PRESENTING A MODEL FOR PERFORMANCE EVALUATION OF SUPPLY CHAIN WITH VALUE ANALYSIS APPROACH

PRESENTING A MODEL FOR PERFORMANCE EVALUATION OF SUPPLY CHAIN WITH VALUE ANALYSIS APPROACH Mohammad Reza Motadel Industrial Management Department, Central Tehran Branch Islamic Azad University, Tehran, Iran Mahboobe Kordestani (Corresponding author) Post graduate in industrial management in Islamic Azad University, Central Tehran Branch, Tehran, Iran Abstract In today's world, cost pressures and a necessity to produce goods and services at competitive prices have been forced companies to manage costs reasonably, thus saving costs and optimum allocating resources have been brought up as an obligation in production process and presenting product. In addition to identify the most important indices affecting supply chain performance, in this article, it is tried to present a model for performance evaluation of supply chain (in terms of a case study in a carpet manufacturer company) with value analysis approach and with the use of multiple linear regression that it tries to maximize value index across the supply chain. It should be noted that this research from purpose viewpoint is applied study and its method is survey and questionnaire is the most important tool for gathering the required data that has been used in this study. Meanwhile Spearman test, specific vector technique and multiple linear regressions are used for analysis of extracted data from questionnaires. Key words: Supply chain, performance evaluation, value analysis, value index 1. Introduction In new business environment, focusing only on company performance can not be the only factor in organization success, but supply chain performance or a network that company is one of its partners must be taken into consideration. In this situation, the concept of supply chain management is considered more than ever. Supply chain management as a set of methods will continue to manage and coordinate the entire chain, from supplier management of suppliers to customer of customers (Gunasekaran, 2004). Like any system and management strategy, supply chain management needs performance measurement system in order to identify success, to determine the amount of meeting customers` needs, to help organizations in order to understand processes, to discover knowledge that these organizations are not aware of it and finally to realize planning improvements (Kim & Kumar, 2010). Then for creating an efficient and effective supply chain, a need for assessing performance is felt. Performance evaluation has a determining role in development and progress of supply chain, so that it can direct design and management of supply chain towards the desired performance. Performance evaluation and its indices play a major role in classification of goals and determining future policies(roth & Jackson, 1995). On the other hand, many experts of management science believe that companies must seriously reduce their cost if they want to remain competitive. Value analysis is a powerful and effective tool for costs overrun. In addition, value analysis is an initiative action that can be employed in design phase of processes and products in order to prevent future serious problems in production (Soni & Kudali, 2009). Therefore value analysis techniques have been used in this research to answer this question what are effective factors for supply chain performance and how to improve them. Finally, a model will present for performance evaluation of supply chain with reliance on this technique and based on multiple linear regressions(askariazade & Wanous,2009). COPY RIGHT 2013 Institute of Interdisciplinary Business Research 185

2. Importance and necessity of research Creating a distinct and sustainable competitive advantage is the goal of every company, and only in this case, the company will be able to guarantee its life and survival. To answer this question that how this situation will be achieved, performance evaluation of supply chain can be considered as one method among others (Motadel & Halvachi,2011). Following matters can be mentioned in expressing the importance and necessity of this research, firstly appropriate performance of supply chain has a key role in the success of an organization, achieving its objectives and particularly its profitability. In this regard, establishment of evaluation system for supply chain performance that is created based on value analysis technique can help to identify strengths and weaknesses of supply chain and its continuous improvement. Secondly evaluation performance of supply chain can lead to better decision making. Deviations analysis of planned results can prevent occurring deviations again in the future. Thirdly, feedbacks of evaluation performance of supply chain can assist managers in detection of progress amount, communication and solving complex problems(ezutah & Wong, 2009). On the other hand, competition forces manufacturers to look for methods for improving customers value constantly. Therefore, it is necessary to keep product costs at a competitive level and still work on product innovation and quality should be done(motadel & Halvachi,2011). In such circumstances, the use of value analysis as a tool for performance evaluation of supply chain can have a significant impact on reducing costs while maintaining quality. Economic problems and constant inflation of prices which engaged most countries in the world, has doubled the value benefit of this analysis (Lanshit, 2002). 3. Theoretical framework 3.1 Value Analysis In 1947, Miles had brought up the concept of value analysis which later was called value engineering and value management in order to overcome problems caused by constraints and changes in the field of providing raw material of General Electric plant in final years of World War II. Value analysis is a group, systematic, functionalist approach and has professional applications that are used to evaluate and improve the value (Lanshit, 2002). Lawrence Miles, the father of value engineering, says: "Creative and organized review of values and costs in order to maximize index value with quantitative values" or in other words, value analysis is a method for determining priorities and spending money and resources for works with more value and less cost and optimum resource allocation. Value analysis not only reduces the direct costs of product manufacturing, but also reduces other expenses related to the implementation and its application. Value analysis is applied to maximize value through evaluating procurement, production and distribution chains with emphasis on delivery time and quality proportional to prices (Sharma, 2005). In this study, also value analysis has been used to create a model in order to evaluate performance of supply chain effectively. 3.2 Supply Chain Management In modern business environments, manufacturers are faced with increasing pressure on individualized requirements of customers for product, quality improvement and a response to demand. To maintain the business in these pressures, most companies seek to develop long term strategic partnerships with several suppliers and cooperation with them, so that increasing requirements of competition in the field of effectiveness, cost and response to customer force companies to have a strategic partnerships with suppliers, downstream customers and COPY RIGHT 2013 Institute of Interdisciplinary Business Research 186

