Designing an internal supply chain performance measurement system:

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Designing an internal supply chain performance

measurement system:

a case study within Eurofins Food Testing

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Groningen, February 2013

Institution: University of Groningen.

Faculty: Economics & Business.

Education: Master of Science Business Administration. Specialization: Organization & Management Control.

Name: Jacob-Kees van der Heide.

Address: Sabangplein 25a, 9715 CW Groningen.

Student number: S1838784.

Phone: +31(0)630417431.

E-mail: jkvdheide@gmail.com.

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Preface

This thesis is the final part of my Master of Science in Business Administration Organization and Management Control at the Rijksuniversity of Groningen. I had the opportunity to do a case study at Eurofins Food Testing and help the management with the development of a supply chain performance measurement system.

I would like to thank S. Meersseman for the opportunity, time and guidance she gave me during this research at Eurofins Food Testing Heerenveen. Furthermore, I would like to thank all the employees at Eurofins Food Testing who have made it possible to complete this thesis. I would like to thank my supervisor at the University of Groningen, Drs. M.M. Bergervoet for his comments, feedback and guidance during this process.

With this thesis not only an end has come to my master study but also to a long study career. During this study career my parents and sister have always supported me. Therefore I would specially thank them.

Sincerely yours,

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Management summery

This report starts with a description of the Eurofin Food Testing and its environment. Eurofins Food Testing wants to become the dominant player in their markets however, due to bad performance and ‘mis’ management in recent years, the company has problems in achieving their strategic objectives. Based on interviews within the organization, three main problems are distinguished for this phenomena.

• The strategic objectives and control mechanisms are not in line with each other. • There is no synchronization and communication between the different departments. • Managers have too view and inefficient control mechanisms to monitor and influence

their departments and employees behavior.

Based on literature, it became clear that that these problems could be solved by developing a supply chain performance measurement system (SCPMS). However, the management currently uses some performance measures which are crucial for the company. That is why, the research question will be:

How should the management of Eurofins Food Testing develop a SCPMS, based on their current performance measures, in order to achieve their strategic objectives?

The case study started in the reviewing phase to determine which current measures should be kept, which existing measures were no longer relevant and which performance measures were considered as highly important. Continuing with the development, the design phase gave insight in potential problems within Eurofins Food Testing’s supply chain and consequently the ‘gaps’ that existed with regard to their performance measures. The case study findings suggest that the management is highly focused on the last stages in the supply chain process e.g. delivery and customer satisfaction, whereas they should balance their focus toward all the stages in their supply chain. Furthermore, because of the absence of a planning, coordinating organizational activities became difficult and ineffective. Notwithstanding, the fact that some interviewees mentioned the importance of such a planning, corresponding performance measures where overlooked e.g. ‘accuracy of forecasting techniques’ and ‘capacity utilization’. Finally, the currently used performance measures where designed and constructed in a illogicality and inconsistent way. This invalid way of monitoring could eventually lead to wrong decision making because of the simple fact that wrong performance assumption were made. In order to line up the strategic objectives and control mechanisms, synchronize department activities and make efficient control mechanism, Eurofins Food Testing should:

• Use the organizational strategic objectives as strategic themes to set direction for the company.

• Use performance template for designing performance measures to ensure a consistent and precise way of measuring performance.

• Make a planning to coordinate supply chain activities.

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1. The organization

This chapter is divided into five paragraphs. The first paragraph gives a short introduction about Eurofins. In the second paragraph the structure of Eurofins will be displayed. The third paragraph will describe the food business in the Netherlands which is followed up by a description of Eurofins Food Testing in paragraph four. The final paragraph of this chapter will describe the strategy of Eurofins Food Testing.

1.1. Introduction

Eurofins is a life science company operating internationally to provide a comprehensive range of analytical testing services to clients from a wide range of industries such as the pharmaceutical, food and environmental. With over 12000 employees in more than 160 laboratories across 32 countries, Eurofins offers a portfolio of over 25000 reliable analytical methods for evaluating the authenticity, origin, safety, identity, composition and purity of biological substances and products. The Eurofins Group is the world leader in food testing and one of the global market leaders in pharmaceuticals and environmental testing and is one of the most innovative and quality oriented international players in its industry. Eurofins is positioned to support clients increasingly stringent quality, safety standards and demands of regulatory authorities around the world.

1.2. Organizational Structure

The structure of Eurofins is divided into two parts e.g. supportive departments and operations. Both answer to the comity and board of directors. The supportive departments are classified into activities and give support to operations. Operations has been classified geographically (figure 1).

Figure 1: Organizational structure Eurofins. Source: Intranet Eurofins Food Testing

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Sales (MBU), Production (PBU) are Supportive (SBU) business units which are further separated into different departments such as sales, ASM etc. This research will focus on Eurofins Food Testing which is part of the business entity ‘Food Benelux’ in the business unit cluster ‘The Netherlands’. Eurofins Food Testing operates in the food business as an independent unit.

1.3. The food business in The Netherlands

All organizations in the Netherlands which deal with food and/or consumer products have to comply to the standards of the food and consumer product safety Act (warenwet). This Act safeguards the health and safety of consumers. The Dutch food and consumer product safety authority is the public institution which checks if businesses and organization comply with the food and consumer product Act. By violation this public institution has the authority to give a warning or impose and administrative fine. If there is a danger for the health and safety of the consumer, this authority can demand that a company has to recall their products from the market. The company must announce the product recall by an advertisement in major national and regional newspapers. In extreme cases, this authority can closed down a company for a period of time. Therefore, it is important that organizations operating in the food industry know the exact composition of their products. By analyzing raw materials, half products in different process steps and the end products, food manufacturers can monitor the changes in product content to identify any contaminations which could be harmful to their consumers. These contaminated products can be eliminated before these products are released on the consumer market to avoid any consequences demanded by the authority. To safeguard the food manufactures objectivity these analyzes must be done by an independent organization.

1.4. Eurofins Food Testing

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Figure 2: Organizational structure Eurofins Food Testing. Source: Intranet Eurofins Food Testing.

