Logistics Performance Levels

Broadly there are two levels of performance measures—the internal and external measures. According to Vijay Govindarajan and Robert Anthony,¹ the firm must strike the balance between the external measures, such as customer satisfaction, and the internal measure, such as productivity, cost, quality, and asset management, because the companies normally ignore the external results in the belief that the internal measure are enough.

Performance measures must be evaluated through the various perspectives before they are evolved and implemented. In general, a performance measure may be viewed through the follow­ing four perspectives:

• Financial
• Non-financial
• Internal
• External

1. Financial Measures

Operating Cost. Operating cost is the most important performance measure. It reflects the efficiency and effectiveness of the logistics system. The operating cost element covers warehous­ing cost, freight, material-handling equipment running and maintenance cost, labour cost, cost of returned goods and inventory-carrying cost. Operating cost is expressed as a percentage of total sales of the inventory moved through the system. The typical logistics cost performance measures are shown in Figure 18.1.

• Warehousing cost per unit (number, volume or weight) of throughput
• Freight cost per unit of material transported
• Labour cost
• Cost of goods damaged during transportation
• Logistical packaging cost
• Order processing cost
• Per unit (throughput) cost in the warehousing
• Administration cost

Return on Investment. Return on investment (ROI) has both financial and non-financial perspectives. This is an important financial performance measure to indicate whether the invest­ment made in logistical assets, such as warehouse, equipment, storage system and transportation vehicles, is paying dividends by way of profit enhancement through cost reductions. The numerator in the ratio is the income and the denominator is the investment. ROI also indicates whether the investment is properly utilized so that it generates the desired revenue.

2. Non-financial Measures

Productivity. The productivity of a logistical system is judged by its output with respect to the input into the system. It is an important performance measure to gauge the efficiency of the sys­tem. For example, in the organizational context, the incremental increase in head count in the marketing team should bring additional sales revenue as per the norms set by the firm. A firm may decide on productivity norms (based on past experience), so that an incremental sales generation of INR 1 million per sales person will justify the addition of new recruits to the marketing depart­ment. In logistics, the productivity performance measures are:

• Units loaded per person per hour onto transport vehicles
• Cases filled and packed per person per eight-hour shift
• Idle time of the handling equipment
• Throughput in the warehouse per hour

Productivity measures are sometimes difficult to compute as the outputs are hard to measure and input utilization is difficult to spread over to match the stipulated time frame of the output.

Asset Management. Asset utilization means the utilization of the capital invested in the assets such as warehouse building, storage system and material handling equipment and also funds tied up in the inventories. The utility of the investment is measured through inventory turnover ratio, returns on investment and inventory stock levels in the number of days.

Inventory turnover ratio indicates the rotation of a given value of inventory with respect to the value of sales in a set time frame. Normally, the time frame is one year. A higher turnover ratio indicates faster cash rotation in the business cycle and higher utilization of the assets. This ratio has both financial and non-financial perspectives.

Order Fulfilment. Order fulfilment is one of the important criteria to judge the level of customer service of the firm. It is the relative ability of the firm to satisfy the customer. This requires a close coordination of all the functional areas of the organization. The various sub-measures covered under order fulfilment are:

• Cycle time (order processing, replenishment, procurement and manufacturing and distri­bution)
• Delivery—on-time/delayed
• Fill rate (order fill, case fill, product fill)
• Stock out frequency
• Shipping errors (wrong delivery, incorrect invoice and material shortage)

For the firm to enhance its order fulfilment capability, the close coordination of all the arms of logistics is a must. The system needs real-time information support and an exceptional report­generating and alarming capability for proactively initiating corrective steps.

Quality. In the order fulfilment process, the perception of the logistical service quality is created through “near to the perfection” approach. This may be interpreted as making order delivery as error-free as possible. The impression of quality logistics service is created through initiating and controlling the following performance measures:

• Transit damage frequency
• Value of the total damage
• Frequency and cost of goods returned from customers (damaged/sub-quality)
• Material shortages frequency
• Delivery commitment deviations—frequency and tolerance

Quality measure is basically an evaluation of the entire logistical process, rather than the indi­vidual activities involved in the logistical operation. It speaks of the degree of effectiveness of the entire order fulfilment process to deliver error-free service.

3. Customer Perception Measures

For initiating the steps to achieve competitiveness in logistical operations, the firm needs to take a regular feedback from the customers on the existing service levels and the gaps. Customer feedback may give the firm a comparative analysis of the service levels and value-added service offerings of the competitors operating in the markets. The feedback on delivery performance, reliabil­ity, responsiveness, and the relationship initiatives and practices of the firm vis-a-vis competitor firms needs to be regularly obtained towards the updates on external performance measures and controls thereafter. The firm should regularly conduct or sponsor customer surveys for map­ping customer perceptions and initiate measures for improvement in logistical services and enhancing competitiveness. These surveys may be conducted or organized through the firm’s own marketing and service team, or through channel members or consultants.

4. Innovations

For calibrating the logistical performance measures, firms go in for innovative techniques such as benchmarking with the excellent logistical practices in the industry. The benchmarking may be with competitors, firms in related industry or firms in non-related industry. Benchmarking per­formance measures help the firms to gain a competitive edge. For example, Xerox Corporation, USA, benchmarked I.L. Beans Corporation for distribution procedure to improve on its lead time in exports sales. Typical benchmarking measures in logistics are:

• Order processing procedure
• Transportation—route, modes and freight rationalization
• Warehousing—storage, material-handling system and automation
• Packaging
• Logistical productivity
• Delivery service
• I nformation flow and connectivity

The benchmarking may be done based on the published information, alliances with firms to be benchmarked or appointing a consulting firm/expert, depending on the criticality of the results.

Federal Express has a point system for measuring results. Every day points are accumulated and conspicuously displayed to front line workers so they can understand system performance and take measures for improvement in performance (see Table 18.1).

For logistical performance measurement and control, Kodak has evolved a unique system of “defects per unit” (DPU). They have divided logistics performance measures on the quality param­eters in various logistical activities as shown in Table 18.2.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.