service providers to exploit their capabilities and create new value for customers which this has led to form the concept of supply chain management (Chopra, 2003). Expanding markets and products brought competition from inter-corporate level into inter-suppliers chains level and the focus on improving this performance is the only way to achieve competitive advantages in global markets of business. In this attitude, supply chain management of strong strategies are considered to increase competitiveness of companies and their supply chains, so that after introducing term of supply chain management by Liever and Weber in 1982, a considerable expansion in the process of applying of this approach has been emerged (Hammervoll, 2009). Planning, organizing and controlling activities in supply chain are called supply chain management (Chan, 2003). In other words, supply chain management is integration of activities related to transfer of goods and services include current flow of information from source of raw materials to final consumers (Beamon, 1998). As Stevens has expressed in 1999, supply chain management is a system that its components are suppliers, production facilities, distribution and customer services that are connected through information flows of material forward and backward(ganaskaran, 2001). There are other definitions for supply chain management, such as making integration business key processes from end consumer to the original supplier that supply products, services and information and thus adds value for customers and other stakeholders (Hofmann& Locker, 2009). 3.3 Performance Evaluation Performance evaluation and more generally performance management is a process through which useful and effective information about how to perform tasks effectively can be achieved to reinforce positive behaviors and eliminate unnecessary and inappropriate behaviors. Performance evaluation is an appraisal process and performance measurement in a specified period with goal achieving approach and strategy of organization so that former expectations and indices transfer to evaluator transparently (Gulledge & Chavusholu, 2008). Performance measurement was used as a means of monitoring system to ensure about movement of organization toward achieving predetermined goals and expectations. For performance evaluation, a system should be reviewed from different viewpoints(neely et al. 1995). Measuring performance can be considered to identify those factors that should be measured and meanwhile definition of components used to determine performance. Feedbacks of performance measurement can assist managers to monitor progress detection, enhancing motivation, communication and solving problems (Beamon, 1999). Good performance of a supply chain has a role in the success of an organization and sustainable goals achievement, and particularly its profitability. In this context, full recognition of the existing supply chain structure and establishment of supply chain performance evaluation system seems necessary to identify weaknesses and continuous improvement. There are many methods for evaluating supply chain performance. Among the most important performance evaluation methods; evaluation method based on the balanced scorecard, assessment based on reference model and assessment based on the excellence model can be referred (Yan & Chen, 2011). 4. Research objectives 1. Identifying indices that affect main processes of supply chain of Farshe Almase Kavir Co. with value analysis approach; 2. Determining effective functional and cost indices priority for main processes of supply chain in Farshe Almase Kavir Co. 3. Presenting a model for evaluation of supply chain with value analysis approach 4. Measuring supply chain performance of Farshe Almase Kavir Co. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 187

