Measuring supply chain performance has become a top priority for many companies today. As manufacturers continually look for ways to control costs while maintaining service levels, the various functions within the supply chain—including logistics—are put under a microscope to ensure they are bringing optimal value to the organization.

Evaluating the overall value of a company's logistics function includes tracking both the performance of an internal logistics organization as well as the company's core carriers and logistics service providers. And the metrics used today to evaluate both of those sides are expanding beyond cost and rates—they are aimed at measuring overall value to an enterprise and even predicting future performance.

One of the most challenging parts of measuring an internal logistics organization is attaching a quantifiable value to the services that organization provides. Companies are slowly getting better at seeing the balance between cost and value of a logistics operation internally, says Peter Wietfeldt, a consultant with supply chain consultancy PRTM of Waltham, Mass.

"Sometimes increasing logistics investment increases costs on paper, but also improves overall value and lowers the total cost," Wietfeldt says. "The key is being able to measure both and understand how one impacts the other—include both the qualitative and quantitative measures."

Wietfeldt says there are two distinct areas of performance to measure internally: functional excellence and a broader supply chain excellence. The functional measures may track the percent of shipments via each mode, percent of shipments expedited, how many distribution centers are in use and where, etc. The supply chain excellence measures may include value that logistics brings to overall supply chain performance.

"A common mistake is to benchmark and measure costs and focus on driving logistics costs down as far as they can go. But when they go too low, the overall value decreases as well with performance," says Wietfeldt, adding that companies with a separate logistics organization tend to do much more measuring, benchmarking and optimization than those organizations with logistics as part of another function in the organization because there is accountability and responsibility attached to the function.

When paper and consumer products firm MeadWestvaco of Stamford, Conn. was formed in January 2002 through the merger of two separate companies, one of the areas targeted for potential efficiencies was the distribution and logistics operations. To ensure that the synergies between the different business units could be identified and optimized, the company created a corporate logistics organization in its Richmond, Va. headquarters. The new 23-person organization was tasked with coordinating logistics and distribution efforts across the business units, but not necessarily controlling all of the company's freight. One of the first major efforts undertaken by the corporate logistics organization was a benchmarking project within the company's internal logistics operations.

"We did a supply chain survey early on in the merger," says Chris Osen, vice president of logistics at MeadWestvaco. "From that survey, we identified areas of opportunity. We used it as a chance to kick off a collaborative effort within the newly combined organization. The benchmarking was not meant to change the direction of the company, but to provide leading indicators of who's doing what well and how to share that information across the enterprise."

Benchmarking within MeadWestvaco's logistics operations takes place both at the divisional level as well as the corporate level, depending on what question the company is trying to answer. Osen says the key to that strategy is sharing benchmark results across the organization in either case. If one division completes a useful benchmarking study, the data can be shared just as if it were done at the corporate level and vice versa.

One specific benchmarking exercise that Osen's organization recently completed was a detailed comparison of the transaction costs from the company's integrated load center with the costs at a third-party logistics provider. Osen says the study correlated the services provided at each with the number of full-time employees to make sure MeadWestvaco's internal operation was providing a similar value to that of a 3PL.

Most of the internal measurement work to date has focused on the outbound logistics operations, but there has been some best practice sharing between the corporate logistics organization and procurement on negotiating contracts. MeadWestvaco's Consumer and Office Products division is much more focused on inbound logistics than the others, so the corporate logistics organization will be looking to that division to provide some best practices that can be shared across the organization in the next year or so.

Osen says there is always pressure to demonstrate the bottom-line value of any project in his organization, and the difficulty in logistics is the interdependence of the different projects.

"You can negotiate contracts to get immediate rate reductions, but then you need to optimize the use of those low-cost lanes because if you don't execute you won't see the savings on the bottom line. What value do you put on on-time service increasing from 98% to 99%? How do you put that in a balance sheet? You might be improving customer satisfaction, but what is it worth?"

Measuring the performance of carriers and logistics service providers is also gaining more attention from supply chain organizations today. In an era of supplier consolidation and improved sourcing strategies for logistics, internal logistics professionals are putting more effort into evaluating carriers and 3PLs for best value today instead of simply best cost.

"There's a fine line between handing things over blindly and micromanaging a logistics service provider," says Wietfeldt. "It has to be a balance. For example, measuring the value-add that a 3PL brings is more important, but also more complicated, than simply measuring how much they reduce costs."

MeadWestvaco, the fourth largest container exporter in the country, outsources all of its transportation, so measuring the performance of its carriers is very important. Osen says this is especially true in its retail-based business units, where timely shipments are the lynchpin of customer satisfaction.

As part of the emphasis on improving performance of its carriers, the company has implemented a scorecarding and core carrier program for its $500 million outbound logistics operations. Osen says the project started this year within a MeadWestvaco division that accounts for about 50% of its truckload spend.

A cross-divisional team of logistics professionals who were polled on what qualities and metrics they felt carriers should be evaluated on developed the carrier scorecarding program. After a few brainstorming sessions, between 20 and 30 metrics were developed and then reviewed to see which were actionable and could be tracked, as well as which were most important to the business units and customers.

Currently, the corporate logistics organization at MeadWestvaco is fine-tuning how the different carrier measurements are weighted to get a truly balanced scorecard for truck, rail and ocean carriers. Carriers are currently notified of their scores through periodic meetings and reports, but Osen says the long-term plan includes automating that process with an online carrier portal.

Right now, the scorecards are more for information-sharing, but Osen envisions them being used as a predictive tool to see which way the trend is going for specific carriers and when certain actions are required to reverse the trend.

"It's a fact-based tool and we're sharing that with the carriers so they know what they'll be measured upon and when we get to the review with them, there are no surprises," he says. "Obviously, we're trying to rationalize our rates and capacity with this program. But those are measured against a carrier scorecard, which has a number of other factors on it including on-time delivery, EDI tracking, and prenotification of failures. We like to know if a truck is stuck in traffic somewhere so we can communicate with our customer."

The plan is to rebid its major transportation contracts in late 2004 based on that core carrier program and then roll it out companywide in 2005.