohr, 2002). A possible explanation for this might be that the implemented technologies have not been supported by investments in the organizational culture of promoting open sharing of in-formation. Therefore it can be found that the connectivity, for example, in the form of technologies, and the willingness to share information are two fundamental elements of in-formation sharing (Fawcett et al., 2007).
Connectivity has a very important role in information sharing. In most cases high connec-tivity is reached through information technologies enabling companies to collect, analyze and evaluate information among the participants of the chain to improve the decision mak-ing. Connecting the participants of a chain across functional and organizational boundaries provides them with relevant, accurate and actual information, reduces temporal and spatial distances, allowing better and more coordinated decisions (Fawcett et al., 2007). Advanced connectivity offers the change in competitive capabilities as well. The best known capability of information is to replace inventory in the supply chain (Constant, Kiesler, & Sproull, 1994). Another aspect of actual connectivity enables detection of less tangible elements such as environmental trends or inflection points to discover changing competitive rules or changing customer demands (McGee, 2004).
Connectivity creates the basis for information sharing but people make the decision what will be shared and when. In many cases individuals are unwilling to share information which might place their organization in a competitive disadvantage. Even though these fears might not be justified, an enormous amount of useful information is never shared and stays unavailable to decision makers (Fawcett et al., 2007). Organizational theory implies that the company culture influences how willing an organization and its people are to share information (Constant et al., 1994). Therefore to take full advantage of integrated informa-tion in a supply chain, the participating companies must have a high level of willingness among all key players. In sum, the technological connectivity of a company, combined with the cultural willingness, will determine how much useful information will be shared to im-prove the supply chain performance (Fawcett et al., 2007).
Furthermore, Fawcett et al. (2007) identified four different barriers of information sharing. The first barrier concerns the costs and complexity when implementing such an informa-tion sharing system. In many cases budgets are exceeded and the systems do not perform as intended. The second barrier is found in system incompatibility. Sometimes different IT-systems do not function together or some companies have not been able to invest in such systems and still work manually. The third barrier are the costs created by incompatible sys-tems, and since the investment and implementation costs for such systems are high, it is important to reach the intended cost-saving through more effective and efficient processes. Unfortunately, in some cases companies have advanced IT-solutions, but, for example, all the orders from customers are sent by fax instead of e-mail and must be entered manually into the system, leading to enormous extra costs. The last barrier states that managers simply do not understand the unwillingness of individuals to share information. Therefore there are no investments into the organizational culture and valuable information is not shared among the supply chain participants.
Effects on supply chain performance measurement
Information sharing is the basis for every functional performance measurement system. Especially when trying to develop a supply chain performance measurement system for the entire supply chain, the sharing of information beyond boundaries of organizations be-comes essential. In sum, it can be stated that the barriers of information sharing need to be overcome for a successful supply chain performance measurement system, since it can be seen as an advanced development of information sharing in the supply chain.