1.5. Strategy

The vision of Eurofins is to become the world leader in the market of bio-analytical tests. The mission of Eurofins is to provide customers with high quality laboratory and advisory services. It operates in a clearly defined markets that are substantial in size, are considered to have high growth potential and where the competition is fragmented. It serves clients who operate mainly in the food, pharmaceutical and environment sectors. Eurofins has four values which describe the attitudes, behaviors and characteristics of the organization. The first value is customer focus. Customer focus is translated into delivering customer satisfaction by listening to and exceeding customer expectations Furthermore, adding value for our customers through our services and seeking innovative solutions to help our customers achieving their goals. The second value is quality. Quality is described as: delivering quality in all our work, providing accurate results on time and using the best appropriate technology and methods. Seeking to improve or change our processes for the better is the last quality value. Competence & Team spirit is the third value of Eurofins which involves employing a team of talented and competent staff. Investing in training, creating good career opportunities and recognizing and encouraging outstanding performance. The last value is integrity which includes behaving ethically in all our business and financial activities, demonstrating respect towards our customers and our staff and operating responsible environmental policies. In achieving the vision and mission and cope with the values, Eurofins Food Testing has translated their strategy into four strategic objectives which are:

- Market growth through organic development e.g. selling more analyses to existing customers and attracting new customers.

- Increase performance by providing accurate results on time.

- Increasing customer satisfaction by providing accredited service of high quality. - Increase cost efficiency.

BUM Rotterdam

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2. Research design

This chapter consists of two paragraphs constructed according to the methodology of de Leeuw (2003). The first paragraph focusses on the research motive and in the second paragraph the problem statement will be described. The problem statement is segmented into the research objective and research question (de Leeuw, 2003). The research objective describes the purpose of this research and is formulated based on theoretical insight. From this research objective, the research question will be extracted in order to direct the research.

2.1. Research motive

Eurofins Food Testing want to become the dominant player in their markets. However, due to bad performance and ‘mis’ management in recent years, the company has problems in achieving their strategic objectives. In the last couple of years, customers were dissatisfied with the performance and complaints where building up (Appendix A). In almost every month in the year 2010, complaints have past the maximum critical norm (Appendix B). The nature of these complaints were delivery delays, delivery of wrong reports of no delivery at all. If the company is not able to live up to these factors it can have disastrous consequences for the customers such as production delays, product recall, production stop etc. costing Eurofins millions of euro’s for compensation claims. Because complaints are building up over the years, customers left and the companies name was damaged. Furthermore, both the laboratories cannot comply with the minimum turn-around-time norm (Appendix C). This norm is the minimum amount of results that the laboratories have to produce on time.

To examine the organizational problems, data has been collected from interviews with seven mangers at different hierarchical levels in the organization (Appendix D). Furthermore, data has been extracted from a personnel satisfaction survey conducted in the year 2012. The interview results (table 1) showed that, all the interviewed managers had the uniform opinion that the strategic objectives and control mechanisms at department level as well as within the department where not in line with each other. Furthermore, the interviews revealed that the strategy and strategic objectives where poorly communicated within the company which was confirmed in the personnel satisfaction survey. The survey results show that, 70% of the personnel pointed out that there was a lack of communication between management and employees. Because the absence of a structured and aggregated information and monitoring system it is impossible to monitor the extend in which strategic objectives have been reached or not. This causes an ad-hoc culture, which was confirmed by all the interviewees, where departments managers made short term decisions in their own interest but which do not have to be in line with the organizational strategic objectives.

However, this was not the only result. The interviews pointed out that there was no cooperation and communication between the different departments. The three production department managers complaint that they had no clue how many samples they could expect that day. As the department manager (Microbiology laboratory) stated:

‘At eight o’clock in the morning all work spots are occupied however, there are no samples. Just before going home, the last samples are coming in’.

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assisted service managers had reported the result to the customer, these ‘wrong’ results were rejected by de customer and complaints where inevitable. These samples had to be recollected and analyzed again. These two situation are only a few which are more common than exception. These examples indicated that the departments are working independently form each other instead of together. This is confirmed in the personnel satisfaction survey where 63% of the personnel stated that there is insufficient information transferred between the departments. This poor synchronization and communication between departments costs the organization lots of money. The effect of this poor synchronization and communication contributes to the amount of rework that both laboratories have to do, and inevitable the maximum norm has been exceeded (Appendix E). Another effect of this poor synchronization is that it causes frustration between the departments which has a negative effect on the communication as well as the cooperation between departments. The interviews also revealed that top management had introduced some control mechanism on department level and within the departments in the form of KPIs. The department managers use these KPI however, their origin is unknown. Furthermore, the two business unit managers and all four department managers concluded that there where to few control mechanisms to monitor and control the departments and activities of the employees. Furthermore, some of these KPIs do not represent the right information and have no impact what so ever. The consequence is that the unit managers as well as the department mangers cannot monitor and control their department in an effective way. Because of the absence of an effective information and monitor system on department level as well as within the departments, managers cannot monitor the behavior of employees and influence if necessary in such a way that it is in line with the strategic objective.

From the interviews held with managers at different hierarchical levels in the organization (Appendix D) combined with the results of the personnel satisfaction survey it can be concluded that the Eurofins Food Testing has three main problems:

1._{The strategic objectives and control mechanisms are not in line with each other.} 2._{There is no synchronization and communication between the different departments.}

3._{Managers have too view and inefficient control mechanisms to monitor and influence their} departments and employees behavior.

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Table 1: An overview of the problems at different functional levels.

Function Problems

Managing director* Poor insight in how department contribute to strategic objectives. Strategic objectives are poorly delegated to the departments. Departmental KPIs are not in line with the strategic objectives.

Business unit Strategic objectives are known but poorly translated to departments.

managers* Strategic objectives and department control mechanisms are not in line with each other. No relation between departmental objectives.

Lack of synchronization and coordination between departments. Departments are unaware how their action effect other departments. Poor feedback between different departments.