5. Research questions 1. Do functional and cost indices of main processes of supply chain affect performance assessment of supply chain in Farshe Almase Kavir Co. with value analysis approach? 2. What is effective functional and cost indices priority for main processes of supply chain of Farshe Almase Kavir Co.? 3. Can we present a model for performance evaluation of supply chain with value analysis approach? 4. Is supply chain performance Farshe Almase Kavir Co. appropriate? 6. Research hypothesis Functional and cost indices of main processes are effective for performance evaluation of supply chain in Farshe Almase Kavir Co. with a value analysis approach. Forecast accuracy is the most important functional and margin profit index is the most important cost index in planning process. Trustiness of supplier is the most important functional and total cost of supply is the most important cost index in supply process. Flexibility is the most important functional and total production cost is the most important cost index in production & manufacturing process. The use of warehouse space is the most important functional and the total cost of warehousing is the most important cost index in warehousing process. Just in time is the most important functional and Total cost of transportation is the most important cost index in distribution process. Presented model is a valid model to assess supply chain performance with value analysis approach. Supply chain performance of Farshe Almase Kavir Co. is appropriate. 7. Research method Given that in this study we present a model to assess supply chain performance of Farshe Almase Kavir Co., then it can be said that this research from goal viewpoint is applied study and from aspect of method, it is categorize in survey researches. This research is designed in four sections: at first it is tried to identify functional and cost indices related to main processes of supply chain with reviewing authoritative articles related to discussions of performance evaluation of supply chain and value analysis, and then using Delphi test, the most important indices are selected according to experts. The effectiveness of these indices also has been studied through Spearman test. Next, these indices have been prioritized using paired comparisons questionnaire and analysis of results of its distribution based on specific vector technique, and ultimately value index is calculated for every main processes of supply chain with use of these indices and their importance and a model is presented to assess supply chain performance with the use of multiple linear regression model. Generally, three questionnaires have been used in this study: Likert scale is used in questionnaire no.1 that is related to identify effective factors in supply chain performance evaluation. In questionnaire no.2 which has been prepared to prioritize effective factors in supply chain performance evaluation, paired comparisons spectra with interval scale is used. Questionnaire no. 3 has been prepared to assess COPY RIGHT 2013 Institute of Interdisciplinary Business Research 188

supply chain performance with value analysis approach in Farshe Almase Kavir Co.. Managers and experts are asked in this questionnaire to determine company situation in every cost and functional indices related to main processes of supply chain with assigning numbers between 0 and 100, during past 30 months. So that zero represents the minimum possible value and a hundred represents maximum possible value from desired index. Cronbach's alpha method is used to examine the reliability of research. The results are presented in Table 1: Table 1: Cronbach's alpha values Number of questionnaire Questionnaire No. 1 Questionnaire No. 3 Cronbach's alpha value 0.91 0.928 According to above table it can be concluded that questions of both questionnaires have appropriate and desirable reliability. It should be mentioned that for questionnaire no. 2 that is developed by paired comparisons technique, there is no need to prove its validity and reliability. 8. Identification of functional and cost indices of main processes of supply chain Regarding expansion of supply chain area, in this research, we divide supply chain into five main processes of planning, procurement, production and manufacturing, warehousing and distribution and because value analysis approach is used to assess supply chain performance, it is necessary to identify functional and cost indices for every one of these processes separately. Thus, after reviewing the literature and research studies on domestic and abroad, totally 73 indices were considered that after Delphi test, 40 indices were selected due to opinion of experts and specialists of statistical population ( Farshe Almase Kavir Co. ). These indices are shown in tables 1,2,3,4,5. Supply Chain Performance of ALMAS KAVIR CARPET COMPANY by Value Analysis Approach Distribution WareHousing Production & Manufacturing Supply Planning Functional Functional Functional Functional Functional Figure 1. Main processes of supply chai Table 2: Functional and cost for Planning process 1-Margin Profit 2-ROI(Return of Investment) Rate 3-The Rate of Cash Turnover 4-The of Information Processing Functional 1-Forecasting Accuracy 2-Planning Time Cycling 3-Information & Materials Progress Integration 4-The Balance Level of Resources with Demands 5-Marketing Strategies Effectiveness COPY RIGHT 2013 Institute of Interdisciplinary Business Research 189