Supply chain learning

Sharing information is essential for organizations to learn from each other in the supply chain. The opportunity to learn from others can encourage continuous improvement of the supply chain performance. Learning is very valuable for innovation and improvement. To create innovative behaviors, organizations need to develop and support learning behaviors. Learning offers the opportunity to question and challenge existing processes that different workplaces institutionalize as standard behavior (Hyland, Soosay, & Sloan, 2003). One ex-treme is that the existing or repetitive learning occurs through standardized or routine be-havior, called “single-loop” or “lower-level” learning (Fiol & Marjorie, 1985), while the other extreme, behaviors that verify, challenge or question existing processes, have been named “double-loop” or “higher-level” learning (Senge, 1990). These capabilities of learn-ing can only be implemented over time by progressive consolidation of behaviors, or by ac-tions aimed at developing new assets or recognizing the stock of existing resources (Hyland et al., 2003). Hyland et al (2003) identified four key capabilities of learning:
The management of knowledge
Managing and cultivating knowledge is a procedure of building, changing, displaying and proving organizational competence. In the right setting and circumstances, such a process may lead to knowledge that can be shared with others and benefit the organization. Know-ledge can be recorded, stored and distributed in the form of information sharing.
The management of information
Information and knowledge are no substitutable terms. Knowledge is new information gained through interpretation, analysis and the context in which it is discovered (Kidd, Richter, & Li, 2003), while information concerns known data that have been organized, analyzed and interpreted by computers or people. One of the biggest mistakes is to ignore the differences between knowledge and information or to assume that information tech-nologies can overcome the difficulties of information gathering or knowledge generation (Hyland et al., 2003). Concerning the management of information an organization should generate, acquire, process and use information (Myburgh, 2000). Information sharing is not perfect, especially in supply chains, and this complicates decision making and communicat-ing with a holistic approach.
The ability to maintain and manage information technologies
Technology plays a very important role for supply chain learning. On the one hand, tech-nology stores information, and on the other hand it can also help to search, structure, cate-gorize and analyze the information. The use of information technologies is the basis for or-ganizations and supply chains to maintain or extend their learning abilities (Hyland et al., 2003). Furthermore, information technology can provide support in overcoming one of the primary challenges of supply chain management, which involves the coordination of people and processes between organizations (Clements, 2007).
The management of collaborative operations
Collaboration between internal and external partners is essential to create knowledge and information in the supply chain. The creation of knowledge takes place when individuals with different backgrounds collaborate and share information. This development is gaining a growing importance in organizations in order to improve the overall supply chain per-formance and to stay competitive.
These capabilities of learning can be seen as the basis of supply chain learning, but for the implementation of a supply chain performance measurement system it is also interesting what kind of learning behaviors exist for individuals and organizations. Hyland et al. (2003) thereby found the following learning behaviors:
• Individuals and groups use the organization’s strategic goals and objectives to focus and prioritize their improvement and learning activities.
• Individuals and groups use innovation processes as opportunities to develop know-ledge.
• Individuals use a part of the available time or resources to experiment with new solu-tions.
• Individuals integrate knowledge between different parts of the operation.
• Individuals transfer knowledge among different processes.
• Individuals abstract knowledge from experience and generalize it for application to new processes.
• Individuals try to understand and internalize knowledge from external sources.
• Individuals and groups make knowledge available to others by incorporating it in such vehicles as reports, databases, product and process standards that can be more widely disseminated and retained over time.
In most cases only a limited number of these learning behaviors can be found. Not all companies are willing to learn or have a culture supporting organizational learning. The most challenging element for organizational learning is trust (Kidd et al., 2003). Lack of trust often hinders the sharing of information and therefore limits ability to learn from oth-ers. A key element therefore is to develop trust throughout supply chain participants.
Effects on supply chain performance measurement
Learning from others in the supply chain and understanding the capabilities and learning behaviors in organizations or supply chains is tremendously important when implementing a supply chain performance measurement system. For the implementation it is relevant to know how individuals react, analyze and adapt to a new measurement system and how they learn from each other. The benefit recognition of a supply chain performance measure-ment system is particularly challenging, as well as inspiring the supply chain participants to learn to share information on the basis of trust.

Supply chain relationships

Supply chain relationships are complex, multi-stranded arrangements of exchange between different actors in short, medium and long terms. Not only might there be several relation-ships between two organizations around different products and services, but often there are many individuals involved in establishing and maintaining supply chain relationships. Research views relationships as processes involving short-term transactions of products, services and payments, giving rise to an increase of social relations such as trust and reputa-tion between the involved parties and thereby forcing social, informational and technologi-cal exchange (Easton & Lundgren, 1992).
Such supply chain relationships have two major dimensions. The first dimension focuses tangible aspects of relationships such as the volume and timing of materials and informa-tion flows, product quality improvement, and cost minimization. The second concentrates on intangible aspects such as trust, cooperation, and communication (Naude & Buttle, 2000). Trust is seen as the belief of a firm that another company will perform actions that will result in positive actions for them, as well as not to take unexpected actions that would result in negative results for them (Anderson & Narus, 1990). Cooperation refers to situa-tions in which firms work together to achieve mutual goals (Heide & John, 1988). Com-munication is the formal and informal sharing of meaningful information between firms (Anderson & Narus, 1990).
In terms of high intensity of involvement, supply chain relationship may take the form of partnerships or strategic alliances. A Partnership is a long-term process and should not be seen as an instant cost saving exercise, but rather as an investment. Buying organizations recognized that supplier are the experts in their own field of technology and that they can draw upon this expertise to create synergies within a supply chain. A partnership involves the supplier as ‘co-producer’, working with fewer suppliers per customer, developing long-term relationships, managing close interaction among all functions, and sharing physical proximity (Cousins, 2002).
The most sophisticated form of cooperation between companies occurs when a strategic alliance is formed between partnering firms. Strategic alliances enable the buying and sup-plying firms to combine their individual strength and work together to reduce non-value adding activities and improve performance. In order for both parties to remain committed to this form of relationship, mutual benefit must exist. This is termed as developing “win-win” relationships (Whipple & Frankel, 2000).
Trust is also often recognized as the important element in successful strategic relationships with suppliers. It is related to many other elements such as reputation and credibility. Trust can be examined from two distinct perspectives. Character-based trust examines qualitative characteristics of behavior in partner’s strategic philosophies and cultures, and competence-based trust examines specific operating behaviors and day to day performance (Whipple & Frankel, 2000).
Since supply chains are made up of organizations linked by relationships, transparency may also be of relevance when managing a supply chain. The concept of cost transparency with-in the development of supply chain relationships was defined as the sharing of cost infor-mation between customer and supplier, including data which would traditionally be kept secret by each party. The purpose of this is to make it possible for customer and supplier to work together to reduce costs and improve other factors (Lamming, 1993). It is important to note that transparency refers to a two-way exchange of information; that is, that the cus-tomer shares data with the supplier about its own operations, as well as requiring the sup-plier to share. The development from a simple provision of data to two-way sharing of sen-sitive information in the pursuit of a new value creation heightens the richness of the knowledge environment between customer and supplier and in the supply chain (Jeong & Phillips, 2001). Therefore, Lambert and Pohlen (2001) proposed 6 steps for forming and maintaining supply chain relationships:
1. Perform Strategic Assessment
2. Decision to form relationship
3. Evaluate alternatives
4. Select partners
5. Structure operating model
6. Implementation and continuous improvement
These 6 stages are critical to the formation and success of supply chain relationships. It is very important for supply chain participants to concentrate on improving quality, speed, dependability, flexibility and cost through relationships.
Further aspects that need to be kept in mind are the different power positions the supply chain participants can have. Power, in a more general sense, refers to the ability of an indi-vidual or a group to control or influence the behavior of another (Hunt & Nevin, 1974). Therefore when developing a supply chain performance measurement system it is important to know who has the power to influence others in a relationship and how can this power position be used.
Effects on supply chain performance measurement
Considering the different relationships a company is involved in, it becomes especially dif-ficult to implement a supply chain performance measurement system accounting for the entire supply chain. A functional measurement system relies highly on the relationships with customers and suppliers in order to measure and evaluate important information and data. These complex, multi-dimensional relationships involving internal and external part-ners are the basis for performance measurement systems and are very challenging to man-age, for example, due to constant changes. Furthermore, a lack of trust or transparency be-tween partners can complicate the development of a reliable performance measurement system.