Not enough and incomplete control mechanisms at department level.

Department mangers* Strategic objectives are known but poorly translated into the departments. Lack of coordination between department activities.

KPIs are not in line with the strategic objectives. The origin of the KPIs are unknown.

KPIs do not represent the right information.

Not enough KPIs to monitor the department activities and employees behavior.

*A detailed description about the interviewees is given in Appendix D.

2.2. Problem statement

This paragraph consists of two sub-paragraphs e.g. research objective and the research question. The research objective describes the purpose whereas the research question gives the research direction (de Leeuw, 2003).

2.2.1. Research objective

The first and third problem described in paragraph 2.1. could be prevented by having an effective performance measurement system (PMS) in place. A PMS can be seen as a multi criteria instrument, made of a set of performance measurements (Berrah and Sharma, 2007). Performance measures yield a fundamental type of management information needed to control operations. It creates focus, triggers corrective actions, is a basis of evaluation performance and may help challenging and improving strategic choices (Lowman et al., 2004). For effective performance measurement and improvement, measurement goals must represent organizational goals and the performances measures selected should reflect a balance between financial and non-financial measures which should relate to strategic, tactical and operational levels of decision making and control (Gunasekaran et al., 2004). This assures a closed loop control system where strategy is deployed to all business processes, activities, task and personnel, and feedback is obtained through the PMS to enable appropriate management decisions (Bititci et al., 1997)

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By integrating the supply chain into a PMS the company can measure supply chain performance as a whole and has the ability to drilldown to different measures and different levels of detail in such a way that managers can understand causes of significant deviations of actual performance from planned performance (Lowman et al., 2004). This assures a closed loop control for monitoring activities to meet strategic objectives (Bhagwat and Sharma, 2007). Furthermore, it can create a balance between financial, which is important for strategic decisions and external reporting, and non-financial measures, which are important for day to day control of manufacturing and distribution (Gunasekaran et al., 2004). This supply chain performance measurement system (SCPMS) helps organizations in faster and wider progress monitoring of their operation but also helps them in improving their internal en external function of business such as service quality improvement, service operation management, quick response, gaining lost market share, and proper implementation of business strategies (Cho et al., 2012).That is why, the objective of this research can be formulated as: To provide insight into the development of a SCPMS, based on the current performance measures of Eurofins Food Testing, so that the management can achieve their strategic objectives.

In consensus with the management of Eurofins Food Testing, with regard to the development of SCPMS, a ‘balanced scorecard’ (BSC) concept will be used because:

- it include a variety of financial and non-financial measures from various perspectives. - _{it pays attention to relationships between different measures.}

- _{it links PM explicitly to strategy development.}

For analyzing the supply chain, the supply chain operations-reference (SCOR) model is used which is useful when it comes to develop supply chain performance measures. According to the model, a company’s internal supply chain would be represented by four meta-level processes: plan, source, production and delivery (Chae, 2009).

2.2.2. Research question

From the research motive and the research objective the research question can be constructed. By answering the research question the three problem described in paragraph 2.1. will be solved. The research question is formulated as:

How should the management of Eurofins Food Testing develop a SCPMS, based on their current performance measures, in order to achieve their strategic objectives?

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3. Theoretical framework

Within this chapter the theoretical framework, conceptual model and sub-question will be displayed. The first paragraph will outline the organizational control which refers to hierarchical leveled activities within a firm. In the second paragraph the BSC concept will be addressed, which is followed up by the review phase in the third paragraph. In the fourth paragraph the design phase will be discussed followed by the conceptual model. In the last paragraph of this chapter the sub-questions will be constructed based on the conceptual model.

3.1. Organizational control

Firm’s activities are hierarchies in function, wherein the major difference between them is the time horizon for planning and the decisions of different levels of management (Cho et al., 2012). The strategic level deals with decisions that have long term planning effect on the firm. This includes top management decision regarding product design, corporate financial plans, competitiveness and level of adherence to organizational goals etc. The tactical level includes decisions that are typically updated anywhere between once every quarter and once every year. This includes resource allocation and measuring performance against targets to be met in order to achieve results specified at the strategic level. The operational level refers to day-to-day decisions such as scheduling, lead time and routing (Gunasekaran et al., 2004). Measuring at this level requires accurate data and assesses that result in decisions of the low level

management. The supervisors and workers are set operational objectives that, if met, lead to, the achievement of tactical objectives (Cho et al. 2012).By taken a system perspective on the control of an organization, these hierarchical functions within the firm’s activities can be taken into account. These activities can be seen as performance measures that managers perform in order to reach predefined goals that are derived from the strategic objectives,

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3.2. Balanced scorecard concept

Traditional performance measures, which have been heavily financial biases where developed from cost and accounting systems, have been criticized from encouraging short term thinking, lack of strategic focus, encouraging minimization of variance rather than continuous improvement, not being externally focused etc. In an attempt to overcome these criticisms, PMSs have been developed to encourage a more balance view, such as the BSC (Bourn et al., 2000). The BSC offers a holistic view and provides a framework for selecting multiple performance measures related to strategic goal by integrating traditional financial measures and non-financial measure from the perspectives: customer, internal process, and learning and growth (Herath et al., 2010).In this way the BSC evaluates corporate performance from four different stakeholder perspectives (Bhagwat and Sharma, 2007). The assumption of the BSC is that there is a cause-and-effect relationship which allows the measures in non-financial areas to be used to predict future financial performance. The claim is that financial measures say something about past performance while non-financial areas are the drivers of future performance (Norreklit, 2000). By using a BSC concept, the strategic objectives can be mapped in a chain of cause-and-effect relation in such a way that managers can visualize the strategy. Companies can simplify the structure by chunking it into strategic themes which consist of a district set of related performance measures (Norton and Kaplan, 2008). These themes are used to set strategic direction because strategy by itself cannot be measured (SCC, 2010).The chain starts with the company’s long-term financial objectives and links down to objectives of customer loyalty, company’s processes and eventually to the learning and growth objectives (Kaplan and Norton, 2008). It has been well established that the design and management of a PMS requires careful selection and management of performance measures (Bai and Sarkis, 2011)to encourages behavior which will support the strategy (Neely et al., 2005).