Table 3: Functional and cost for Supply process 1-Total of Supply 2-The of Materials Transportation 3-The Additional for Urgent Orders of Materials Functional 1-Trustiness of Supplier 2-The Materials Quality 3-The Rate of Resources Shortage 4-The Level of Partnership with Supplier Table 4: Functional and cost for Production & Manufacturing process 1-Total Production 2-The of Stocks During the Manufacturing Process 3-The of Transferring to Warehouse Functional 1-Leadtime Of Production 2-Flexibility 3-The Rate of Damaged Products 4-Utilizing of the Capacity Table 5: Functional and cost for WareHousing process 1-The Total of Warehousing 2-The Value of Damaged Goods in Warehouse 3-The of Materials Transportation to Production Shop Functional 1-The Use of Warehouse Space 2-The Accuracy of Placemet in Warehouse 3-The Time Between Disembarkation and Placement in Warehouse 4-The Time of Delivering Orders Table 6: Functional and cost for Distribution process 1-Total of Transportation 2-The Ratio of Transportation to Product Value 3-The of Customer`s Returned Goods 4-The of Gauranties & Aftersales Services Functional 1-JIT(Just in Time) 2-Delivered Goods Quality 3-The Rate of Orders Accurate Delivering 4-Flexibility in Delivery 5-The Rate of Customers Complaints 9. Data analysis The Spearman test was used in order to analyze data from distribution of questionnaire 1 and ensuring from effectiveness of indices that were considered for each main process in supply chain in the previous step, and thus background for Hypothesis 1 evaluation was provided. Since in this study, supply chain is divided into five main processes, so this hypothesis can be divided into following five sub-hypotheses. Spearman's test results, for example, are presented in planning process in Table (7). According to Table (7), it is observed that test credit is less than 0.05 in all indices. Therefore, research hypothesis is accepted, and existence of relationship among variables can be acknowledged with 95% confidence. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 190

Table 7: Spearman's test results for indices of planning process indices of planning process PM X11 X12 X13 X14 X15 X16 X17 X18 X19 Correlation Coefficient 1.000.934.950.931.985.856.914.896.778.856 Sig. (2-tailed).000.000.000.000.000.000.000.000.003.000 N 12 12 12 12 12 12 12 12 12 12 That was collected by distributing questionnaire no. 2 which is a paired comparisons questionnaire. Regarding appropriate adjustment rate for paired comparisons matrices it can be concluded that these matrices have required adjustment. Results from expert choice software are provided in the table (8). Table 8: Results from expert choice software Process Planning Supply Production & Manufacturing WareHousing Distribution index Variable weight index X 11 0.338 functional X 12 0.298 X 13 0.191 X 14 0.094 X 15 0.080 X 16 0.361 X 17 0.239 X 18 0.232 X 19 0.168 X 21 0.300 functional X 22 0.199 X 23 0.203 X 24 0.154 X 25 0.143 X 26 0.419 X 27 0.392 X 28 0.189 X 31 0.387 functional X 32 0.225 X 33 0.199 X 34 0.189 X 35 0.510 X 36 0.283 X 37 0.207 X 14 0.548 functional X 42 0.150 X 43 0.141 X 44 0.161 X 45 0.411 X 46 0.302 X 47 0.288 X 51 0.312 functional X 52 0.238 X 53 0.204 X 54 0.128 X 55 0.118 X 56 0.453 X 57 0.184 X 58 0.171 0.192 X 59 COPY RIGHT 2013 Institute of Interdisciplinary Business Research 191

