To answer the question, “How are we doing?” most companies look inward and apply any number of functionally oriented measures. But excellent supply chain managers take a broader view, adopting measures that apply to every link in the supply chain and include both service and financial metrics.

First, they measure service in terms of the perfect order—the order that arrives when promised, complete, priced and billed correctly, and undamaged. The perfect order not only spans the supply chain, as a progressive performance measurement should, but also view performance from the proper perspective, that of the customer. Second, excellent supply chain managers determine their true profitability of service by identifying the actual costs and revenues of the activities required to serve an account, especially a key account. For many, this amounts to a revelation, since traditional cost measures rely on corporate accounting systems that allocate overhead evenly across accounts. Such measures do not differentiate, for example, an account that requires a multi-functional account team, small daily shipments, or special packaging.

Traditional accounting tends to mask the real costs of the supply chain—focusing on cost type rather than the cost of activities and ignoring the degree of control anyone has (or lacks) over the cost drivers. Deriving maximum benefit from activity-based costing requires sophisticated information technology, specifically a data warehouse. Because the general ledger organizes data according to a chart of accounts, it obscures the information needed for activity-based costing. By maintaining data in discrete units, the warehouse provides ready access to this information.

To facilitate channel-spanning performance measurement, many companies are developing common report cards. These report cards help keep partners working toward the same goals by building deep understanding of what each company brings to the partnership and showing how to leverage their complementary assets and skills to the alliance’s greatest advantage . The willingness to ignore traditional company boundaries in pursuit of such synergies often marks the first step toward a “pay-for-performance” environment.

Aval Sethi