3.3. The review phase

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of the tools, content and gather additional requirements to be incorporated the next month. Whereas, the complete ‘scorecard’ and corresponding metric selection should be updated yearly.

Table 2: Performance metrics for the financial perspective.

SCOR processes Financial perspective Customer perspective Internal Business perspective Learning and Growth perspective Plan Net profit vs.

productivity ratio; Rate of return on investments; Variations against budget; Information carrying cost

Range of products and services; Order lead

time; Information carrying cost

Total supply chain cycle time; Total cash flow

time; Accuracy of forecasting techniques; Product development cycle time Range of products and services; Accuracy of forecasting techniques; Product development cycle time; Order entry

methods

Source Buyer-supplier partnership level; Supplier cost saving

initiatives; Supplier rejection rate

Buyer-supplier partnership level; Driver

reliability for performance; Achievement of defect

free deliveries

Supplier lead time against industry norm; Level of

supplier's defect free deliveries; Purchase order

cycle time; Supplier rejection rate; Efficiency

of purchase order cycle time; Frequency of

delivery

Buyer-supplier partnership level

Make Cost per operation hour

X Planned process cycle

time; Effectiveness of MPP; Capacity utilization;

Cost of incoming stock level; cost of WIP; Cost

of Scrap level; Cos of finished goods in transit

Supplier assistance in solving technical problems; Supplier ability to respond to

quality problems; Supplier cost saving initiatives; Supplier's booking in procedures; Capacity utilization Deliver Delivery performance; Delivery reliability

Delivery lead time; Delivery performance; Effectiveness of delivery invoice methods; Delivery reliability; Effectiveness of distribution planning schedule; Respond to urgent deliveries; Quality of delivery documentation Flexibility of service systems to meet particular customer needs; Quality of delivery

documentations; Level of customer perceived value of service; Flexibility of service systems to meet particular customer needs Customer satisfaction

X Customer query time;

Level of customer perceived value of service; Flexibility of service systems to meet

particular customer needs; Quality of

delivered goods

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3.4. The design phase

As stated above, the design phase of a PMS is about identifying key objectives and designing the measures itself (Bourn et al., 2000).

3.4.1. Identifying the key objectives of a supply chain

The SCOR-model is a diagnostic tool that assists managers to design, manage and improve supply chain processes of an organization(SCC, 2010). The model considers and integrates the processes of a company’s activities and customers, thereby providing a holistic supply chain perspective. Once a particular supply chain is mapped, the standardized processes can be assessed with the use of specific metrics (Giannakis, 2011; Persson and Araldi, 2009).

The SCOR model standardizes the activities of a supply chain into the following high-level processes: 1._{Plan: Processes that balance aggregate demand and supply to develop a course of action}

which best meets sourcing, production, and delivery requirements 2._{Source: Processes that procure goods and services to meet demand.} 3._{Make: Processes that transform products to a finished state.}

4._{Deliver: Processes that provide finished goods or services to meet demand.}

The process Source contains the procurement of goods and services to meet the demand of raw material, components, and other services needed in production. The Make process contains the activities that transform products to a finished state. The Deliver process contains the transportation and distribution of finished products to the company’s customers. These three processes consist of information flows and physical flows. The Plan process coordinates processes by balancing the demand and supply of products and resources in the other processes (Persson and Araldi, 2009). Planning is the coordination mechanism for execution activities e.g. source, make and delivery which ultimately generates revenues. Monitoring how planning and execution are synchronized is critical for operational performance and supply chain management success (Chae, 2009). A representation is given in figure 4.

Figure 4: representation of the SCOR-model.

However, for effective performance measurement, supply chain performance measures must be linked to customer satisfaction. Customer satisfaction metrics identify the existing gap between the expectations of the customer and the performance level of the firm, with regard to the characteristics of the output delivered (Gaiardelli et al., 2007).

Planning

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salespeople. The master production plan which uses the demand information to generate monthly, weekly or daily production plans, considering production capacity and material availability (Chae, 2009).As stated by Bhagwat and Sharma(2007), ‘all the operations planning takes place within the framework set by capacity decisions’. According to

Kaijwara and Miyabayashin (2006),both planning and production capabilities should support each other. If planning reacts more quickly than the production capability, the company is in a mismatch situation, resulting in frequent plan changes (figure 5). Upon the availability of the information of the planning stage, business units either take action or execute the master production plan e.g. the sales unit offers delivery promising to customers and the production unit manufactures the targeted amount of products and the

purchase unit releases purchase orders to suppliers for material sourcing (Chae, 2009). In this way effective supply chain planning also drives effective delivery process (Zhou et al., 2011).

Execution

Supply chain planning plays an important role in optimizing supply chain activities because it improves the coordination within and between supply chain partners (Datta and Christopher, 2011). However, it is well-acknowledged in the supply chain literature that improving the coordination of product flow and information sharing e.g. execution, among partners to synchronize their activities can lead to enhanced supply chain performance (Jayaram et al., 2010).

Information flow

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established by increased frequency of contact between supply chain members which has been shown to be beneficial to firms. However, to evaluate this relationship, parameters need to be considered for example, the level of assistance in mutual problem solving or suppliers cost saving initiatives (Gunasekaran et al., 2004). With regard to suppliers evaluation, providing feedback about partners performance is a good information sharing practice and has a direct positive impact on the relationship, and an indirect impact on firm financial performance (Zhou et al., 2011). Evaluation based on suppliers performance and buyer-supplier relationship will result in a win-win partnership e.g. decreasing uncertainty among subunits which stimulated information sharing, leading to a more efficient an integrated supply chain (Gunsekaran et al., 2001). However, information sharing alone does not improve supply chain performance, it also requires material flow coordination among supply chain partners (Kaipia, 2009).