Supply chain complexity

The more participants and levels are included in a supply chain, the more complex the management becomes. The complexity of most supply chains makes it difficult to under-stand how activities at multiple tiers are related and influence each other. It is challenging for performance measures that they must reflect the complexity and consider cross-company operations from original suppliers to the end customer (Lambert & Pohlen, 2001).
In general, the complexity of supply chains can be described in terms of several intercon-nected aspects of the supply chain, including (Yates, 1987):
• Number of elements or subsystems.
• Degree of order within the structure of elements or subsystems.
• Degree of interaction or connectivity between the elements, subsystems and the envi-ronment.
• Level of variety, in terms of the different types of elements, subsystems, and interac-tions.
• Degree of predictability and uncertainty within the system.
Complexity refers to the level of structural and dynamic complexity exhibited by the prod-ucts, processes and relationships (Bozarth, Warsing, Flynn, & Flynn, 2009). From this defi-nition two classes of complexity can be defined. The structural complexity, defined by Fri-zelle and Woodcock (1995), as associated with the static variety characteristics of a system. The operational or dynamic complexity can be defined as the uncertainty associated with a dynamic system (Frizelle & Woodcock, 1995).
In a dynamic environment such as a supply chain, even simple supplier-customer relation-ships with structurally simple information and material flows have a tendency to demon-strate operational complexity. The operational complexity of supplier-customer relations is associated with the uncertainty of information and material flows within and across organi-zations (Sivadasan, Efstathiou, Calinescu, & Huatuco, 2006). It can be observed within or-ganizations on a daily basis in the form of orders, unreliable deliveries, changes to what has been ordered, alterations to specifications and other unpredicted variations (Sivadasan et al., 2006).
The level of operational complexity that must be managed in supply chains is also deter-mined by the dynamics of the markets companies are involved in. Different types of mar-kets will have different levels of complexity, with regard to how predictable the market conditions are. The location of the organization within the supply chain (whether it is lo-cated towards the final customer or towards the raw material end) is governed by the dif-ferent interactions that exist at various tiers within the supply chain. This means that add-ing more levels to a system increases the complexity because each additional tier within the supply chain acts as a further obstacle to the flow (Frizelle & Woodcock, 1995).
Supply chains are inherently complex in many different perspectives, since a large number of firms operate simultaneously with many supply chain partners, interacting through a va-riety of information and material flows in an uncertain way. These characteristics of supply chains also rule the complex nature of individual supplier-customer relationships. Accord-ing to Bozarth et al. (2009), the complexity of a supply chain can therefore be examined by considering these elements:
• The complexity of the internal organization.
• The complexity at the supplier-customer interface.
• The complexity associated with the dynamic environment.
The internal complexity of organizations can be considered in terms of individual opera-tional processes and organizational structures. The complexity of supplier-customer inter-face is closely connected with characteristics of the products that a company manufactures, both in terms of the variety of product categories and complex nature of the products. Complex products embody more information than simple products and require greater control. The dynamic environment causes constant changes, for example, due to changing customer requirements (Sivadasan et al., 2006).
Effects on supply chain performance measurement
All of the aforesaid suggests that supply chains are complex. The complexity of supply chains influences all suppliers and customers that participate in a supply chain. It is impor-tant that companies are aware of complexity-inducing activities and actions in order to ef-fectively control it. The significant challenge for performance measurement in supply chains is to identify what should be measured and to focus only on the important elements of the entire supply chain to reduce complexity.

