Role of performance measurement in logistics operations

The aim of every Logistics and Supply Chain Management professional is to keep the cost of logistics to minimum and product performance higher for the profit of the organization higher. Logistics cost usually involves the cost that is occurring other than the production cost. These include the cost for service, transportation, inventory and warehouse. Companies see this cost which adds price to the product after production thus decreasing the performance.

The first step in assessing the performance of logistics is by calculating the difference between total cost and the sum of production cost material cost labor cost utility costs etc. This will be usually the profit associated with the manufacturing of a product. Logistics cost is the decrease in this value due to the cost involved during the transportation stages from company to customer through supply chain and logistics management.

In some cases the service cost increase due to the inability to deliver the product in bulk thus not meeting the orders. Ordering delays, delivery time delays and back order management also usually affect the logistics cost. Products which are damaged or malfunctions upon delivery also increases the logistics cost which include the returning item cost. There are three major reasons why firms measure their logistics performance.

They are to:
(1) Reduce their operating costs
(2) Drive their revenue growth
(3) Enhance their shareholder value

Measuring operating costs helps to identify whether and where to make operational changes to control expenses and to discover areas for improved asset management. To attract and retain valuable customers, the price/value of products offered can be enhanced through cost reductions and service improvements in logistics activities. The returns on stockholder investments and the market value of the firm are impacted by the performance of firm logistics. These seem to be obvious reasons why companies should want to be competent in performance measurement. Key processes can be measured to assess performance which include: On-time delivery, Order fill, Invoice Accuracy and Order Cycle Time.

Measuring logistics performance is important and firms that don’t measure probably don‘t plan for performance and, therefore, do not take corrective action when appropriate to do so. Consequently, firms lack control of important activities. It has also been affirmed that organizations would gain competitive advantage, through logistics, when they seek and achieve excellence in the twin peaks of cost and service leadership. Similarly, in operations strategy, organizations can compete not only on productivity, but also by giving perceived value through innovation and quality

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