Material flow

Many practitioners of supply chain management have recognized the importance of managing material flows across the supply chain as an important strategic success factor (Leng and Zailani, 2012). The material flow process consist of efficiently transform raw materials into finished goods to meet supply chain demand in a timely manner (Zhou et al., 2011). For an efficient material process flow, product demand is essential (Kaipai, 2010). However, different product demand requires a different supply chain. Fischer (1997) states that there are two basic types of supply chain: effective and responsive. Effective supply chain aims at cost-effectives and lean operations where products can be considered as functional, whereas responsive adapted to customer demand in which the products are considered as innovative. However, both processes can be optimized by mapping the material traveling ‘path’ so that non-value adding activities can be identified and suitable steps can be taken to eliminate them (Gunasekaran et al., 2001). By eliminating non-value adding activities the production output can be increased. One option is to reduce cycle times, either through product or process innovation. Another way is to eliminate the causes of unproductive time. A third is to seek to eliminate the time wasted in producing poor quality product, possibly thought the introduction of fail saving (Neely et al., 1997). A smooth material flow and the control of this material flow is the center of supply chain management design and practices so the supply chain performance can be improved (Childerhouse and Towill, 2011).

3.4.2. Designing a performance measure

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Table 3: Metric definition template: attributes with their explanation

Performance measure Details

Title Use exact names to avoid ambiguity.

Objective _{The relation of the metric with the organizational objectives must be clear.} Scope States the parts of the organization that are included.

Target _{Benchmarks must be determined in order to monitor process.} Equation The exact calculation of the metric should be known.

Units of measure _{What is the units use.}

Frequency The frequency of recording and reporting of the metric.

Data source _{The exact data sources involved in de calculating the metric value.} Owner The responsible person for collecting data and reporting the metric.

Drivers _{Factors that influence the performance, i.e. units, events etc..} Comments Outstanding issues regarding the metric.

Source: adapted from Lohman et al. (2004)

3.5. Conceptual model

From the research question and the theoretical framework the conceptual model can be extracted. This model captures the problem with regard to Eurofins Food Testing e.g. their disability to achieve its strategic objectives. As stated before, the base for the development of a SCPMS are the organizational strategic objective which are treaded in paragraph 1.5. In the review phase an analysis will be done to determine which current measures should be kept and which existing measures are no longer relevant. Furthermore, analyzing potential problems in key areas of the supply chain e.g. planning, information sharing and material flow, gives insight in which ‘gap’ exist and which new measures are needed in order to design Eurofins Food Testing SCPMS (Figure 6).

Figure 6: Conceptual model

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3.6. Sub-questions

The sub-question are derived from the conceptual model and are itemized into three parts e.g. descriptive - , analytical - and design sub-questions. The descriptive sub-question will help to describe the current situation of Eurofins Food Testing with regard to the supply chain and the performance measures. In the analytical part, an analysis is made to identify which current measures should be kept and which existing measures are no longer relevant. Furthermore, problems in the supply chain with regard to forecasting techniques, production capacity, information sharing from external uncertainty as well as internal uncertainty and non-value adding activities will be analyzed. The design sub-questions will answer which aspects in the design of performance measures and the SCPMS itself are needed in order to design the Eurofins Food Testing SCPMS. However, as stated by Gunasekaran et al.(2004)‘for effective performance measurement and improvement, measurement goals must represent organizational goals’. These organizational goals have been treated in paragraph 1.5.

Descriptive sub-questions:

1. How does the internal supply chain currently takes place?

2. Which performance measurements are currently used within EFT? 3. How are the performance measures currently designed?

Analytical sub-questions:

4. Which supply chain performance measures are considered as most important according to the management of EFT ?

5. Which problems can be identified in the forecasting techniques used in the organization? 6. Which problems can be distinguished in the production capacity?

7. How Is the external information uncertainty distributed throughout the organization? 8. How is the internal information uncertainty distributed throughout the organization? 9. Which non-value adding activities can be distinguished in the companies supply chain?

Design sub-questions:

10. Which aspects for designing performance measures are needed?

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4. Research method

This chapter consist of three paragraphs. The first paragraph will describe how the data from the different sub-questions will be collected. In the second paragraph, the analysis of the data will be discussed. In the third and last paragraph the reporting is treated.

4.1. Data collection

Research data was collected from various sources such as informal conversation, business documents, survey and interviews. Business document and informal conversations where primarily used to describe the current situation of Eurofins Food Testing referring to the descriptive sub-questions 1 -3 presented in paragraph 3.6.

The data obtained to answer the analytical sub-questions was primarily collected via a survey and semi-structured interviews. The survey has been used to determine which current measures should be kept, which existing measures are no longer relevant and which performance measures are considered as highly important to the management team in order to monitor and control the organization, referring to sub-question 4 paragraph 3.6.. The respondents ranging from different organizational areas and levels(appendix I)were presented with a list of potential SCPMs (table 2) and asked to mark these on a scale of ‘unimportant’ to ‘highly important’ based on a five points Likert scale. This scale is used to measure the difference in attitudes and opinions between the respondents (Baarda en de Goede, 2001). Furthermore, the survey gives the opportunity to add performance measures which did do not occur in the survey however, were considered as highly important.

The data to answer analytical sub-questions 5 – 9 in paragraph 3.6. was collected through semi-structured interviews. Semi-structured interviews are used because it gives the interviewee and interviewer the possibility to gain in-depth information and clarify certain phenomenon. The themes investigated during the interview included: Planning, forecasting techniques, production capacity, information sharing from external uncertainty as well as internal uncertainty and non-value adding activities. Based on these themes an interview protocol was constructed to ensure that the same themes were treated with each interviewee. A total of 14 interviews were conducted with employees at different organizational levels and with different functional areas (appendix J). Interviews lasted between 45 minutes and 2 hours.

The design sub-question 10 and 11 (paragraph 3.6.) will be primarily answered by literature presented in the reverence and will be supported by the answers obtained from the other sub-questions.