Supply chain flexibility

Flexibility is viewed as an action against uncertainty. In a more global sense it can also be a competitive advantage for supply chain management (Sánchez & Pérez, 2005). Flexibility is described in two types: offering flexibility and partner flexibility. Offering flexibility is linked to the ability of an existing supply chain to change products or services due to envi-ronmental influences. Partner flexibility is linked to the ability of changing supply chain partners because of changes in the business environment (Gosain, Malhotra, & Sawy, 2004). Next to these two types that separate the description of supply chain flexibility into products or partners, the following dimensions can be used to illustrate the flexibility (Stevenson & Spring, 2007):
1. Robust network flexibility: The range of events an existing supply chain structure is able to handle.
2. Re-configuration flexibility: The ability with which the supply chain can be re-configured (adaptability). The need to reconfigure is mainly determined by the range of the existing supply chain structure.
3. Active flexibility: The possibility to act as a chain when responding to or in anticipa-tion of changes.
4. Potential flexibility: The flexibility for a supply chain is partly a contingent resource, it does not have to be a demonstrable capability.
5. Network alignment: The supply chain participants focus on combining their capabili-ties to meet the supply chain objectives and compete as a whole.
The dimensions of supply chain flexibility offer a great opportunity to understand and eva-luate the flexibility of a supply chain. The disadvantage of these dimensions is that they are not describing where the flexibility can be routed back to. Therefore in the following table 3.1 several flexibility elements, described by Sanchez and Perez (2005), are arranged to fur-ther explain the previously presented dimensions of flexibility. This offers the opportunity to better understand the flexibility in supply chains and how it can cause enormous prob-lems and challenges.
These elements provide a deeper overview of supply chain flexibility and where this flex-ibility is found and why it is needed. The types, dimensions and elements of flexibility also give a general idea of how complex the flexibility in a supply chain is. Even though it is widely recognized as an important competitive advantage (Neely et al., 2005; Sánchez & Pérez, 2005), it is difficult to measure the flexibility and existing measures are often criti-cized to be subjective and situational. Furthermore, flexibility is multi-dimensional, mean-ing that a supply chain might be flexible in one dimension such as supplier sourcing, while in another, such as volume flexibility, it is not flexible at all. Until a solution is found to measure supply chain flexibility in a sufficient way, it will be difficult to manage or to com-pare the flexibility of different supply chains (Stevenson & Spring, 2007).
Effects on supply chain performance measurement
Considering the implementation of a supply chain performance measurement system, flex-ibility becomes a challenge. A functional supply chain performance measurement system must be able to adapt to changes, but at the same time it needs to ensure comparable data over longer time periods. Furthermore, such a system should include flexibility by measur-ing the relevant figures and by accounting the different flexibility types, dimensions and elements for a supply chain. Comparing the flexibility of different supply chains might still be too complex to achieve due to many different factors influencing the flexibility.

Table of Contents
Table of figures
Table of table
1 Introduction
1.1 Purpose
1.2 Disposition
2 Supply chain performance measurement
2.1 Definition and scope
2.2 Internal and external supply chain performance measurement
2.3 Supply chain performance measurement systems
2.4 Metrics of external supply chain performance measurement
3 Problems and challenges of supply chain performance measurement
3.1 Supply chain information sharing
3.2 Supply chain learning
3.3 Supply chain relationships
3.4 Supply chain complexity
3.5 Supply chain flexibility
3.6 Summary of occurring problems and challenges
4 Research method
4.1 Qualitative research
4.2 Sampling and collection of empirical data
4.3 Interviews
4.4 Analysis of empirical data
4.5 Trustworthiness
4.6 Method evaluation
5 Results of the empirical study
5.1 Findings of the empirical study
5.2 Summary of the empirical findings
6 Analyses of supply chain performance measurement challenges
7 Conclusion
8 References
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