Developing a performance measurement system for world-class distribution logistics by using activity-based costing and management. Case: basic metal industries
by Pasi Koota, Josu Takala
International Journal of Technology Management (IJTM), Vol. 16, No. 1/2/3, 1998

Abstract: The performance of distribution logistics has developed into a significant element in the competitiveness of an industrial company. The basis for the development has been the globalisation of the markets in the 20th century, the customer's increased demand for service and the capital intensiveness of distribution logistics. In order to have control over the performance and capability to direct the development efforts effectively, the formulation of performance needs to be measured. The previous research within the field of measuring logistics performance has presented various dimensions of performance from a certain viewpoint, e.g. physical, economic, internal and external measures. However, the use of performance measures in practise for strategic and operative business management requires a limited set of measures to ensure the top corporate performance. This paper discusses the formulation and measurement of performance in distribution logistics by using a descriptive and constructive research approach. Distribution logistics is considered as an interactive part of a company's total business process and supply chain. The following aspects of performance measurement are discussed: the development of measures, today's needs for measurement and different roles of performance measurement. Performance is approached from aspects vital to successful business management in today's environment, including both internal and external viewpoints. Discussion also reflects distribution logistics role in a company's business process on strategic and operational levels. Activity Based Costing and Management (ABC/ABM) is introduced as a tool for producing relevant information for performance measurement and an overall measurement system is developed in a participative case study in a huge and globally competitive company in basic metal industries. The system is designed to measure the operational performance of the distribution logistics, which also provides information for strategic decision-making. It was found that a conventional cost accounting system built mainly for the registration of costs does not provide the managers with the information needed to manage performance and to identify areas for potential improvement. With ABC/ABM, the performance could be measured and analysed starting from the activity level and proceeding to larger totalities. The inefficiencies were located and the structuring of profits and costs became more visible. The system consists of six different measurements. The viewpoints represented include internal and external, physical and economic, soft and hard as well as the supplier's performance backwards in the supply chain and the customer's performance forward. As a result, the following findings were achieved in the performance measurement system: importance of internal customerships to performance, formulation of performance in own activities, effect of distribution logistics performance on the overall profitability, level of service realised in own operation and development of the highly emphasised innovativeness in the distribution logistics. The results of the development of the distribution logistics (with its development tools) may be generally utilised, e.g. in basic metal and forest industries having bulk production.

Online publication date: Fri, 04-Jul-2003

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