4.2. Data analysis

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categorized as less important, not mean it is unimportant, but rather is less important compared to other performance measures in the measurement group. Performance measures which are not in the survey however, are considered to be highly important will be marked as highly important and will be included in the actual design.

The interview data was analyzed, following the guidelines of Bryman and Bell (2007). The interviews were tape-recorded, transcribed and documented according to the theme described in paragraph 4.1. During this process, constant comparison and cross-referencing with other data sources e.g. business documents and informal conversation was done to triangulate comparative data. Furthermore, critical issues and assumptions derived from one interview were used to proposition to another, in order to confirm or deny the perceptions that had been developed. The individual answers of the interviewees were cut into chunks of data and grouped by themes in order to obtain a general picture. The interviews were conducted in Dutch and the quotes used in the research have been translated into English as described by Bryman and Bell (2007, pp 496).

Keep in mind that this research takes an interpretive approach, which emphasizes the essentially subjective nature of the social world and attempts to understand it primarily form the frame of reference of those being studied (Hopper and Powel, 1985). Because of this interpretive approach, the nature of the produced results are subjective and have not been empirical tested which means that the result only apply for Eurofins Food Testing and are not generalizable and applicable in other circumstances.

4.3. Reporting

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5. Current situation

This chapter will describe the current situation with regard to the Eurofins Food Testing supply chain and their currently used performance measures. This refers to the three descriptive sub-questions which are displayed in chapter three:

1. How does the main internal supply chain currently take place? 2. Which performance measurements are currently used within EFT? 3. How are the performance measures currently designed?

5.1. Internal supply chain of Eurofins Food Testing

The internal supply chain consists of the interactions between departments. These interactions form flow paths which regard to materials and information. Within Eurofins Food Testing two main material streams can be distinguish e.g. a water sample stream and the food sample stream. The stream of water samples is coordinated by Planning which is part of the Outside service department. Planning gives the authority to collect the water samples to the water sample collectors who bring the samples to the sample registration department. Planning receives their orders from the business unit C-mark, the representative of the ‘water’ customers. The food sample can be brought to sample registration department in three different ways. The customer can send their samples straight to the company, transport can collected the samples at the customer and the sample collectors can collect and bring in the samples. The majority of the food sample stream are brought in by transport. They have their own routes along major customers and are coordinated from another Eurofins division located in Barneveld. The other samples reach the sample registration department in one of the other two ways. The difference between water and food sample collectors is that Planning makes the routes for the water sample collectors however, the food sample collectors work in their one district, make their own routes and make their own plans based on the ‘long term’ planning. The Sample registration department is responsible for the acceptance of samples. They collects all the incoming samples, label them en bring the samples to the different laboratories or if necessary, outsource the samples. However, if samples are below the acceptance standards e.g. unreadable order, wrong analysis etc. the employees of the Sample registration department will contact the customer or inform an assistant service manager for clarification before accepting the samples. The laboratories analyses the accepted samples and send the results to the customer.

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Material flow Information flow Long term planning

Figure 7: internal supply chain

The long term planning has been taken into the internal supply chain process because this is the ‘only’ mechanism which Eurofins Food Testing uses to coordinate the food sample collectors and can be seen as in information flow towards the food sample collectors. The dot-line towards the food sample collectors illustrates that they are not coordinated and can be seen as department working ‘independently’. Furthermore, the dot-line towards Transport indicates that this department is coordinated from another Eurofins division located in Barneveld. As stated before, Transport will collect samples on a timely base at major customers. The collected samples will be transported to Eurofins Food Testing.

5.2. Performance measures of Eurofins Food Testing

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Table 4: Performance measures Business unit Operations

Organizational level Performance measures

Business

Operation Customer satisfaction, productivity, financial, Turn-around-time.

Departments

Planning Planned samples, Collected sample, Not collected samples.

Sample registration Sample amount, Order errors, Registered samples, Customer complaints.

Laboratory Chemistry Sample amount, Analyses/month, rework, Turn-around-time.

Laboratory Microbiology Sample amount, Analyses/month, Productivity/hour, rework, Turn-around-time.

Table 5: performance measures Business unit Sales

Organizational level Performance measures

Business

Sales Growth, turnover, Financial.

Department

Account managers Turnover, Promotion, Paid assignments, credit invoices, Customer service.

5.3. Current design performance measures at Eurofins Food Testing

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6. Analysis

The analysis starts with the review phase to determine which current measures should be kept, which existing measures are no longer relevant and which performance measures are considered as highly important to the management team in order to monitor and control the organization. This refers to sub-question 4 in paragraph 3.6 and will be answered in the first paragraph of this chapter.

4. Which performance measures are considered to be important according to the management of EFT?

However, reviewing performance measurers is not enough, the analysis continues into the design phase were potential problems in the supply chain e.g. forecasting techniques, production capacity, information sharing from external uncertainty as well as internal uncertainty and non-value adding activities are identified. These potential problems give insight into the ‘gaps’ that exist within the performance measures. To overcome these ‘gaps’, new measures are needed. To investigate these ‘gaps’ the sub-questions 5-9 are analyzed within this chapter.

5. Which problems can be identified in the forecasting techniques used in the organization? 6. Which problems can be distinguished in the production capacity.

7. How Is the external information uncertainty distributed throughout the organization? 8. How is the internal information uncertainty distributed throughout the organization? 9. Which non-value adding activities can be distinguished in the companies supply chain?

The purpose of this analysis to gain an overview of performance measures considered as highly important to the management team and ‘new’ performance measures which are essential for monitoring and controlling the organization however, are not recognized as important by the management. This overview of performance measures form the base for designing a SCPMS in order to achieve the strategic objectives. The actual design will be discussed in the next chapter.

6.1. Important supply chain performance measures

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Table 6: Considered highly important performance metrics.