10. Determination of estimation equation for main processes of supply chain Since supply chain performance is measured by using its indices and in addition to that in the previous sectins, these indices are identified and prioritized for each main processes of supply chain, so in this section, value index is calculated for every one of these processes using following formula. Value Index i.w i C j. W j (1) Variables used in the formula (1) are defined as follows: P i : company status in achieving ith functional index (i= 1,2,. n) W i : Significance and weight of ith functional index (i= 1,2,. n) n: Number of functional indices of desired process C j : Company status in achieving jth cost index (j= 1,2,. m) W j : Significance and weight of jth cost index (j= 1,2,. m) m: Number of cost indices of desired process Questionnaire no.3 was used to determine company status in achieving functional and cost indices (P i and C j ). For this purpose, questionnaire no. 3 was delivered to 4 experts that were working in a company since its establishment. After collecting questionnaires, the arithmetic average was used for experts consensus. Using questionnaire no.3 data and weight of indices (W i and W j ) that were calculated with the use of specific vector technique in the previous section, the amount of value index can be measured for every main processes of supply chain. Next, multiple linear regression is used to obtain an estimate equation for every one of main processes of the supply chain. For example, it is necessary to introduce dependent and independent variables to determine estimate equation of planning process. Independent variables of this model are cost and functional indices related to planning process that their effectiveness was proved through assumption test. To determine the values of independent variables, questionnaire no. 3 was delivered to 4 experts of a company. Value of dependent variable that is planning process performance is calculated through the weighted sum of through performance and cost indices related to planning process over the past 30 months. We enter data as input into the software SPSS. Following results are obtained by linear regression technique. 10.1 Estimation equation of planning process As it is visible in table (9), regarding that a significant amount is less than 0.05, it can be concluded that all independent variables of planning process have a significant correlation with dependent variable. The amount of multiple correlation coefficients is equal to 0.797. Multiple correlation coefficients indicate a strong relationship with generally independent variables of planning process. Due to value of multiple correlation coefficients and its closeness to 1 it can be concluded that the proposed model is appropriate for planning process that include all indices in this process. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 192

Table 9:Values of B and Beta in planning process Model 1 B Beta Sig. (Constant) 1.312.000 X11 0.554 0.675.001 X12-0.349-0.542.005 X13 0.312 0.437.002 X14 0.278 0.322.000 X15 0.159 0.218.012 X16 0.355 0.389.000 X17 0.198 0.335.000 X18 0.096-0.358.000 X19-0.048-0.197.000 Y 1 = 1. 11 2. 12 3. 13 4. 14 15. 15 16. 16 17. 17 18. 18 19. 19 Y 1 =1.312+ 0.554 X 11-0.349X 12 +0.312X 13 +0.278X 14 +0.159X 15 + 0.355X 16 +0.198X 17 + 0.096 X 18-0.048X 19 11. Estimation equation for performance of supply chain based on key processes performance It is essential that independent and dependent variables are introduced in order to determine estimation equation for performance of supply chain based on main processes. Independent variables in this model are performance of five supply chain processes that during past 30 months have been calculated based on survey of experts. Dependent variable in this model is supply chain performance of Almase Kavir Co. that its values are achieved from total supply chain main processes. Table 10: Values B and Beta of supply chain performance evaluation model Model B Beta Sig. 1 (Constant) 0.13.015 Y1 0.360 0.042.043 Y2 0.115 0.091.004 Y3 0.296 0.346.006 Y4 0.017 0.777.000 Y5 0.232 0.266.000 As it is visible in Table (10), all independent variables have a significant correlation with dependent variable. The amount of multiple correlation coefficients is equal to 0.8. Regarding multiple correlation coefficients it can be concluded that proposed model is appropriate for supply chain performance evaluation that include performance of all processes. Therefore estimation equation of supply chain performance evaluation based on main processes performance, as follows: Y t = + 1.Y 1 + 2.Y 2 + 3.Y 3 + 4.Y 4 + 5.Y 5 Y t = 0.13+0.360 Y 1 +0.115 Y 2 +0.296 Y 3 +0.017 Y 4 +0.232Y 5 Y 1 : Planning process performance Y 2 : Procurement process performance Y 3 : Production and manufacturing process performance Y 4 : Warehousing process performance COPY RIGHT 2013 Institute of Interdisciplinary Business Research 193

Y 5 : Distribution process performance 12. Conclusion Supply chain management and its assessment is one of the most important under discussion issues in trade literature of companies. Since supply chain management plays a major role in business process, supply chain performance evaluation is considered as an important element in managing the organization (Hoffman & Locker, 2009). On the other hand, competition forces manufacturers to look for methods for improving customers value constantly. Therefore, it is necessary to keep product costs at a competitive level and still work on product innovation and quality should be done. In such circumstances, the use of value analysis as a tool for performance evaluation of supply chain can play a new role (Gomez et al., 2011). For this reason, in this article, it is tried to present a model for supply chain performance evaluation with the hope that it could be fruitful in performance improvement in expansion area of supply chain. COPY RIGHT 2013 Institute of Interdisciplinary Business Research 194

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