Highly Important performance measures *, ** SCOR processes Financial perspective Customer perspective Internal business perspective

Learning and growth perspective Plan Net profit vs.

productivity ratio

Order lead time X X

Source Supplier rejection rate; Buyer-supplier

partnership level

Level of supplier's defect free deliveries; Supplier rejection rate

Make X X Cost of finished goods

in transit; Cost of WIP; Cost of Scrap level

X

Delivery Delivery reliability; Delivery performance

Delivery reliability; Delivery performance;

Respond to urgent deliveries; Delivery lead

time; Effectiveness of delivery invoice methods; Effectiveness of distribution planning schedule X X Customer satisfaction X Level of perceived customer value of service; Customer query

time; Quality of delivered goods

X Level of perceived

customer value of service

* The table with moderated important performance measures can be found in appendix O. ** The table with less important performance measures can be found in appendix P.

According to Bhagwat and Sharma(2007) there should be a balanced view between the four different stakeholders perspectives within the BSC. However, the result of the survey show that the management is highly focused on the customers perspective of the BSC, especially in the delivery process and in some extend to customer satisfaction of the SCOR-model. This could be explained because the results within the delivery process influences the customer satisfaction. As Gunasekaran et al. (2001) state ‘without a satisfied customer the whole exercise of applying the supply chain strategy could be costly and futile’. However, in order to satisfy customers, the management of Eurofins Food Testing has to focus not only on the last process in the SCOR-model but also on the first processes in the model. By balancing the focus within the SCOR-model as well as within the four BSC perspectives, overall performance should be increased.

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supply chain cycle time’ is considered as moderated important (appendix O) whereas ‘accuracy of forecasting techniques’ is considered as less important(appendix P)to the management of Eurofins Food Testing.

The results also show that with regard to the internal business perspective the focus is on the performance of the upstream department e.g. the supplier. The management of Eurofins Food Testing finds it important that there is some suppliers performance monitoring e.g. ‘Level of supplier's defect free deliveries’ and ‘Supplier rejection rate’. In this way, the company can ensure that the performance of the downstream department is guaranteed. This is in line with Gunasekaran et al. (2004) whom stated in their article ‘evaluating and measuring suppliers performance is very important in managing the supply chain for peak efficiency and effectiveness’.

6.2. Planning process

The planning process is essential in supply chain management because it is the coordination mechanism for the execution activities e.g. source, make and delivery which ultimately generates revenues (Chae, 2009). However, it became clear that the company does not have a planning to coordinate operational activities. The business unit manager (Operations)stated:

There is no planning or overview with regard to the amount and nature of samples brought in. The only thing we know is that samples are collected at certain major customers at a specific day which has been written down in ‘customer agreements’. However, the amount and nature of all samples is only known when the samples have been registered at 11 a.m. This was confirmed by an analytical service manager (Sales) who commented:

I have only some idea which customer bring in their samples at certain days however, I have no clear picture of the amounts of samples brought in per day.

Based on these two quotes, this regularity of sample pickups give the impression that there is some rough planning. This could indicate that there is some planning data available which could be used to forecast demand.

6.2.1. Forecasting techniques

According to Chae (2009),extant forecasting techniques relying on historical data combined with mathematical models or salespeople whom take regular customer demand forecasting data. From interviews with both business unit managers e.g. Operations and Sales, it became clear that approximately 80% of the total sample stream consisted of these regular sample pickups at major customer. This main sample stream was partially known with regard to the amount and nature of samples whereas the other part e.g. 20%consisted of minor customers and was not known at all. The figures about the sample stream sizes where based on historical data. More detailed, the business unit manager (Operations) knew the amount of samples that where picked up in the past from all the customers and explained that:

Based on historical data I know which days we could expect an increased amount of samples however, there is much variation within the amounts. Regardless of this variation, I plan my activities. So, my activities are based on historical data not on a forecast.

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I use historical sample data to gain insight into the samples I can approximately expect. Based on that information I make a roughly planning for the amount of people I need. Due to this information I can anticipate on seasonal fluctuation however, no models are used to make a forecast.

Remarkably, this historical data is known at various managers levels in the organization however, is only partially used to make a rough planning. Furthermore, no mathematical models where used to predict future demand. With regard to the other forecasting technique, where sales people take regularly demand information from customers, both account managers confirm that in their contact with their customers, yearly growth forecast was discussed. The key account managers (Sales) stated: Of course I ask my customer how much they expect to grow. I am responsible for the yearly sales budged. This information is written down in a ‘customer visiting report’ and send to the organization.

Both the assistant service managers acknowledge that this information is known however, nothing is done with this information. It became clear that there was a problem regarding these growth figures. An assistant service manager (Sales) commented as follows:

I am aware of these customer visiting reports and there corresponding numbers about sales growth however, these numbers have no meaning to me because these numbers are represented in sales figures not in sample quantities which is essential for planning.

Based on this information it can be stated that the demand information is known however, it is not translated and used. Furthermore, it must be notified that to make a detailed planning, demand information should be taken regularly instead of yearly not only at major customers but also at smaller customers.

6.2.2. Production capacity

Demand information is only one factor in the framework of planning, production capacity must be known as well. As Bhagwat and Sharma (2007) stated: ‘all the operations planning takes place within the framework set by capacity decisions’. From interviews it became clear that the interviewees made estimations about the production capacity of the laboratories. The number varies between 700 – 1500 samples a day. Whereas, the key account manager (Sales) simply state:

I have no idea what the production capacities of both the laboratories are. The head of sample officer (Planning) could clarify this in a more detailed way:

I do not know the capacity of the laboratories. I only know that there are different processes and all have their own timeframe. Because of these different process time I do not know what the sample limit of the departments are or when the process goes out of control.

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I have some insight into the amount of time analyses take however, this is not written down. Based on historical data I can recover the amount of analyses we have done in the past however, the maximum daily amount of analyses we could do is not known because of the variation in types of analyses.

Based on the above statements it can be concluded that production capacity is roughly known in the organization whereas the maximum capacity is not known because there is no clear overview of the amount of time analyses take and the variation in analyze demand.

Overall, it can be concluded that this information in combination with the demand forecast is essential in order to make a planning. That is why, the ‘accuracy of forecasting techniques’ and the ‘production capacity’ should be monitored and used as a performance measure in the actual design.

6.3. Information sharing

As stated before, the degree of information sharing is defined by the uncertainty among the subunits which is influenced by how well the external uncertainty is distributed among the internal subunits and the uncertainty created by its internal operations e.g. internal uncertainty (Premkumar, 2000). 6.3.1. External uncertainty

According to Mason-Jones and Towill (1998), all departments have to have the most up to date market information in order to cope with external uncertainty. As stated before, the account managers have some insight into yearly customer growth which is shared within the organization. However, this information has not been translated in a way that can be used. Furthermore, from interviews with account managers, assistant service managers, and the laboratory employees it became clear that market information included a significant increased amount of samples on top of the ‘regular’ sample stream, contact between these departments intensified. As the key account manger (Sales) commented:

If I want to contract a new major customer I always verify and consult this with the laboratories and the ASM department. I discuss with them if it is possible and how we proceed for that particular customer. A major customer can never bring in huge amounts of samples without contacting me, after I have contacted the other departments. However, this is not the case with minor customers. They can send in their samples without notifying anyone.

Furthermore, there is regular contact between assistant service managers and the laboratories if customers want to analyze their samples on short notice. However, from the interviews with employees of the department sample registration it can be stated that this information is not always shared with them. The senior logistic sample coordinator(Sample registration) commented:

In many cases we are not informed in time when samples have to be analyzed on short notice. If we do not get this information, these specific samples are treated as normal and in some cases arrive to late at the laboratories. This causes mutual frustration.

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6.3.2. Internal uncertainty

Every day at nine a.m. the assistant service managers, sample registration and the laboratories have a production meeting to discuss the daily situation about sample collection, analysis, errors etc. This increased frequency of contact between supply chain members contributes to a tight buyer-supplier relationship which is beneficial to firms (Premkumar, 2000; Jayaram et al., 2010).As a laboratory technician(Microbiology Laboratory) stated:

Due to the daily production meetings between the laboratories, ASM and sample registration it becomes clear what to expect from one another and what the possibilities are. We get a better understanding of each other’s processes. Because of the meeting there is more interaction between the different department which I think is a good development.

Furthermore, these frequent meetings provides visibility into supply chain processes which enhances the level of assistance in mutual problem solving. However, this buyer-supplier relationship should be monitored in order to get insight into the extent of this relationship. Besides the fact that buyer-supplier relationship should be monitored, buyer-suppliers evaluation should be monitored as well. According to Zhou et al. (2011) providing feedback, which is an evaluation measurement about suppliers performance, is a good information sharing practice and has a direct positive impact on the relationship. The interviews revealed that information sharing with regard to supplier performance was partially monitored. The senior logistic sample coordinator (Sample registration) stated:

At the chemistry laboratory they keep an ‘Issue Log’ were the errors they discover are written down. Because of this ‘Issue log’ we gain insight into the errors we make and can take proper action to correct and prevent these errors from happening again. However, such an ‘Issue Log’ is only used at the chemistry laboratory.

The Chemistry Laboratory only monitors the performance of their upstream department e.g. sample registration, and gives ‘feedback’. However, this supplier performance evaluation should be done at all the departments in order to be efficient. That is why, the level of supplier’s defect free deliveries should be monitored in all departments.

Overall, it can be stated that by monitoring the ‘accuracy of forecasting technique’ the external uncertainty could be decreased. Furthermore, the uncertainty between internal subunits decreases by monitoring the ‘buyer-supplier relationship’ and measuring the ‘level of supplier’s defect free deliveries’ in a consistent way. These three performance measures should be used in the actual design.

6.4. Material flow

The material flow process consist of efficiently transforming raw materials into finished goods to meet supply chain demand in a timely manner (Zhou et al., 2011). By eliminating non-value adding activities the production output can be increased. This is done by eliminating causes of unproductive time or be seeking to eliminate the time wasted in producing poor quality product(Neely et al., 1997) 6.4.1. Non-value adding activities

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I receive orders in many different ways, through the CRM system, by e-mail or people just leave a note. We have a standardized orders fill in, however these are not used. This is frustrating because I have to correct this and in most cases important information is missing. The logistic sample coordinator (Sample registration) stated almost the same:

Another activity which takes lots of time is the hand written orders which we get from the sample collectors. Not only are these sometimes unreadable also they lack detailed information. For clarification we have to call up these persons.

These departments are the first links in the supply chain. It is of essence that the information given to them consist of a high quality to prevent any information distortion later on in the supply chain. To ensure this, the ‘quality of delivered documentation’ should be monitored throughout the supply chain so that the performances of the whole supply chain is improved.

Furthermore, all the interviewees from the departments sample registration, assistant service managers, and the laboratories had the unified opinion that discovering and eventually correcting orders containing wrong analyses data was the most time consuming activity in all the departments. Time spend on this non-value adding activity has consequences for departmental performance and contributes significant to workload of the department sample registration because they have to correct these mistakes and rebook the order. The senior logistic sample coordinator(Sample registration) commented:

I think that the biggest annoyance is that the orders which have been registered in ‘StarLims’ errors contain, which have to be corrected.

Whereas the account service manager (Sales) stated:

The most frustrating are the errors made in the registration of orders, errors made to sign in the analysis such as wrong client codes, wrong analysis, analysis which have been forgotten etc. To correct these errors takes lots of time.

From the interviews with sample registration employees it became clear that orders containing wrong analysis information have roughly two causes. The first one came from digital orders where customers themselves filled in the wrong analysis data. In most cases these faults are discovered somewhere in the supply chain and have to be corrected. However, it became clear that within these errors a consistency regarding customers could be detected. As the logistic sample coordinator(Sample registration) commented:

Some clients make almost every time the same mistake if they upload their order. In comparison with the past it has improved, however some will never learn

Or, as the laboratory technician(Microbiology Laboratory)stated:

I think that some of our clients have problems to place the order because I see that the same errors are made by the same clients.

Designing an internal supply chain performance measurement system: