MASTERS THESIS

2004:294 CIV
TOMAS STEFENSON
Performance Measurement
at DHL Solutions
Towards an improved performance measurement system
consisting of relevant and well-designed measures
MASTER OF SCIENCE PROGRAMME
Department of Business Administration and Social Sciences
Division of Industrial Logistics
2004:294 CIV ISSN: 1402 - 1617 ISRN: LTU - EX - - 04/294 - - SE

ii
PREFACE

Most company performance yardsticks [i.e. measures] are too short, too
rigid, or used more like a teachers ruler to whack rather than to motivate.
The time is long overdue to replace these outdated yardsticks with a more
dynamic measurement system that motivates continuous improvement in
several dimensions of performance simultaneously.
(Lynch and Cross, 1995)

This paper is the primary result of my Masters Thesis work carried out at DHL
Solutions in Sweden during the summer and fall of 2004. It will also mark the
closure of my Master of Science Program in Industrial Management and
Engineering, with focus on Industrial Logistics, at Lule University of
Technology.

For assistance and support I would like to thank my supervisors at DHL
Solutions, Linda Johannesson and Daniel Gartell. They have contributed to the
completion of this Masters Thesis in an excellent manner. Furthermore, I
would like to express my gratitude towards the sponsors of the project, Owe
Norberg and Kurt Liljergren, who gave me the opportunity to set out on this
journey. My gratitude also goes to Kerstin Lindstrm, who put me in contact
with these persons. At DHL Solutions, I would also like to thank all the
interview respondents at operating units and headquarters as well as all
personnel who have contributed to my work in many different ways. Without
you this paper would not have been completed.

I would also like to show my gratitude to my supervisor at Lule University of
Technology, Torbjrn Wiberg, who supported me on academic matters when I
needed it the most.

Finally, my thoughts of gratitude go to my mother for help with proofreading
and to the rest of my family as well as my girlfriend for support and assistance
on all matters.

Lule University of Technology 2004-12-10


___________________________________
Tomas Stefenson


iii
ABSTRACT

During the past decades, the competition for many businesses has moved from
just being based on price to include such factors as: quality, service innovation
and flexibility. Managers keep track of the performance on such factors by
means of performance measurement. This process is a way of measuring how
well the organization carries its strategies and objectives into effect. Since the
environment has changed and strategies have changed with it, many companies
need to redesign their existing performance measurement systems with respect
to the objectives they follow today.

This thesis is carried out at DHL Solutions in Sweden and aims at improving
their current view on performance measurement, their performance
measurement system and instituted individual measures by conceptualizing the
existing theories on the subject and adjusting them to fit the situation in the
organization. The most fundamental recommendation on the subject presented
in the literature is that performance measures should be directly derived from
the current strategies followed. Also, the entity of individual measures should
be integrated in a balanced system where managers monitor multiple
dimensions of performance simultaneously. These two recommendations are
the underlying principles of this thesis.

In the Swedish organization of DHL Solutions, there are many weaknesses in
the current performance measurement process. Including: weak relationships
between measures and overall strategies; ill-defined dimensions of performance
(such as productivity and quality); lack of system-view on the issue of
performance measurement (i.e. an unbalanced system); and the fact that
individual measures are not always well-designed.

To overcome these flaws in the present performance measurement process, this
thesis puts forward four recommendations for DHL Solutions to follow in order
for them to improve this whole process. Recommendations one and two argue
that they should integrate a systematic process for strategic management in
their organization where strategies and objectives are formulated and translated
into operationally relevant actions (including a tailored measurement package
for tracking the progress of the selected strategies). The third recommendation
states that DHL Solutions in Sweden should use the so called performance
pyramid as a framework for the integration of performance measures in a
balanced system. Finally, the fourth recommendation states that they should
make use of the performance measure record sheet as a means to ensure that all
instituted as well as new individual measures are relevant and well-designed.

iv
TABLE OF CONTENTS

PREFACE.............................................................................................................................. II
ABSTRACT..........................................................................................................................III
TABLE OF CONTENTS.....................................................................................................IV
LIST OF FIGURES .............................................................................................................VI
LIST OF TABLES ...............................................................................................................VI
TERMINOLOGY AND ABBREVIATIONS .................................................................. VII
1. INTRODUCTION.......................................................................................................... 1
1.1 INTRODUCTION............................................................................................................................................... 1
1.2 BACKGROUND ................................................................................................................................................ 1
1.3 PURPOSE......................................................................................................................................................... 2
1.4 DELIMITATIONS.............................................................................................................................................. 2
1.5 PROBLEM DISCUSSION ................................................................................................................................... 3
1.6 OUTLINE OF THE THESIS................................................................................................................................. 3
2. METHODOLOGY......................................................................................................... 5
2.1 RESEARCH APPROACH.................................................................................................................................... 5
2.2 LITERATURE REVIEW..................................................................................................................................... 5
2.3 DATA COLLECTION ........................................................................................................................................ 6
2.3.1 Primary Data......................................................................................................................................... 6
2.3.2 Secondary Data ..................................................................................................................................... 7
2.4 WORKING PROCESS........................................................................................................................................ 7
2.5 METHODOLOGY DISCUSSION ......................................................................................................................... 8
3. THEORY....................................................................................................................... 10
3.1 EXTERNAL BUSINESS ENVIRONMENT .......................................................................................................... 10
3.2 CORPORATE AND BUSINESS STRATEGY....................................................................................................... 11
3.3 INTERNAL BUSINESS ENVIRONMENT ........................................................................................................... 13
3.4 PERFORMANCE MEASUREMENT................................................................................................................... 13
3.4.1 Performance Measures........................................................................................................................ 15
3.4.2 Performance Measurement Systems ................................................................................................... 18
3.4.3 Productivity.......................................................................................................................................... 24
4. THEORETICAL FRAME OF REFERENCE.......................................................... 27
4.1 PERFORMANCE MEASUREMENT AT THE MACRO LEVEL.............................................................................. 27
4.2 PERFORMANCE MEASUREMENT AT THE MICRO LEVEL............................................................................... 28
5. THE ORGANIZATION UNDER INVESTIGATION ............................................. 30
5.1 THE CORPORATION DHL EXPRESS AND LOGISTICS ................................................................................. 30
5.2 THE BUSINESS AREA DHL SOLUTIONS..................................................................................................... 30
5.2.1 Operating Unit A................................................................................................................................. 32
5.2.2 Operating Unit B................................................................................................................................. 32
5.2.3 Operating Unit C................................................................................................................................. 33
5.2.4 Operating Unit D................................................................................................................................. 34
6. EMPIRICAL FINDINGS............................................................................................ 35
6.1 DHL SOLUTIONS EXTERNAL ENVIRONMENT ............................................................................................. 35
6.2 CORPORATE AND BUSINESS STRATEGY AT DHL SOLUTIONS ..................................................................... 36
6.3 DHL SOLUTIONS INTERNAL BUSINESS ENVIRONMENT.............................................................................. 37
6.3.1 The Warehousing Process................................................................................................................... 38

v
6.4 PERFORMANCE MEASUREMENT AT DHL SOLUTIONS ................................................................................. 40
6.4.1 Performance Measures at DHL Solutions .......................................................................................... 42
6.4.2 The Performance Measurement System at DHL Solutions ................................................................ 44
6.4.3 Productivity Measurement at DHL Solutions..................................................................................... 45
7. ANALYSIS.................................................................................................................... 48
7.1 ANALYSIS OF THE CURRENT SITUATION...................................................................................................... 48
7.1.1 Strategic Management......................................................................................................................... 49
7.1.2 View on Performance Measurement ................................................................................................... 51
7.1.3 The PM-system .................................................................................................................................... 52
7.1.4 Instituted Individual Measures............................................................................................................ 56
7.2 SUMMARY OF MAIN WEAKNESSES AND FLAWS .......................................................................................... 59
7.3 A NEW PERFORMANCE MEASUREMENT REGIME......................................................................................... 61
7.3.1 Implications for the Organization....................................................................................................... 68
8. CONCLUSIONS........................................................................................................... 69
8.1 GENERAL CONCLUSIONS.............................................................................................................................. 69
8.2 THE PERFORMANCE MEASUREMENT PROCESS............................................................................................ 69
9. RECOMMENDATIONS............................................................................................. 71
9.1 FOUR GENERAL RECOMMENDATIONS.......................................................................................................... 71
9.1.1 Implement Strategic Management in DHL ......................................................................................... 71
9.1.2 Develop an Operating Plan for DHL Solutions in Sweden................................................................ 71
9.1.3 A Framework for a PM-system at DHL Solutions in Sweden ............................................................ 72
9.1.4 Establish Guidelines for Individual Measures.................................................................................... 74
10. DISCUSSION ........................................................................................................... 76
10.1 EXTERNAL ENVIRONMENT AND PLANNING HORIZON ............................................................................... 76
10.2 HOW TO USE THE RECOMMENDATIONS? ................................................................................................... 77
10.3 CUSTOMER SATISFACTION A WIDER PERSPECTIVE................................................................................ 78
LIST OF REFERENCES .................................................................................................... 80
APPENDICES ...................................................................................................................... 84
INTERVIEW GUIDE, HEADS OF DIVISIONS.......................................................................................................... 85
INTERVIEW GUIDE, DIVISION CONTROLLERS .................................................................................................... 88
INTERVIEW GUIDE, HEADS OF OPERATING UNITS............................................................................................. 90
ELEMENTS IN THE PERFORMANCE MEASURE RECORD SHEET........................................................................... 92
THE RECORD SHEET FOR MEASURES USED AT DHL SOLUTIONS ..................................................................... 94
MEASURES MONITORED AT DHL SOLUTIONS IN SWEDEN................................................................................ 98
DEVELOPMENT OF AN OPERATING PLAN........................................................................................................... 99
GENERIC STRATEGY OPTIONS FOR THE OPERATING PLAN.............................................................................. 106
DEFINITIONS IN THE PERFORMANCE PYRAMID FOR DHL SOLUTIONS ............................................................ 117
CUSTOMER SATISFACTION AT DHL SOLUTIONS ............................................................................................. 122



vi
LIST OF FIGURES

Figure 2.1 Working process............................................................................................... 7
Figure 3.1 Strategic management .................................................................................... 12
Figure 3.2 Strategy-specific performance measures........................................................ 20
Figure 3.3 The performance pyramid .............................................................................. 21
Figure 3.4 Relationships between operating measures and financial results................... 26
Figure 4.1 Theoretical frame of reference for the macro level ........................................ 28
Figure 4.2 Theoretical frame of reference for the micro level......................................... 29
Figure 5.1 Organizational structure at DHL and DHL Solutions.................................... 31
Figure 6.1 Simplified flow chart for the warehousing process........................................ 39
Figure 6.2 Four groups of measures at DHL Solutions ................................................... 42
Figure 6.3 Distribution of costs between different resource inputs................................. 47
Figure 7.1 A distorted performance pyramid at DHL Solutions ..................................... 53
Figure 7.2 A new view on objectives setting and measurement feedback ...................... 62
Figure 7.3 DHL Solutions vision.................................................................................... 64
Figure 7.4 Generic strategies for the Swedish organization............................................ 65
Figure 7.5 Feedback through measures to central levels ................................................. 65
Figure 7.6 Strategies and objectives for the core processes at operating units................ 66
Figure 7.7 Feedback through measures on core process performance ............................ 66
Figure 7.8 Generic strategies and objectives for the operational level ............................ 67
Figure 7.9 Feedback through operational measures to operating unit managers............. 67
Figure 9.1 How DHL Solutions should use the performance measure record sheet ....... 75
Figure 10.1 A probability/impact-matrix for the recommendations.................................. 77


LIST OF TABLES

Table 3.1 Recommendations with regard to the design of performance measures ............ 17
Table 3.2 The performance measure record sheet.............................................................. 17
Table 6.1 The reasons why managers at DHL Solutions measure performance................ 42
Table 7.1 SWOT-analysis of the present strategic management process........................... 60
Table 7.2 Main weaknesses and flaws with the present PM-process................................. 61


vii
TERMINOLOGY AND ABBREVIATIONS

Business Strategy Strategies for each strategic business unit derived
from the corporate strategy.
Operating Unit For the purpose of this thesis, an operating unit (or
simply a unit) is one of the 18 warehouses in Sweden.
Client In this paper, the clients are DHL Solutions
customers.
Corporate Strategy The overall strategy for the whole corporation (in this
case DHL Express and Logistics).
Customer For the purpose of this thesis, a customer is the
clients customer. That is, the receiver of goods.
General Thrusts Any general courses of actions a company takes in
order to move towards a new position (irrespective of
how these have been formulated or developed).
Headquarters If nothing else is said this denotes the Swedish
headquarters in Stockholm.
KPI Key performance indicator
Long-Term A time horizon over 3 years.
Managers All employees in the Swedish organization with a
functional or organizational responsibility. These are
represented at multiple levels in the organization (i.e.
managers at headquarters or operating unit managers).
Medium-Term A time horizon between 1 and 3 years.
Objectives The mid- to long-term goals the company tries to
achieve (either by use of strategic management, or
not).
Operating Plan The translation of the business strategy into a set of
activities and objectives.
Order lines The number of order lines in a customer order is equal
to the number of article types in that order.
Organizational Levels Individual level = Individual employees in Sweden.
Operational level = Where work gets done; processes
and departments in Sweden. Operating unit level =
Operating units in Sweden. Local level = The whole
Swedish organization with all its operating units.
Regional level = The whole organization of the
Nordic countries and UK. Corporate or top level =

viii
DHL Solutions whole organization (occasionally this
denotes the whole organization of DHL Express and
Logistics). Central level = Any organizational level
above the operating unit level.
Partial Measures Measures on a dimension of performance that do not
account for all aspects of the dimension connected to
monetary terms.
PM Performance measurement
PM-process The performance measurement process The whole
issue of performance measurement integrating the
view on performance measurement, the PM-system
and individual measures.
SBU Strategic business unit a definition in the discipline
of strategic management for a part of the company
which is not affected by strategies in other parts of the
organization.
Short-Term A time horizon shorter than 1 year.
Total Measures Measures on a dimension of performance which
reflects the whole dimension and cost decreases or
cost increases for that dimension.
VAS Value added service
INTRODUCTION


1
1. INTRODUCTION
This chapter begins with a short introduction to the problem area and then
continuous with a brief description of the case study company, DHL Solutions,
and a presentation of their specific problems. Further on, the purpose and
delimitations of the thesis is presented and the disposition of the paper is
outlined.
1.1 Introduction
Tough global competition, product proliferation, shorter product lifecycles as
well as advanced product and process technologies have forever changed the
formula for success in business.
1
During the last two decades service industries
have been a sector of importance and growth in the Western economies as they
operate in an increasingly competitive environment. Furthermore, the
competition has long since changed from simply being based on price to be
founded on a range of other complementary factors such as: quality; product
and service innovation; and flexibility of response to customer needs. Managers
of today have to develop strategies to be able to operate in these dynamic
environments.
2


The success and continuity of an organization depend on its performance,
which may be defined as: The way the organization carries its strategies and
objectives into effect. This requires that all noses are pointing in the same
direction, as every person in the organization contributes to the company
objectives via his or her activities. A good manager keeps track of the
performance of the system he or she is responsible for by means of
performance measurement (PM).
3
Bititci et al. (1997) states that:
The need for an integrated set of performance measures which supports rather
than contradicts business objectives is clearly established.

Since the business environment has changed and strategies have been altered
accordingly, companies obviously need to overlook and modify their existing
view on performance measurement in order to align it with the thrusts and
objectives of the new business era.
1.2 Background
DHL Solutions is one of four business areas in the global corporation DHL
Express and Logistics. They are primarily focused on third-party logistics

1
Lynch and Cross (1995)
2
Fitzgerald et al. (1996)
3
Flapper et al. (1996)
INTRODUCTION


2
(3PL); which means that they offer to manage the whole supply chain after
production for their clients. This includes services such as: warehousing,
inventory management and transportation management. See chapter 5 for a
more detailed presentation of the organization under investigation.

DHL Solutions in Sweden has not put enough effort on a comprehensive
redesign of their PM-system according to their present reality. Moreover, they
have seen many organizational changes during the past decade, including
changes of: corporate owners; reporting and information structure;
organizational culture; and management at top level. DHL Solutions have also
taken over some smaller businesses during these years.

These factors, in combination with a complex network of corporate directives
as well as local and central initiatives, have resulted in a situation where DHL
Solutions in Sweden have an out-of-date PM-system consisting of a
hodgepodge of numerous individual measures. Also, questions of what
measures to focus on are frequently raised and managers in the organization
experience that their present view on the PM-process have some shortcomings.
Therefore, managers at DHL Solutions headquarters in Sweden have decided
that a masters thesis is to investigate how they can overcome these flaws in
their PM-process. This leads to the purpose of this thesis stated below.
1.3 Purpose
The purpose of this masters thesis is to evaluate the view on performance
measurement, the present PM-system and instituted individual measures at
DHL Solutions in Sweden and then provide a comprehensive solution for how
they can improve these elements of their organization.
1.4 Delimitations
This thesis is limited to concern the Swedish operations of DHL Solutions only.
Furthermore, deeper investigations of operating units (i.e. warehouses) are only
carried out at four of the 18 units. In the study of the existing individual
measures, the work will concentrate on the measures operating unit managers
use for there own operations management and how the data for these measures
are generated; but also on how these measures are aggregated into total
operating unit measures to be reviewed by headquarters. However, the thesis
will not give any recommendations on how the operating units should monitor
individual client assignments.
INTRODUCTION


3
1.5 Problem Discussion
When regarding the present problems in DHL Solutions Swedish organization
as well as the actual purpose of this thesis a number of particularly interesting
problem areas can be defined. To be able to achieve the ultimate purpose and
improve DHL Solutions PM-process these problem areas, or questions, needs
to be answered in this paper. The questions are:
1. What is performance measurement?
a. Research and knowledge of individual performance measures.
b. How can a set of measures be integrated in a PM-system?
2. How do different characteristics of an organization affect PM?
a. External environment.
b. Corporate and business strategy.
c. Internal environment.
3. What is the present situation at DHL Solutions (Sweden) regarding PM?
a. Culture, policies and guidelines.
b. What individual performance measures are instituted today and
how are these measures designed and used?
c. Are these measures integrated in a PM-system and if so, how is
this system designed?
4. What kind of organization is DHL Solutions (Sweden) with regard to the
characteristics that affect performance measurement (see paragraph 2)?
5. What are the main weaknesses and flaws instituted in the existing PM-
process at DHL Solutions in Sweden?
a. View on performance measurement.
b. Design and use of individual measures.
c. The integration of these measures into a PM-system.
6. How can DHL Solutions in Sweden overcome these flaws in the future?
1.6 Outline of the Thesis
This masters thesis is divided into ten chapters. The contents of the chapters
are briefly outlined below.

Chapter 1 Provides the background to the problem area, purpose,
delimitations and problem discussion.
Chapter 2 Explains the research methodology used and presents a
discussion on methodological problems as well as weaknesses
and strengths in the study.
Chapter 3 Forms the theoretical base of research knowledge on which the
thesis rests.
INTRODUCTION


4
Chapter 4 Presents a frame of reference of the theories most important to
this thesis and a discussion on how they are correlated.
Chapter 5 Provides a detailed presentation of the case study company.
Chapter 6 Describes the current situation at the case study company and
the empirical findings of the study.
Chapter 7 Contains an analysis of the empirical results with regard to the
theoretical frame of reference; including a development of a
new performance measurement regime.
Chapter 8 Summarizes the conclusions that can be drawn from the
analysis.
Chapter 9 Contains recommendations regarding how the case study
company should pursue with further actions.
Chapter 10 Ends the thesis by providing a discussion on the conclusions and
recommendations presented.
METHODOLOGY


5
2. METHODOLOGY
In this section, the methodological approach to the project and the means of
data collection are presented. This section also contains a discussion of the
strengths and weaknesses of the study.
2.1 Research Approach
This thesis may be seen as a combination of a research project and a
development project. The former because there were some formalities that had
to be followed regarding scientific standards and research methodology brought
upon by the university. The latter because the real purpose of the study was to
develop the organization under investigation by using existing knowledge, not
to find generalized knowledge for the use by whomever.
4


Although, this thesis was aimed to evaluate the major weaknesses with the PM-
process at DHL Solutions and result in a greater understanding of the subject,
its primary purpose was to generate a set of recommendations for the company
to follow. Therefore, the level of ambition for the study was normative. That is,
it seeks a new norm to follow which hopefully, will lead to a healthier and
more successful organization.
5
The general research approach for the study was
qualitative. A qualitative study is one where the major purpose is to understand
the reality in a holistic way, not to prove specific phenomena.
4
In a qualitative
approach one tries to identify a phenomenon by examining the characteristics
of it.
5


To reach the purpose of the thesis, a case study methodology was adopted; with
parts of DHL Solutions in Sweden as the objects of investigation. A case study
is an attempt to take knowledge from a specific, limited part of a problem area
and then use this knowledge to explain the whole problem area. In this type of
methodology it is imperative to carry out a thorough and objective selection of
the parts that are to be investigated. One major danger with the case study
approach is that limiting the investigation to only concern a small part of the
problem area will result in that the generalized conclusions drawn might not be
representative for the whole problem.
6

2.2 Literature Review
To establish a theoretical base, with which empirical findings could be
compared in an analysis, the author of this thesis carried out a comprehensive

4
Homepage www.infovoice.se/fou/
5
Walln (1996)
6
Ejvegrd (1996)
METHODOLOGY


6
literature review. Several databases were used to find relevant literature
(primarily books on the subject and peer-reviewed articles published in
academic journals). The most frequently used databases were: Substansen (for
books at The University of Stockholm), Libris (for books in most of the
libraries in Sweden), Emerald and Business Source Elite Ebsco (for journal
articles). Additionally, literature was found via references in the articles
downloaded from these databases and in the possession of the author of this
thesis. Examples of keywords used in the search were: Performance
Measurement, Productivity and Third-Party Logistics.
2.3 Data Collection
The collection of data that was analyzed together with the theories obtained can
be divided into two types. Primary data is data that was directly collected by
the researcher in order to meet the purpose of the project. Secondary data, on
the other hand, is data that had been collected prior to the start of this project
for a purpose other than the project at hand.
2.3.1 Primary Data
The major source of data, that the analysis of the situation at DHL Solutions
was based on, was data obtained through a combination of structured and
unstructured interviews. These interviews were made in person with a selected
population of respondents in the company under investigation. The structured
interviews followed prepared interview guides specific for the respondents
management position (the guides are presented in appendices 1-3). The
unstructured interviews, on the other hand, were more like informal
conversations with observations of the processes at hand. The selection of
respondents was carefully carried out in close agreement with the supervisors at
the company. Deeper investigations with the use of structured as well as
unstructured interviews with managers were undertaken at four of the 18
operating units and at the Swedish headquarters. According to the sponsors and
supervisors of this project, these four units constitute a good representation of
the whole Swedish organization.

In the research of performance measurement at the company, different
dimensions of performance were equally investigated, with exception of the
productivity dimension, which was examined in more detail. This was due to
the fact that the project had started out with a focus on productivity. However,
in the end the deeper investigation of the productivity dimension was seen as an
example study of one of several dimensions of performance. The results from
the investigation of the productivity concept was somewhat generalized to
concern performance measurement as a whole. Also, for the performance
METHODOLOGY


7
dimension of customer satisfaction a brief benchmarking session was carried
out. Basically, this was a half-day visit to the consultancy firm CFI Group in
Stockholm. CFI Group is primarily focused on the business of consulting
organizations on the measurement of customer satisfaction; and based on this
they help organizations to formulate strategies to optimize the customer
satisfaction dimension and in the long run to enhance profitability.
2.3.2 Secondary Data
In addition to the interviews the thesis also considered data collected from DHL
Solutions business systems and previously documented material. The main
source of secondary data was the Excel-files used for data collection and
reporting of measures at the operating units.
2.4 Working Process
The main activities of the working process used to achieve the purpose of this
thesis are presented in Figure 2.1.


Figure 2.1 Working process
(Source: Authors own construct)
Interviews with
Heads of
Operating Units
Observations
and unstructured
interviews

Literature review

Interviews
with Heads
of Divisions
Conclusions
Present a set of recommendations, including a framework
for performance measurement, for DHL Solutions
Empirical Findings Theories
Analysis
Explore the strengths
and weaknesses with the
present performance
measurement system
Matching between organizational
type (external environment, internal
environment, corporate strategy)
and the way of measurement
METHODOLOGY


8
The first part of the project time, apart from problem specification, was
dedicated to the empirical study and the literature review, which were carried
out simultaneously. Subsequently, the results from these activities were cross-
analyzed. This enabled an assessment of strengths and weaknesses with the
present measurement system as well as a matching between this system and the
characteristics of the external environment, corporate and business strategy and
the internal environment. The conclusions drawn from this analysis constituted
the foundation for the development of a set of recommendations for DHL
Solutions to follow in order for them to improve their current performance
measurement process. The formulation of the recommendations, including a
tailored measurement framework, required a new review of relevant literature
before they were presented to the company.
2.5 Methodology Discussion
When deciding on what research approach to use in this masters thesis, the
fundamental determinant was whether the purpose should be to develop new
individual measures on for example the productivity dimension; or if it should
be to enhance organizational learning on the whole concept of performance
measurement. The former implies that a quantitative approach should be used
with a more mathematical or statistical experiment methodology. The latter, on
the other hand, implies that a qualitative approach should be used with a
methodology where the problem is attacked on a higher organizational level;
where functions and employees interact in a complex and unpredictable way.
Since the ultimate purpose of this project was to improve DHL Solutions
overall PM-process the research approach used was obviously qualitative.

At the outset of a project one also needs to reflect on what research
methodology to use. In this masters thesis the primary choice stood between
the case study methodology (where one studies a limited part of a problem in
order to enhance knowledge on the whole problem area) and the survey
methodology (which is based on data collection by using questionnaires on a
wide front in order to enable statistical comparisons). However, after some
consideration the most obvious research methodology to use for this project
was the case study methodology. Surveys are primarily used in the quantitative
research area and would be too limited to use for this situation, since the
purpose and the objectives of a qualitative study need to be somewhat flexible.
That is, to be able to deliver satisfactorily, a set of recommendations to the
company under investigation one must be able to slightly change the focus of
the data collection during the project. This is also the reason why qualitative
researchers seldom formulate clearly defined hypotheses to be tested in the
research.
METHODOLOGY


9

Irrespective of what methods for data collection that are being used, the
information gathered must always be criticized and regarded in a wider
perspective. In a research project, this can be accomplished by using the
concepts of reliability and validity. Reliability is a measure of the precision of a
data collection methodology. It measures to what extent the instrument or
procedure would generate the same results if repeated under similar
circumstances. Validity, on the other hand, is a measure of the relevance of a
data collection methodology. It should answer the question: Are instruments
and procedures measuring what they are supposed to measure?
7


In order to improve the probability of reaching high validity in the study, data
was collected from multiple sources in the organization. Information was
gathered primarily by structured interviews, but also by observations of the
processes and from documentations and data files. Also, data collection was
carried out at more than one management level of the company, which
enhanced the probability of reaching a comprehensive understanding of the
present situation by enabling an analysis of the congruency between different
data sources.

Since there are trade-offs between validity and reliability in the interview
situation (i.e. structured interviews enhances the reliability whereas
unstructured interviews results in a higher validity), the interview guides
needed to be carefully designed. For this project, a mix of open-ended and
closed questions was used. Since the interviews were conducted in Swedish
there was a risk of translation errors in the results presented. This risk was
minimized by letting the respondents read and correct the empirical results
before moving on to the analysis of these results.

Although, the case study approach could perhaps have been used with more
care, the major weakness of this thesis does not lie in the methodology used.
Rather, it is the delimitation of the problem area that will primarily have a
negative effect on a successful implementation of the recommendations
presented in this paper. This is largely due to the characteristic of strategic
management and performance measurement as being complex and
comprehensive issues. All levels of the organization (also including those not
regarded in this project) will affect and be affected by these two issues.
Therefore, a successful execution of the recommendations is dependent on how
effectively the Swedish organization can demarcate themselves from the rest of
the organization.

7
Bell (2000)
THEORY


10
3. THEORY
This section consists of the wide array of theories obtained from the literature
review. The presentation starts with overall theories affecting the subject and
ends up with the more specific concept of productivity.
3.1 External Business Environment
Since the beginning of the 90s, it has been more clearly recognized that
performance measurement system design depends on three interacting
variables. These variables are an organizations external environment, its
chosen corporate and business strategy, and its internal environment.
8
This
section and sections 3.2 and 3.3 will briefly explain these variables.

The external environment of an organization includes variables such as: the
state of the macro economy; the degree of government regulation; and the
interplay of Porters Five Forces.
8
The first two of these variables can be
analyzed in an environmental scanning process on the four elements known as
the STEP-elements. These elements are:
9

Sociocultural environment: Including the demographic structure of
markets, as well as attitudes and opinions of customers.
Technological environment: This element involves the innovation of new
technologies affecting products, processes, distribution or administration.
Economic and competitive environment: Macro- and micro-economic
conditions which affect the structure of competition.
Political and legal environment: This element covers the external forces
covered by governments or trade associations.

The Five Forces Model is more oriented to the process of competitor analysis.
The model is a useful starting point in this process as it enhances the
understanding of the competitive environment at the macro level. The Five
Forces to analyze are:
9

The bargaining power of suppliers
The bargaining power of customers
The threat of new entrants (i.e. new competitors on the market)
The threat of substitute products and services
The rivalry among current competitors

8
Brignall and Ballantine (1996)
9
Brassington and Pettitt (2000)
THEORY


11
3.2 Corporate and Business Strategy
To achieve the ultimate goal of this masters thesis, the analysis of the present
situation as well as the recommendations themselves must partly be based on
the wide concept of strategic management. The discipline of strategic
management is an organizational and management process incorporating such
elements as individual strategies, strategic thinking, strategic planning and
strategy implementation. In strategic management, the aim is to ensure that
management continuously set and achieve appropriate strategic objectives. In
this context, appropriate means objectives and strategies that reflect the
following three realities:
10

The aspirations and expectations of the leadership
Circumstances and trends in the external environment (e.g. marketplace-,
competition- and STEP-factors), and the organizations competitive
position within that environment
The organizations capabilities to successfully carry out the strategies
selected

In large enterprises, which are competing in more than one type of business,
strategic management operates at two distinct levels. At the highest (corporate)
level, strategic management is the process by which the management of a
multi-business creates its future through structuring and managing the portfolio
of businesses. At the next (individual business) level, strategic management is
the process by which management creates the future of the business through
setting long-term objectives, formulating a plan to accomplish these, and then
achieving the sustained focus required to realize the desired outcomes.
10


In summary, there are four principal parts of the strategic management process
(see Figure 3.1). First, corporate top management formulates a strategy for the
enterprise as a whole stating the general path to follow (i.e. definition of
businesses, general strategies and preliminary resource allocations). This is
known as the corporate strategy. Second, each business area, or in other ways
defined parts of the enterprise (commonly denoted Strategic Business Units,
SBUs), formulate their own strategic plan (their business strategy) based upon
the knowledge established during the first step. When consensus between these
two parts of the process has been attained, each SBU can continue by
translating their generic SBU-strategy into an operating plan with clearly
defined action steps. This enables the SBU to successfully implement each
selected strategy on the operational level. Finally, the implemented strategy
needs to be aligned with organizational systems such as budgets and

10
Judson (1996)
THEORY


12
information systems. Basically, the effectiveness of the strategic management
process depends on how closely management can align and make fit the four
parts of the process mentioned above.
10



Figure 3.1 Strategic management
(Source: Interpretation from Judson, 1996)
The purpose of this thesis implies that the focus on strategic management can
be limited to only concern the last two parts of the process the operating plan
and organizational systems (particularly the connection to performance
measurement) when it comes to subsequent investigations on the subject.
Where the business strategy is oriented primarily to the firms external
environment and typically has a long time horizon, the operating plan is more
focused on the internal environment and addresses organizational changes
required to achieve the strategic business objectives. The operating plan helps
management drive strategic implementation by stimulating cross-functional
understanding, specifying the resources required, establishing commitment
among the employees and lay out the processes for measuring and monitoring
progress. See appendix 7 for a comprehensive explanation of how DHL
Solutions can formulate an operating plan (including a tailored performance
measurement system) based upon their generic business strategy.
10

Market Strategy
Another interesting aspect of the strategy formulation-process on the macro
level is the choice of market strategy. That is, on which markets and how does
the company intend to compete? Fundamentally, the objectives of a market
strategy are to create superior customer value and to create economic value for
Corporate Strategy
Business Strategy
(Each SBUs strategic plan)
Performance
Measurement
Budgets Reward Systems Information Systems
and Communication
Operating Plan
Organizational Systems
THEORY


13
the owners of the business. Although, the latter can be seen as a result of a
strategy that succeeds in the former. Slater et al. (1997) presents four general
market strategy types that corporations pursue in order to meet these objectives.
In truth, few businesses follow a single strategy type. Most combine elements
from two or three types, with one being dominant. The strategy types are:
Product leaders: Companies with this strategy seek to identify emerging
opportunities and continuously strive to develop and deliver new
products that exceed existing performance boundaries. This is the
strategy of companies such as Intel or Microsoft. The key task for
product leaders is to maintain an environment where creativity can
flourish.
Customer intimacy: This is the strategy that is used by, for example,
IBM. These kinds of companies concentrate their efforts on building
strong relationships with a selected group of customers. The company
has a deep understanding of customer needs and the customers, on the
other hand, are willing to pay a higher price for the service or special
attention they receive. Accompanying this orientation is a focus on the
lifetime value of a relationship, not just the profit of an individual
transaction.
Brand champions: The mass market counterparts of customer-intimate
businesses. Companies such as Coca-Cola and Procter & Gamble invest
heavily in advertising to build up the values of their brands. The
foundation skills of brand champions are superior marketing capabilities.
Operational excellence: The discipline of companies that offer the
lowest total cost to their customers. These companies often have a strong
commitment to standardization and simplicity, and it is common that
they emphasize the use of information technology.
3.3 Internal Business Environment
An organizations internal environment encompasses such factors as the style
of corporate/SBU relationship, the formal and informal organizational
structure, the organizational culture and history, and the organizations process
type.
8

3.4 Performance Measurement
In a sense, all organizations measure performance. They may do it
systematically and thoroughly, or on an ad hoc-basis and superficially, but they
do it. The bottom line is that organizations have to track and monitor events to
be able to know what they are doing. Or as Lord Kelvin (1824-1907) once put
it:
THEORY


14
When you can measure what you are speaking about, and express it in
numbers, you will know something about it.

Organizations measure performance for many different reasons. Some of the
reasons may be to:
11

Identify success
Identify if they are meeting customer requirements
Help them understand their processes: to confirm what they know or
reveal what they do not know
Identify where problems, bottlenecks or waste exist and where
improvements are necessary
Ensure decisions are based on fact, not on supposition, emotion, faith or
intuition
Show if improvements planned, actually happened

According to Neely et al. (1995) the level of performance a business attains is a
function of the efficiency and effectiveness of the actions it undertakes. In this
statement, efficiency is a question of doing the things right, whereas
effectiveness is a question of doing the right things.
12
With this in mind we can
make the following definitions:
13

Performance measurement: The process of quantifying the efficiency
and effectiveness of actions.
A performance measure: A metric used to quantify the efficiency and/or
effectiveness of an action.
A performance measurement system: The set of metrics used to quantify
both the efficiency and effectiveness of actions.

One specific type of performance measures is the so called key performance
indicator (KPI). A KPI is, as the name reveals, a performance measure that is a
key to success for the organization. The KPIs are aggregated measures of
performance that are important to the core competencies or critical to the
competitiveness of an organization. The use of KPIs stems from the concept of
critical success factors (CSFs), which were developed in the late 70s. CSFs
can be defined as: Those few critical areas where things must go right for the
business to flourish.
1
In other words, KPIs are the set of performance measures
that a manager need to track to be able to know how the organization under his
or her responsibility is functioning.

11
Parker (2000)
12
Vuorinen et al. (1998)
13
Neely et al. (1995)
THEORY


15

The academic literature on performance measurement is diverse, and different
authors emphasize different perspectives of the topic. Although, one common
recommendation among authors is that performance measures and performance
measurement systems should be derived from corporate and business strategy.
That is, there should be a closed management loop with the deployment of
strategic objectives and the feedback through measures.
8, 14, 15, 16, 17 and 18


Judson (1996) also promotes this idea by stating that performance measures
and reporting systems established to track organizational performance are not
strategically neutral. By this he means that every measure of performance, once
instituted, focuses the attention of every manager and employee concerned on
the issue that is being measured. Hence, what is being measured and tracked is
signaled as important; to be given a higher priority than other matters. This is in
fact one of the purposes of performance measures. Conflicts arise when there is
little relationship between the aspects of organizational performance that are
being measured, and the aspects that are critical to the successful execution of
the strategy.
3.4.1 Performance Measures
The concept of performance measurement has historically been focused on
financial measures, such as sales turnover, profit and return on investment.
However, traditional financial measures do not match entirely with the
competencies and skills companies require to face todays business
environment.
19
In fact, there has been a lot of criticism on the role of financial
measures during the past two decades. This is primarily due to the fact that they
reflect the results of management actions and organizational performance, not
the cause of it.
8
In other words, financial measures have a backward-looking
focus. Furthermore, traditional measures have a tendency to focus on
individuals or functions, rather than on the processes that are at the core or the
organization as a whole. Additionally, traditional performance measures
encourage a short-term vision due to their lack of strategic focus. Another
dangerous shortcoming of financial measures is that they have a strong
emphasis on control. This makes individuals more concerned with conforming

14
Bititci et al. (1997)
15
Neely et al. (1997)
16
Slater et al. (1997)
17
Sinclair and Zairi (2000)
18
Tangen (2003)
19
Kanji (2002)
THEORY


16
to standards than with continuously improving. As a consequence, they
encourage local optimization.
19


In order to meet this criticism on financial measures, a new way of looking at
performance measurement was developed. Important works by R. S. Kaplan,
among others, in the late 80s and the early 90s seriously changed the
knowledge and practice of accounting and performance management.
20
The
emphasis now is to complement the financial measures with measures built
around other perspectives as well. Or as Sinclair and Zairi (2000) puts it:
Performance should no longer be measured by financial measures alone. A
wider, more balanced range of measures is required. [] Measures should be
used as a part of the management process to improve performance, rather than
standards to be met.
Managers must also have in mind that developed measures are not cast in
stone and that areas which need to be measured will change over time, as
strategies change.

There are a wide range of recommendations on how to develop and use
performance measures and KPIs. Neely et al. (1997) presents a summary of
these recommendations in their ambitious review of the literature on the
subject. Table 3.1 (on the next page) presents the most interesting of these
recommendations for the purpose of this thesis.

Neely et al. used this knowledge to develop a framework for the design of
performance measures. Table 3.2 shows this framework, the performance
measure record sheet, which seeks to specify what a good performance
measure constitutes. The framework ensures that a developed measure follow
the recommendations presented above if the measure is clearly specified on
each element of the record sheet. An explanation of the ten elements in the
record sheet and their relationship to the recommendations summarized in
Table 3.1 are presented in appendix 4.


20
Kaplan and Norton (1992)
THEORY


17
Table 3.1 Recommendations with regard to the design of performance measures

(Source: Neely et al., 1997)

Table 3.2 The performance measure record sheet

(Source: Neely et al., 1997)

Elements Details

Title
Purpose
Relates to
Target
Formula
Frequency
Who measures?
Source of data
Who acts on the data?
What do they do?
Notes and comments

Recommendations

1. Performance measures should be derived from strategy
2. Performance measures should be simple to understand
3. Performance measures should provide timely and accurate feedback
4. Performance measures should be based on quantities that can be
influenced, or controlled, by the user alone or in cooperation with others
5. Performance measures should relate to specific goals (targets)
6. Performance measures should be relevant
7. Performance measures should be part of a closed management loop
8. Performance measures should be clearly defined
9. Performance measures should focus on improvement
10. Performance measures should have an explicit purpose
11. Performance measures should be based on an explicitly defined formula
and source of data
12. Performance measures should employ ratios rather than absolute numbers
13. Performance measures should use data which are automatically collected
as part of a process whenever possible
14. Performance measures should be based on trends rather than snapshots
15. Performance measures should be precise be exact about what is being
measured
16. Performance measures should be objective not based on opinion
THEORY


18
3.4.2 Performance Measurement Systems
The need to integrate the performance measures obtained in a system is two-
fold. First, as Sinclair and Zairi (2000) points out, it is imperative to convey
information through as few and as simple a set of measures as possible. These
measures must be analyzed as an entity in order to avoid redundancies and to
find a balanced set of measures. Second, measures need to be part of a
comprehensive system which integrates the goals of everyone in the
organization, in a way that enables them to work together for the benefit of the
organization as a whole.

In response to the dissatisfaction of traditional performance measures, a
number of frameworks and models were developed in the early 90s to support
companies in their process of measuring performance. Among the most widely
cited are the balanced scorecard and the performance pyramid.
8
These
performance measurement models are explained briefly below.
The Balanced Scorecard
Kaplan and Norton made a significant contribution in overcoming some of the
limitations of traditional performance measurement systems by linking them to
strategy. They developed a balanced scorecard, which was first presented in
1992. It is a comprehensive performance summary that complements financial
measures with operational measures, which are the drivers of future financial
performance. The word balanced calls attention to the fact that the system
must combine financial and non-financial measures.
19
The set of measures can
be grouped into four main perspectives (i.e. dimensions of performance), which
respectively enable managers to answer four important questions about their
organization. These are:
15

How do we look to our shareholders (the financial perspective)?
What must we excel at (the internal business perspective)?
How do our customers see us (the customer perspective)?
How can we continue to improve and create value (the innovation and
learning perspective)?

Slater et al. (1997) explains these perspectives further. The financial
perspective is concerned with identifying the key financial drivers in creating
value for the shareholders. Measures on financial performance are outcomes
(i.e. lagging indicators) and hence, they tell us what has happened in the past.
The internal perspective is primarily concerned with the efficiency of the entire
business system. It will be most useful when it views the firm as a system of
business processes, all of which must be coordinated for the purpose of creating
THEORY


19
customer value. The customer perspective includes measures of corporate or
brand awareness, customer satisfaction, customer retention, and customer
profitability. Customer focused measures may be leading indicators (i.e. they
predict the future) of what the financial measures will later reveal. The
innovation and learning perspective is concerned with how effectively the
business can adapt to changing conditions with the development of new
products and services or the improvement of internal processes.

The balanced scorecard gives a holistic view of the organization by
simultaneously looking at the four important perspectives discussed above. It
enables companies to track financial results while, at the same time, monitoring
progress in building the capabilities and acquiring the assets they need for
future growth. One of the reasons the balanced scorecard is such a powerful
tool is that it stresses the linkages for achieving outstanding performance in
related measures, rather than concentrating on isolated measures. It provides
managers with a sense of interdependency among different organizational
areas. Moreover, the balanced scorecard avoids information overload by
helping organizations concentrate on a limited number of critical measures.
19


In spite of the advantages of the balanced scorecard mentioned above some
authors actually stresses that the scorecard should not in fact, be balanced.
Slater et al. (1997) claims that the performance measurement system must be
matched with market strategy (presented in section 3.2). In other words, it
should be evident that different market strategies and competitive conditions
call for different measurement systems. Although the financial perspective is
important regardless of strategy, companies with a certain market strategy type
should emphasize one of the other perspectives. Product leaders must
concentrate on the innovation and learning perspective when it comes to
performance evaluation. Customer-intimate businesses naturally focus on
understanding the customer and his perception of the value of the product or
service offered (the customer perspective). Brand champions should also
emphasize the customer perspective in their performance measurement system.
Operationally excellent businesses want to emphasize the internal perspective
because of their focus on efficiency. See Figure 3.2 for examples of measures
that can be obtained by companies using the different market strategies.

THEORY


20

Figure 3.2 Strategy-specific performance measures
(Source: Slater et al., 1997)
The Performance Pyramid
In 1991 Richard Lynch and Kelvin Cross released their book Measure Up!
Yardsticks for continuous improvement. It is an ambitious and thorough
explanation of a new performance information network. The work stems from
the failure of traditional performance measurement systems to meet the needs
of managers in the new business era. The failures led the authors to three
conclusions about what performance measures should do:
1

Measures must link operations to strategic goals. Departments and
functions should know how they are contributing separately and together
in meeting their strategic mission.
The system has to integrate financial and non-financial information in a
way that is usable by operating managers. Also, management and
employees need the right information at the right time to support
decisions.
The measurement systems real value would lie in its ability to focus all
business activities on customer requirements.
ALL STRATEGIES
The financial perspective
Return on capital
Earnings growth
Sales growth
Asset turnover
Operational Excellence
The internal perspective
Product cost
Inventory level
Time in process
Throughput efficiency
Customer Intimacy
The customer perspective
Customer satisfaction
% of targets business
Customer retention rate
Reasons for defection
Brand Champion
The customer perspective
Price premium
Perceived quality
Relative value
Brand awareness
Product Leadership
The innovation perspective
% sales, new products
Time to market
Customer value
Target revenue and ROI
THEORY


21
These conclusions led them to the development of the performance pyramid, a
tool that supports the design of new performance measurement systems or the
reengineering of existing ones.

From an external point of view, the customers and the stockholders determine
what is important to measure, whereas the competition determines how good
the performance in those measures needs to be. Successful manufacturers and
service companies have been competing on three fronts: customer satisfaction,
flexibility, and productivity. A valuable lesson from the Japanese is the order in
which these weapons should be mastered: customer satisfaction first,
productivity second, and then finally flexibility.
1


The performance pyramid, shown in Figure 3.3, represents linked building
blocks in the performance information network. A four-level pyramid of
objectives and measures ensures an effective link between strategy and
operations by translating strategic objectives from the top down (based on
customer priorities) and measures from the bottom up.
1



Figure 3.3 The performance pyramid
(Source: Lynch and Cross, 1995)
At the top level, a vision for the business is articulated by corporate senior
management. Objectives are then defined in market and financial terms for
each strategic business unit at the second level and strategies are formulated,
External
effectiveness
Internal efficiency
Corporate
vision
Customer
satisfaction
Flexibility Productivity
Market Financial
Delivery Cycle time Quality Waste
Strategic
business units
Core business
processes
Departments,
groups, and
work teams
Objectives
Measures
THEORY


22
describing how these objectives will be achieved. At the third level, more
tangible operating objectives and priorities are defined in terms of customer
satisfaction, flexibility, and productivity for each core process supporting the
business strategy. At the base of the pyramid, objectives are converted into
specific operational criteria (quality, delivery, cycle time, and waste) for each
department or component of the business system. These levels of the pyramid
are explained in more detail in the following paragraphs.
1


The purpose of formulating a vision is to bare the heart and soul of the
company as well as setting its strategic course. The vision defines the markets
in which and the basis on which the company plans to achieve its goals. Some
of the major bases on which companies compete are: price, product innovation,
product differentiation, product quality, product availability, quality of sales
force, after-sales service, and financial aid to customers.
1


Most strategic business units define success in terms of (1) achieving the long-
term goals of growth and market position and (2) achieving the short-term
goals of specified levels of positive cash flow and profitability. Market
measures are external measures, driven by the customer. They can include
measures such as: absolute market share, relative market share, share to largest
competitor and new product sales. The financial measures, although
traditionally emphasized, only represent (at best) half the picture. Still,
financial measures are valid top-level measures for the business as a whole and
for each of its strategic business units. The need for change is instead the
overemphasis of these measures in the short run and how objectives get
translated into day-to-day operations.
1


Core business processes are the bridge between the top level traditional
indicators and the day-to-day operational measures in the performance
pyramid. They include all internal functions and processes that are required to
follow a particular business strategy. The new product introduction process, the
order fulfilment cycle, and customer services are all examples of such core
processes. The objectives for these core processes, as well as for top
management, are balanced on the three factors of customer satisfaction,
flexibility, and productivity. Yet it is not unusual for companies or processes to
pay more attention to one of these factors. At the core process level of the
pyramid there are actually two kinds of measures. Global measures provide top
management with a sense of whether strategic objectives are being achieved.
They should be monitored month-to-month or quarter-to-quarter. Specific
workflow measures, on the other hand, represent day-to-day measures of
operating effectiveness and efficiency. They are calculated by rolling up the
THEORY


23
four performance measures (on the quality, delivery, cycle time, and waste
criterions) in each department.
1


Any effective control system must be based on a tightly defined linkage
between measurements at the operational level (the base of the pyramid) and
the objectives and priorities of the core process. The elements of this linkage
are found in four principal, local operating performance criteria: quality,
delivery, cycle time, and waste. The objective of any function or department in
the core process is to increase performance in quality and delivery and to
decrease cycle time and waste. These four dimensions of performance are
briefly explained below.
1

Quality
Quality means meeting customer expectations 100 percent of the time through
the delivery of defect-free products or services. Poor quality is when a client
has been delivered a service that does not meet their expectations (e.g. it failed
to solve the problem or it was not delivered in a friendly and reliable way).
High-quality services or products will ultimately affect the customer
satisfaction dimension in a positive way.
1

Delivery
Delivery involves the quantity of products or services being delivered on time
to the customer. Poor delivery performance includes incorrect shipments,
shipments to the wrong location, and incomplete as well as late shipments.
Regular on-time and correct deliveries will increase customer satisfaction and
flexibility.
1

Cycle Time
Cycle time refers to the total elapsed time from when a unit of work enters a
process until it exits the process. As such it is the sum of process time, move
time, inspect time, queue time and storage time. Typically, only five percent of
the total cycle time is devoted to any hands-on processing activity. Hence, the
product or service is waiting to be worked on 95 percent of the time. There are
often great opportunities for improvement to be found by focusing on cycle
time reduction. Unnecessarily long cycle times contribute directly to poor
strategic performance regarding productivity and flexibility.
1

Waste
Waste is the non-value added activities and resources incurred in meeting the
requirements of the customer. Waste includes all the effort and costs associated
with failures, appraisals and surpluses. It means that effort expended in
THEORY


24
repairing defects or in producing 110 units to get out 100 good ones is not poor
quality performance, it is poor cost performance (i.e. waste). At the core
process level, the main objective is to improve productivity by reducing overall
costs. At the department level, the objective becomes more specific: measure
and eliminate waste.
1

3.4.3 Productivity
One of the most emphasized and examined dimension of performance (apart
from strictly financial measures) is that of productivity. This especially holds
for the manufacturing industry where an output oriented, cost efficient view
was early adopted. Although widely used, the concept and definition of
productivity is heavily debated in the academic literature. According to Neely
et al. (1995) for instance, productivity is a measure of how well resources are
combined and used to accomplish specific, desirable results and is
conventionally defined as the ratio of output to input.

Although the term productivity is often ill-defined, its measurement is
generally that of a prescribed output to the resources consumed (i.e. the inputs).
Productivity measures can be divided into three main types:
Partial measures: A ratio relating output to a single input, such as
labour, materials or capital.
Total factor or value-added productivity: Based on sales less bought-in
goods, materials and services.
Total productivity measures: A ratio of total output to total input.
Additionally, total productivity can be expressed as the overall measure of
economic effectiveness. This measure should be expressed as the output in
relation to all resources utilized, as follows:
21

Q E C M L
O
TP
+ + + +
=

Where: TP = total productivity O = total output
L = labor input M = materials input
C = capital input E = energy input
Q = other inputs

The equation above implies that higher productivity can be achieved in a
number of ways, including:
13

Increasing the level of output faster than that of the input

21
Stainer (1997)
THEORY


25
Producing more output with the same level of input
Producing more output with a reduced level of input
Maintaining the level of output while reducing the input
Decreasing the level of output, but decreasing the level of input more

Although the measurement of productivity seems to be straight-forward, simple
and useful, productivity measures were developed in and for manufacturing
companies. Therefore, they are based on quantities of standardized and clearly
identified units of measurement. However, the large variance in the content and
quality of the input and output of service firms seems to make such measures
inappropriate.
22
Basically, the problems of instituting productivity measures in
a service firm can primarily be explained by some distinct characteristics of
services in comparison with manufacturing. These characteristics are the
intangibility and heterogeneity of the outputs, the simultaneity of production
and consumption and the perishability of services (that is, they cannot be
stored).
2
Normally, because of these characteristics, only measures of partial
productivity can be obtained. These types of measures may be interesting
pieces of efficiency information but they give no information about how
effectively the service operation as a whole transforms all used input resources
into customer value and ultimately into economic results for the service
provider. What appears to be improved productivity in terms of better
production efficiency may turn out to have a negative effect on perceived
service quality, customer value and in the final analysis, on the economic result
of the firm.
23


Vuorinen et al. (1998), while comparing productivity between services and
manufacturing, claims that the special characteristics of services demand a
more holistic approach including a customer-orientation to productivity. More
specifically, they argue that quality and productivity can not be dealt with
separately in the case of services. As a result of this knowledge, they define
service productivity as the ability of a service organization to use its inputs for
providing services with quality matching the expectations of customers. That is,
the quantity and quality dimensions of service offerings cannot be treated in
isolation. Due to their interrelationship, it may be impossible to separate the
impact of a service process on conventional productivity from its impact on
service quality. Hence, both the quantity and quality aspects must be
considered together to provide a joint impact on the total productivity of the
service firm.

22
Nachum (1999)
23
Grnroos and Ojasalo (2004)
THEORY


26

The productivity concept can also be seen in the context of the performance
pyramid (presented in section 3.4.2). The new view on productivity
measurement this framework entails is formed under a simple assumption:
faster cycle times and elimination of waste improve productivity and enable
lower prices and increased sales, which in turn improve financial performance.
Figure 3.4 shows some of the relationships between the local operating
measures and the financial results, with focus on how to increase productivity
and at the same time increase the profitability.
1



Figure 3.4 Relationships between operating measures and financial results
(Source: Lynch and Cross, 1995)
Productivity, according to Lynch and Cross (1995), refers to how effectively
resources (including time) are managed to achieve the customer satisfaction
and flexibility objectives. Productivity is typically the driving force when firms
compete on the basis of price. It is an internally driven force, with much focus
on the financial side of the performance pyramid. It is not directly perceived by
the customer; however, of the three driving forces (productivity, flexibility and
customer satisfaction), it is often productivity that gets most of the attention.
Productivity should be viewed in the context of the most cost-effective and
timely means of achieving the customer satisfaction and flexibility objectives.



Increased sales
More customers
Faster
cycle time
Less waste
Lower General and Administrative expenses
Lower operating expenses
Increased profits
Increased revenues
Improved cash flow
Improved return on investment
Reduced price
Improved
quality
On-time
delivery
THEORETICAL FRAME OF REFERENCE


27
4. THEORETICAL FRAME OF REFERENCE
This chapter examines the relationships between the different theories
presented in the previous chapter. Here, the theoretical base is conceptualized
in a frame of reference for the purpose of this thesis.
4.1 Performance Measurement at the Macro Level
The discipline of performance measurement can be analyzed at two levels: the
macro level, which puts performance measurement in an organizational
context; and the micro level, where the details of the performance measurement
system and individual measures are examined. In this section, the concept of
performance measurement viewed at the macro level will be discussed.

The study of performance measurement at the macro level is primarily focused
on the characteristics of an organization that will affect the concept and
execution of measurement. Such characteristics, or factors, can be grouped
under three main areas which respectively answer the following questions:
8

Why should the company measure its performance?
What dimensions of performance should they focus on?
How should measurement be executed?
The answers to these questions can respectively be found in the external
business environment, the chosen corporate and business strategy and the
internal business environment. Hence, the theories presented in sections 3.1-3.3
must be regarded in order for an organization to set out on the process of
improving their view on performance measurement.

In Figure 4.1, the theoretical frame of reference at the macro level is presented.
The figure displays the main factors of each area and examples of how these
factors may affect performance measurement. The external environment will
ultimately affect such elements as the required level of information and the
frequency of measure development (i.e. PM planning horizon); whereas the
internal environment probably have an effect on the measurement reporting
structure and the climate of accountability. The subject of corporate and
business strategies, on the other hand, have to be seen from a slightly different
angle. Actually, it is both a determinant of which perspectives to focus on in the
measurement system, but also, it is a part of the measurement development
process as the discipline of strategic management puts the concept of
performance measurement in a wider context. In strategic management, the
development and implementation of performance measures comes after the
process of translating the business strategies into an operating plan.

THEORETICAL FRAME OF REFERENCE


28

Figure 4.1 Theoretical frame of reference for the macro level
(Source: Authors own construct)
This thesis is delimited to only concern the Swedish organization of DHL
Solutions. Moreover, the scanning of the external environment and the answer
to the why of performance measurement is probably a matter for a higher level
of the organization. Therefore, the following chapters will primarily be focused
on the strategy process (particularly the translation of strategies into operational
terms) and the internal environment.
4.2 Performance Measurement at the Micro Level
To be able to show a comprehensive picture of the concept of performance
measurement and to form a useful set of recommendations for DHL Solutions
to follow, the process of performance measurement needs to be investigated on
External Environment
The Why of PM
Corporate and Business Strategy
The What of PM
Internal Environment
The How of PM
Factors such as:
Business climate
Regulations
Competition
Power of clients
Factors such as:
Org. structure
Culture
Process type
Relations
PM
Reporting
PM
Accountability
Strategic Management
(Putting PM in a
wider perspective)

Corporate Strategy


Business Strategy


Operating Plan
PM
Characteristics of an organization affecting
performance measurement
PM planning
horizon
Need for
information
Requirements
on PM targets
Market Strategy
What perspectives
to focus on in the
PM-system and
congruence
between these and
the Pyramid
THEORETICAL FRAME OF REFERENCE


29
a more detailed micro level (see Figure 4.2). At this level, performance
measurement can be seen as a subsequent step in the process of strategic
management. Performance measures are basically instituted to monitor the
strategy implementation progress. However, even when strategies are well
known and measures are derived from these strategies, there are some general
recommendations to follow when establishing a performance measurement
system with a set of individual measures.


Figure 4.2 Theoretical frame of reference for the micro level
(Source: Authors own construct)
At this level of the analysis one must regard both the system aspect and the
individual measure aspect of the subject of performance measurement.
Although, they are supported by different kinds of tools and models these two
aspects are not separable or sequential; in fact, they are interacting. That is,
without individual measures, you will not have a system and without a system,
you will not know if the measures instituted are relevant.

In this thesis, the system aspect is investigated primarily by using the
performance pyramid (see section 3.4.2). However, this model is supported by
the model of the balanced scorecard. The aspect of individual metrics is
examined principally by using the performance measure record sheet (see
section 3.4.1).
The Why
of PM
The What
of PM
The How
of PM
The performance
measurement system
The balanced
scorecard model
The performance
pyramid
Individual performance
measures
The performance
measure record
sheet
STRATEGIC MANAGEMENT
THE ORGANIZATION UNDER INVESTIGATION


30
5. THE ORGANIZATION UNDER INVESTIGATION
This section consists of a more detailed presentation of the company under
investigation, where the organization of the whole corporation and the parts
examined are outlined. The whole chapter is based on information from DHL
homepage, brochures and interviews.
5.1 The Corporation DHL Express and Logistics
In 2003 the three express and logistics companies DHL Worldwide Express,
Danzas and Deutsche Post Euro Express merged into one large corporation
under the name DHL Express and Logistics (or simply denoted DHL). This
merge was initialized by the mutual owner Deutsche Post World Net. DHL
have a wide array of services and offers a one-stop-shopping opportunity for
customers in more than 220 countries.

With annual revenues of nearly 22 billion Euros in 2003 and more than 160.000
employees in approximately 5.000 offices, DHL is the global market leader of
the international express and logistics industry. To cover all their customers
service needs, DHL is divided into four specialized businesses (see Figure 5.1).
These are:
DHL Express: Offers parcel transportation services.
DHL Freight: Offers road or rail freight of part or full loads.
DHL Danzas Air & Ocean: Offers worldwide logistics solutions for air
and sea freight.
DHL Solutions: Provides tailor-made contract and industry-specific
logistics solutions. From consulting to supply chain design, from storage
and sales logistics to production and order management.
5.2 The Business Area DHL Solutions
DHL Solutions is primarily focused on delivering 3PL-services to
manufacturing companies. In order to provide as experienced and skilled
employees as possible in their services, DHL Solutions is divided into industry-
specific sectors. Examples of such sectors are Fast Moving Consumer Goods,
Automotive, Pharma/Healthcare, Electronics/Telecom and Fashion. In all of
these sectors, DHL Solutions produce their services in multi-user (more than
one client in the same facility) as well as one-user warehouses. This enables
manufacturing companies to hold inventory at a local level, while holding
down their expenses.

The headquarters of DHL Solutions for the Nordic countries and the UK are
located in Stockholm. The managers at this regional level have a strategic and
THE ORGANIZATION UNDER INVESTIGATION


31
selling responsibility. Below the regional level, management is divided
between the different countries. At those local levels managers have an
operational responsibility (i.e. the delivery of services).

DHL Solutions in Sweden has 18 warehouses (referred to as operating units)
located between Malm in the south and Stockholm in the north. These
operating units are organizationally separated into two divisions, Division
Consumer and Division Industrial, based on the types of clients they handle
(clients with consumer products or clients with industrial products). Division
Consumer consists of 11 operating units with about 40 warehousing clients all
together. Division Industrial, on the other hand, consists of seven operating
units with a total client base of approximately 20 clients. See Figure 5.1 for a
presentation of the organization.


Figure 5.1 Organizational structure at DHL and DHL Solutions
(Source: DHL Homepage and personal interviews)
DHL Freight DHL Danzas Air
& Ocean
DHL Solutions
DHL Express and Logistics
DHL Solutions
Europe North/UK
Denmark Sweden Norway Finland UK/Ireland
Division
Consumer
Division
Industrial
Other Operating Units Other Operating Units
Operating unit A
Operating unit B
Operating unit C
Operating unit D
DHL Express
THE ORGANIZATION UNDER INVESTIGATION


32
5.2.1 Operating Unit A
The 14 500 square meter warehouse referred to as operating unit A organized
under Division Consumer and managed as a unit in the Pharma/Healthcare
sector. Approximately 90 percent of the turnover at the unit comes from
handling of pharmaceuticals. These products are stored at the warehouse and
then, on order, distributed (the distribution process is not owned by the unit) to
the clients customers in the Nordic countries. The largest client (about 80
percent of the turnover) is the pharmaceutics corporation client x. Operating
unit A has a workforce of between 22 and 26 employees.
24

Distinctive Features
The handling of pharmaceuticals demands several specific processes. One such
process is the quality control, which is initiated by the clients but also regulated
by the pharmaceutical state departments of the Nordic countries and the
European Union. Many activities in the warehouse are affected by these
regulations, which are stated in a diverse set of documents and contracts.
Activities such as special moves to and from designated areas (i.e.
pharmaceuticals waiting to be discarded, in quarantine, under investigation or
so) are activities brought upon by such regulations. Another deviation from the
normal processes is that some products demand special treatments regarding
temperature. Operating unit A has two large refrigerator rooms and one freezer
room. Temperatures in these rooms must be monitored and special procedures
must be undertaken when packing products of this type.
24


Concerning the products received in operating unit A, most of them are packed
in standardized boxes of medium size loaded on EUR-pallets. However, some
products are included in so called value added services (VASs). Characteristic
for VASs are that they include non-standard, customized processes. That is,
these products do not follow the standard flow of work.
24

5.2.2 Operating Unit B
In the beginning of January 2002, DHL Solutions (at that time Danzas
Solutions) bought the 3PL-company Scandinavian Garment Services (SGS),
which provided logistic services in the fashion sector. Although the branch
manager for the fashion sector is responsible for a number of terminals and
warehouses, the main warehouse/terminal is unit B. This facility consists of
12 000 square meters, divided between the terminal function (40 percent) and
the warehouse function (60 percent). In the unit, there are 50 employees and

24
Interview Head of Unit A
THE ORGANIZATION UNDER INVESTIGATION


33
100 percent of the turnover comes from the handling of clothing and related
products and the unit is organized under Division Consumer.
25

Distinctive Features
Because of the relatively recent incorporation of SGS into the organization,
DHL Solutions fashion sector in the Nordic countries (synonymous with the
previous organization of SGS) is still influenced by the old company culture.
The most distinctive difference of this business in comparison to the rest of
DHL Solutions is that it, apart from warehousing, also handles transportations
of clients goods. That is, DHL Solutions at unit B have haulage contractors
connected to the supply chain and manage these contracts by themselves.
Consequently, the facility is both a warehouse (where goods are stored, picked
and packed for the client) and a terminal (a cross-dock where goods are only
sorted and reloaded on distribution trucks). Almost 60 percent of the turnover
comes from the terminal and transportation activities. So, the actual core
business of DHL Solutions is only a part (40 percent) of the activities carried
out at operating unit B. Unit B also has to face the problems of seasonal
variations in volumes handled. Seasonal highs are during weeks 2-15 for the
spring and summer collections and during weeks 30-40 for the fall and winter
collections.
25

5.2.3 Operating Unit C
Operating unit C is a warehouse consisting of 33 560 square meters of space
and it is mainly in the business of alcoholic beverages (approximately 90
percent of the turnover). Therefore, it is managed as an operating unit in the
fast moving consumer goods-sector. Although, which can seem to be
contradictive, it is organized under Division Industrial. The largest client is a
vine and spirits importer (55 percent of the turnover) and the unit has a flexible
(approximately 50 percent temporaries) workforce of between 130 and 180
employees.
26

Distinctive Features
A distinctive feature of this business is that it handles fragile products such as
glass bottles, cans and bag-in-box wines. The risk of scrap in the handling
process is much larger than in operating units which handle other products.
Approximately 70 percent of the products that are received in unit C are packed
in boxes on EUR-pallets. The rest (30 percent) are palletized directly after
receipt (palletizing is a VAS-activity). However, the warehousing process also
includes piece by piece handling of individual bottles and cans. Another

25
Interview Head of Unit B
26
Interview Head of Unit C
THE ORGANIZATION UNDER INVESTIGATION


34
distinctive feature that unit C has to manage is the large seasonal variations in
volumes. The volumes handled at seasonal highs are nearly twice as large as
those handled at seasonal lows. This is also the reason to why they have such a
large proportion of temporaries in the workforce. The most important VAS-
process at unit C is that of reloading and sorting products on specially designed
pallets for one of their clients. In total, the value added services account for
approximately 20 percent of the turnover.
26

5.2.4 Operating Unit D
Operating unit D is a spare parts distribution centre (i.e. a warehouse) with
19600 square meters of space, which was founded in 1992. The only client ever
since has been a large car manufacturer and 100 percent of the turnover comes
from the handling of their spare parts bound for approximately 250 retailers in
Sweden, Norway and Finland. Today the warehouse employ 53 persons and the
operating unit is organized under Division Industrial and managed as a unit in
the Automotive-sector.
27 and 28

Distinctive Features
The operations at unit D have a number of special features. First, they handle
an immense number of different articles compared to other operating units.
Also, the articles show a wide range of characteristics with respect to size,
weight, appearance and further on. Therefore, the handling of these products
requires some distinctive capabilities, such as a specialized workforce. An
advantage with the handling, however, is the ordering routine that includes both
rush orders (delivery times of 24 or 48 hours) and stock orders (delivery times
of up to one week). Approximately 52 percent of the shipped order lines are
rush orders and 48 percent are stock orders. These ordering routines imply a
simplified planning of the workforce because there is, inherent in the process, a
flexibility of activities. That is, employees can wait with stock orders if
resources are required for rush orders. Another unique feature of the operating
unit is that they also handle parts of the customer service for their client. This is
stated in the contract and primarily leads to a need for more administrative
employees, but also, it results in a closer relationship between the operating
unit and the client.
27 and 28



27
Interview Head of Unit D
28
Interview Production Support Manager, Unit D
EMPIRICAL FINDINGS


35
6. EMPIRICAL FINDINGS
The following paragraphs explain the present situation at the company, as it
was perceived by the author of this thesis during interviews and observations.
The chapter follows the same disposition as chapter 3.
6.1 DHL Solutions External Environment
The general business climate for companies in 3PL-warehousing is currently
very good. The annual growth potential for the business is up to 20 percent, but
the actual annual growth at DHL Solutions is between 10 and 12 percent.
29

Generally speaking, the business of 3PL is quite independent of the overall
business climate. This is due to the fact that 3PL-companies can benefit both
from ups and downs in the economic cycle. During times of economic
depression, many organizations turn to 3PL-companies in order to become
more cost efficient and to be able to focus on their core competencies. In times
of prosperity, on the other hand, manufacturing companies produce more and
want to distribute these large volumes to the markets by means of 3PL-
partners.
30


Main regulations that affect DHL Solutions are policies from the European
Union and the Swedish governments regarding food and pharmaceuticals.
These regulations stipulate a high degree of traceability for such products,
which in turn lead to a demand for more and more sophisticated warehouse
management systems.
29
Other regulations that affect the organization are
general laws and policies on e.g. handling of dangerous goods, working
environment and security. However, the application and control of such
regulations can differ between local authorities.
30


Apart from companies who run their own warehouses, the largest competitors
on the Swedish market are Schenker, Green Cargo and DFDS. However, DHL
Solutions have a top five market position in Sweden for all their industry
specific sectors except Telecom and overall they are positioned as number one.
The primary competitive priorities (i.e. what the competition is based on) are
quality, know-how and reliability. Cost is also an important priority, but it is
related to the perceived value of the service.
30
According to the head of division
consumer, on the other hand, the competition is primarily based on cost and
time (delivery and response time). Other important capabilities are IT-support
(to be able to meet the requirements of large clients) and flexibility (to be able
to fulfill assignments that include seasonal variations in demand).

29
Interview Head of Division Consumer
30
Interview Head of Division Industrial
EMPIRICAL FINDINGS


36

The threats from entries of new companies in the market are relatively low.
Primary entry barriers are high investment costs (IT-systems and fork lifts) and
difficulties with building a client base.
29
However, only five to ten percent of
all the warehousing activities in Sweden are outsourced to 3PL-companies, so
there is room for establishments of new companies. The problem for many new
organizations is that large clients to a greater extent seek global solutions from
their logistic partners.
30

6.2 Corporate and Business Strategy at DHL Solutions
At DHL Solutions as a whole there are no distinctive procedures for strategy
formulation. Although visions and corporate strategies may have been
formulated at higher levels of the company, they have not been deployed down
to local levels. Hence, the organization lacks a unified view on strategy
development and objectives setting.
29
However, the head of division industrial
explains that one of the overall objectives is that DHL Solutions should be
perceived as the leading supplier of 3PL-services for clients in the industry-
specific sectors they operate. In these markets the idea is to compete more on
competence and capacity than on price.

Although, the strategies have not been clearly defined, the heads of the
divisions state that they follow some briefly outlined strategies and aim for a
number of general objectives. These are:
Volume growth, for at least five more years
29

Overall financial goal to maintain or increase profitability
29

New sales should be directed to large, global corporations
30

They should not handle clients with low-value goods
30

Consolidation of operating units into fewer, larger multi-units with the
advantages that they can: level out large variations in volumes handled;
allocate more know-how to the units; and make it easier to plan
transportations
29 and 30


Even though they do not have any formulated business strategy, managers at
DHL Solutions in Sweden have developed a market plan (last updated in
January 2004 by managers at headquarters). This market plan is based on an
assessment of the current position in the internal and external environment and
a SWOT-analysis (strengths, weaknesses, opportunities and threats) of this
position. The plan then deals with priorities, goals and recommendations for
future work.
31
However, all heads of operating units interviewed, describe a

31
Internal document Market Plan (2004)
EMPIRICAL FINDINGS


37
lack of communication from higher levels of the organization when it comes to
strategies and strategic objectives. That is, managers at operating units
experience that headquarters do not sufficiently deploy distinctive strategies
down through the organization. Most objectives are inherent in budgets and are
largely based on financial performance.
Market Strategy
DHL Solutions do not have any clearly defined market strategy, such as the
four strategies presented in section 3.2. However, when asked to identify the
strategies that best fit the present situation in the company, both heads of
divisions stated that what they actually aim for is to be operational excellent
and to reach a high degree of customer intimacy. DHL Solutions wants to be
operational excellent because of the low profit margins in the business and
because they want to be able to compete with low costs. They emphasize the
strategy of customer intimacy due to the fact that they actually operate few
clients and want to build long and healthy relationships with them (in order to
increase customer retention and also, to keep the assignments profitable).
6.3 DHL Solutions Internal Business Environment
The organization of DHL Solutions, although consisting of multiple
management levels (i.e. operating unit managers, local managers, regional
management and top management), can be characterized as being rather
decentralized.
25
At least, the general idea is that managers at the Swedish
headquarters should concern themselves with strategic and tactical management
while managers at operating units should be responsible for operational
execution (i.e. the delivery of services). That is, the operating units are
supposed to achieve the objectives set in the budgets formulated by
headquarters, but decisions on how to reach these goals are left to the operating
unit managers.
26


However, this idea is not always followed by managers at the Swedish
headquarters in their day-to-day management. Today, managers at this level
often determine the work needed to be done, how it should be done and by
whom on an ad hoc-basis. That is, each time a problem arise a specific decision
is needed from managers to be able to allocate the required resources needed to
correct the problem. Frequently, managers at headquarters send out resources to
the operating units to set up a number of corrective actions for the units to
follow, often in order for them to become more cost-efficient. Hence, work
procedures are not proactive in the organization.
32 and 33
Or as one of the

32
Interview Controller, Division Industrial
33
Interview Controller, Division Consumer
EMPIRICAL FINDINGS


38
respondents put it: Where the biggest fires are, thats where we put most effort
on extinguishing.

Another important element of the internal environment is the way
communications are managed in the organization. In particular, how do
managers at headquarters and operating units communicate with each other and
what types of information systems are instituted. Generally, there are four types
of information flows between units and headquarters in the organization. These
are:
32 and 33

The major business system SAP for economic reports and accounting
Static reports Written, formalized and continuous reports on some pre-
defined issues
Ad hoc-reports Reports which have no clear purpose (they often
originate from some specific requirements of the global headquarters in
Basel)
Nice to know-information Updates through mail and informal
contacts via telephone or meetings
6.3.1 The Warehousing Process
The general warehousing process is quite similar between the four operating
units examined, despite the fact that each unit has some distinctive operational
characteristics. Therefore, a simplified process description will be presented
here, to which deviations in the units processes can be compared. Broadly
outlined, the warehousing process can be described as in Figure 6.1 (excluding
VASs, which can be incorporated almost anywhere in the process). The main
activities in the warehousing process are:
34

1. The client sends a vehicle and receipt advice via EDI (Electronic Data
Interchange) stating when, what and quantity of goods to be shipped to
the unit.
2. The goods are received at the warehouse and the personnel control
quantity and quality.
3. The pallets or parts are then moved to the buffers in the warehouse and
the quantities and locations are reported into the warehouse management
system, ProLogs. Goods in buffers are located in areas that are harder to
reach and often require a high picking fork lift.
4. After some storage time, when a demand is reported at a pick location,
goods are moved to this location from the buffer (the move is reported
into the system).

34
Internal document Logistical Process Flow (2004)
EMPIRICAL FINDINGS


39
5. When the unit has received a bunch of customer orders via EDI, these
orders are printed and the picking process is planned to require as little
time as possible (i.e. pick route planning).
6. Warehouse personnel pick and pack ordered goods according to standard
procedures and prepare it for shipping (the pick and pack are reported
into ProLogs).
7. The transportation of the order is planned and the order information is
sent to the transporter. When the truck driver arrives at the warehouse he
loads the truck and ships the order to the customer.


Figure 6.1 Simplified flow chart for the warehousing process
(Source: Authors own construct based on Logistical Process Flow, 2004)
Deviations from the Process
At operating unit A, the inbound and outbound activities are quite unique
(activities number two and seven). For example, they need to have a designated
area for the unloading and loading of trucks, from which the goods are not
released until they have gone through a number of pre-defined procedures (i.e.
inbound, storage and outbound areas are clearly separated). Regarding
activities three and four, at unit A they do not separate buffers from pick
locations. They pick goods directly from all storage positions. Also, when
activity number six is completed, they check all order lines on quantity and
quality to ensure that customers will receive complete orders.
24


The process at operating unit B includes a number of deviations from the
general warehousing process described above. First, activity number two is
Customer
Client
DHL Solutions
Vehicle and
receipt advice
Unload truck
and control
qty. and qual.
Put away in
buffers
Move to pick
location
Order
information
Pick order
Store
EDI
Warehouse Management System
Order
Sort, pack
and load
EDI
Send order
Receive
goods
EMPIRICAL FINDINGS


40
carried out in a slightly different way since they are handling clothes. Most of
the goods comes on clothes hangers and are unloaded via telescopic extenders
straight onto an overhead conveyor system. This system is manually operated,
but with it, the employees can reach all the storage positions in the warehouse.
Regarding activity number three, an important deviation is that they have not
implemented ProLogs at unit B yet. Also, they do not separate pick locations
from buffers and there is no pick route planning for customer orders (activity
number six) at the unit.
25


The warehousing process in operating unit C is quite similar to the general
process presented in Figure 6.1. However, one activity that is highly
emphasized at the unit is the control of picked goods (faults are reviewed both
on individuals and as a total). Today, their goal is to check quantity and quality
of at least 10 percent of all outbound orders. On the individual level they also
classify picking personnel in categories A, B and C with respect to their
conformance to quality objectives and based on this they can focus their control
activities on low performance employees.
26


The process at operating unit D is much like the general warehousing process
described in Figure 6.1. One difference, however, is that they sort their inbound
goods in large (37 percent of received order lines) and small parts (63 percent
of received order lines), in order to simplify the storage of the articles.
Consequently, they have divided their warehouse into two main areas (one for
large and one for small parts) and many customer orders require two picking
routes, one for each area.
27 and 28

6.4 Performance Measurement at DHL Solutions
Traditionally, the culture of performance tracking at DHL Solutions has
primarily been governed by control of the financial dimension. This dimension
has a rather long history in the organizations accounting culture. Still,
headquarters follow-up their operating units on financial performance tightly
and they monitor the units overall conformance to budgets on a monthly
basis.
24 and 25


DHL Solutions in Sweden has not formulated and distributed any support tools
or guidelines for how and when performance measures are to be developed.
24

Consequently, measures are established on an ad hoc-basis and no manager in
the organization have full insight into the entity of measures used at a particular
time. The only overall policies for measurement are those indirectly formulated
as a result of corporate projects, such as the MORE-project (an international
project that addresses multiple improvement initiatives).
26
Although, such
EMPIRICAL FINDINGS


41
projects are often instituted for a particular reason and therefore, there is a risk
that their conclusions are based on a parochial view of the organization. All too
often operating unit managers experience that directives for performance
measurement resulting from such projects lacks clear purposes and are
irrelevant for and incongruent with their day-to-day operations.
27


Although frequently used in the organization, the term KPI has no unified
definition throughout the company. Moreover, there are no documents or lists
stating which measures that are KPIs and which are not. However, on a request
to define it the operating unit managers explained that:
A KPI is a key ratio with which the performance of the business can be
explained on some dimension. A portfolio with a number of KPIs
monitored simultaneously should be able to describe if the company or
unit is healthy and well managed.
24

KPIs are the most important control parameters in the company.
Managers should try to identify a handful of KPIs among a wide
spectrum of measures, and give them the attention they deserve. A
suitable KPI portfolio should consist of about three or four distinctive
measures which explain the business in a holistic way.
25

KPIs are measures which contain information that makes it possible to
manage a business properly. The most important characteristics of a KPI
are that it should be measurable, easy to understand and reflect one of
the core processes of the business.
26

A KPI is a measure with which one can review the performance of the
operations in a relevant way.
27 and 28


The reasons why managers want to measure the performance of the parts they
are responsible for are somewhat different between the respondents. Table 6.1
presents the reasons for measurement stated by heads of divisions and units.







EMPIRICAL FINDINGS


42
Table 6.1 The reasons why managers at DHL Solutions measure performance
Reason for measurement
H
e
a
d
,

C
o
n
s
u
m
e
r

H
e
a
d
,

I
n
d
u
s
t
r
i
a
l

H
e
a
d
,

U
n
i
t

A

H
e
a
d
,

U
n
i
t

B

H
e
a
d
,

U
n
i
t

C

H
e
a
d
,

U
n
i
t

D

Identify success X X X
Identify if they are meeting clients requirements X X X X
Help them understand their processes X X
Identify where problems, bottlenecks or waste exist X X X
Ensure decisions are based on fact X X
Show if improvements planned, actually happened X X X X X X
(Source: Authors own construct based on interview responses)
6.4.1 Performance Measures at DHL Solutions
When looking at the portfolio of measures used at DHL Solutions in Sweden
and investigating each measure on why it was instituted and by whom, there are
basically four groups of performance measures in the organization (see Figure
6.2).


Figure 6.2 Four groups of measures at DHL Solutions
(Source: Authors own construct)
The first group of measures (1) includes those developed by higher
organizational levels than the Swedish headquarters. Examples of such are the
measures that each unit is compelled to report to managers at the global
headquarters in Basel. These measures are reported into the shared company
C
l
i
e
n
t

Internal Processes
Managers at
operating unit
Managers at Swedish
headquarters
Managers at central levels
3
2
1
C
u
s
t
o
m
e
r

4
EMPIRICAL FINDINGS


43
server on a monthly basis and the methods of measurement are clearly defined.
However, managers in Sweden lack purposes for the measures and they are
rarely forced to explain poor performance on them. The measures reported into
the server and reviewed in Basel are:
32 and 33

Manageable employee turnover (that is, total leaving staff less non
manageable leaving staff such as retirements)
Absenteeism (sickness hours in percentage of total hours)
Rent per square meter
Sellable capacity (that is, total space in the warehouse)
Complaints (claims per outgoing order)
On time deliveries (measured on orders)
Inventory accuracy (damaged, stolen or incorrectly picked items in
percentage of the total number of handled items)
Customer net change (gained or lost clients)
Idle capacity (percent of non-used space)

The second group of measures (2) contains those demanded by managers at
headquarters in Sweden. These are primarily total operating unit measures on
financial performance incorporated in the accounting system. Primary measures
monitored are:
29 and 30

Profit
Return on sales at operating result 1 (ROS at OR1, where OR1 is the
point in the statement of income up to which the head of the operating
unit is responsible)
ROS at OR2 (where over head costs for the Swedish headquarters are
included)
SWOT/Net Sales (where S=salaries, white collars; W=wages, blue
collars; O=other personal expenses; T=cost of temporaries; and Net
Sales=incomes from handling and value added services)
Occasional reviews on Claims per order line (number of claims wrong
quantity, wrong article or damaged goods divided by total shipped
order lines)

The third group (3) consists of the measures developed at the units to support
the management of their own operations. Heads of units develop templates for
measurement on their own and they are responsible for the relevance of each
measure developed. Examples of measures monitored at the four operating
units examined in this project are:
24, 25, 26 and 27

Profit
EMPIRICAL FINDINGS


44
ROS at OR1
SWOT/Net Sales (HA & VAS)
On time delivery (percent of total orders that was delivered before due
date)
Claims per order line
Failures found in control per order line
Order lines without failure in picking (percent of complete and correct
order lines in outbound control)
Scrap articles in percentage of total handled articles (smashed bottles at
the unit C)
Pallets without faults (inbound and outbound)
Occasional labor flexibility analyses based on the business system (SAP)
Absenteeism (total sickness hours in percentage of total paid hours)
Number of accidents in work
Differences in the inventory control (net/gross)
Productivity (explained in more detail below)

The fourth group of measures (4) includes those instituted at operating units to
meet their clients requirements on operational information. Examples of such
measures are some of the measures calculated at unit D and reported to their
client. For example:
27

Inbound pipe (the number of order lines that were not stored in the
warehouse on time)
Outbound pipe (the number of order lines that were created as pick
orders in ProLogs, but were not picked on time)
Warehouse denials (the number of times that the system have said that
there should be articles at a storage position, but there were not)
Customer fill (number of delivered order lines in percentage of total
ordered order lines)
6.4.2 The Performance Measurement System at DHL Solutions
The entity of measures used in the Swedish organization has never been
analyzed as a system. Consequently, some dimensions of performance are
emphasized more than others. During the interviews in this project, much
criticism on the present measurement system was put forward by managers in
the organization. Including:
At headquarters managers lacks the possibility to compare operating
units on operational productivity. Therefore, they ask for a standardized,
aggregated productivity measure.
29

EMPIRICAL FINDINGS


45
The portfolio of measures lacks measures that reflect long-term
objectives.
29

The view on performance measurement is not uniform among managers
regarding why, what and how they should measure.
30

To be able to use the information from some of the measures in a
relevant way, managers who are monitoring them need to have a large
amount of pre-understanding of the measures.
30

The quality of some of the measures obtained is quite low because their
calculation and data collection often includes manual procedures.
32 and 33

Measures on client and competitor aspects are somewhat under-
represented in the present measurement portfolio.
29

There is a need for more detailed information on some of the measures,
for example by moving from a monthly review to a daily review.
26

6.4.3 Productivity Measurement at DHL Solutions
Although highly emphasized in the organization the productivity concept has
no uniform definition throughout the organization. The heads of the four
operating units examined presents the following definitions for productivity:
Production of services or products per unit of time (where time is man-
hours; that is, labor resources used for the production).
24

The efficiency of processes. It is a mix of the search for a proper capacity
level (i.e. resources used in the processes) and inherent in that capacity, a
large amount of flexibility.
25

A practical definition is that productivity is the amount of a product or
service that you can produce in one unit of time (i.e. man-hour).
26

A definition of labor productivity might be the amount of work done per
invested man-hour. However, the whole productivity concept is
somewhat wider.
27 and 28


Today, managers at the operating units use several measures of productivity: on
individual client assignments, specific processes or for the unit as a whole.
Although all productivity measures are on the form order lines per man-hour,
they differ from each other in the definition of both the numerator and the
denominator. In essence, these variables define what process or client that is
measured, but also there is some debate on exactly what man-hours that should
be accounted for in the formula. The question is which labor resources that are
truly the cost drivers for a particular process.
24, 25, 26 and 27
Additionally, operating
units A and B have other definitions for the numerator. On their largest client,
managers at unit A measure so called storage position lines, instead of order
lines. The reason for this is that the picking of one order line sometimes
EMPIRICAL FINDINGS


46
requires more than one route to the storage position. This measure is also the
most important cost driver in the contract with client x.
24
At unit B, the only
productivity measure used is Cost per unit for terminal and transportation
activities. Basically, this measure is the inverse of the type of labor productivity
measures used at the other operating units. However, here they use units
instead of order lines and cost instead of man-hours. A unit is a volume
variable developed by SGS and it is supposed to address the problem that
garments are not equally in size. For example, a thick winter coat represents
eight units but a thin shirt only represents two units.
25


In order to investigate some of the present productivity measures for
weaknesses and strengths, and also to test the framework for further use, the
performance measure record sheet was used for one measure at each unit. In the
record sheet, the respondents at the units were forced to explain, in detail, the
different elements of a measure (the elements in the record sheet are presented
in appendix 4). Hence, for the first time since the measures were developed,
managers had to be explicit about what the measures really are. Appendix 5
presents four performance measure record sheets, one for each unit, for some of
the productivity measures used in the organization.

When considering productivity as an output to input-concept, the question is
how these parameters can be defined at operating unit level. Most heads of
operating units agree that the total output of the process is difficult to define
and quantify. The units produce services for their clients and the delivery of
these services generates financial earnings in proportion to how valuable the
services are to the clients. Hence, everything included in the service (tangibles
as well as intangibles) is output from the operating units. Although, this might
be the overall definition of the output, the actual, physical output of the
warehousing process is the amount of orders that are handled and how these
orders are handled.

If the definition of the output is quite hard to comprehend, the inputs to the
production of this output is somewhat easier to define. Generally, it includes all
resources consumed during the production of services and can be interpreted as
the money spent (i.e. the costs) for this production. See Figure 6.3 for the
distribution of costs between different resource inputs at the four operating
units.

EMPIRICAL FINDINGS


47
0
10
20
30
40
50
60
70
80
90
100
P
e
r
c
e
n
t
a
g
e

o
f

t
o
t
a
l

c
o
s
t
s
Labor Rent Wrappings and
other materials
Utilities and
energy
Depreciations Other inputs
Unit A Unit B Unit C Unit D

Figure 6.3 Distribution of costs between different resource inputs
(Source: Authors own construct based on interview responses)

ANALYSIS


48
7. ANALYSIS
In this chapter the current situation (the empirical findings in chapter 6) are
analyzed with regard to the theories presented in chapter 3. Also, the main
weaknesses in DHL Solutions today are summarized regarding strategic
management and performance measurement and a new measurement regime
for the Swedish organization is developed.
7.1 Analysis of the Current Situation
Although they operate in the same type of businesses (primarily 3PL-
warehousing), there are some basic differences between the operating units
regarding such factors as culture, processes and types of clients. One obvious
fact that will affect the operating units are that DHL Solutions have to face the
problems of geographical dispersion; including differences in local regulations,
rental prices, wage levels, the supply of skilled workforce, etc. Moreover, the
units are different with respect to size (from 12000 square meters to 33 560
square meters for the units examined), number of clients (from one to tens of
clients) and number of employees (from 22 to 180). There are also some
differences between the units regarding activities in the process and demand for
quality control, as well as types and quantities of articles handled (see sections
5.2.1-5.2.4 and 6.3.1).

As discussed above, there are clearly a number of distinctive differences
between the four operating units examined. However, the question is if these
diversities are at a level where they will affect the overall management of the
operating units. Because essentially, all units are doing the same thing:
providing a warehousing/transportation service to members of supply chains.
Consequently, although managers at operating units tend to emphasize the
distinctive characteristics of their unit and find obstacles to why comparisons
with other units would be impossible, the author of this paper comes to the
conclusion that the presented deviations from the general operations are
irrelevant when it comes to strategic management from headquarters and
overall measurement of operating unit performance. That is, since the units are
operating in the same business and in the same country they should
strategically be managed as an entity.

Because of this, the following analysis of the current situation will be presented
as if the operating units can be regarded as equals with regard to strategic
management and overall performance measurement. Paragraphs 7.1.1 through
7.1.4 analyze the present situation with regard to strategy formulation, the view
on performance measurement, the present PM-system and instituted individual
measures.
ANALYSIS


49
7.1.1 Strategic Management
When investigating the issue of corporate and business strategies in the
Swedish organization of DHL Solutions (section 6.2) it becomes apparent that
the company does not follow such a distinctive process as the discipline of
strategic management (presented in chapter 3.2). That is, there are no obvious
connections between the different management levels (i.e. global, regional and
local headquarters) with defined processes for strategy formulation, where a
corporate strategy is developed at the outset and then translated into business
strategies and finally operating plans. Rather, in DHL Solutions there is a
functional distinction between the different organizational levels, and at each
level, managers are left to handle their operations largely by themselves.
Directives and reports are sent back and forth between these different levels
without a clear picture of the business as a whole.

Although there is a missing link between corporate management and local
management, Swedish headquarters try to run their operations strategically and
tactically as best as they can. For example, managers at the headquarters in
Stockholm have developed a market plan (see section 6.2), which states the
general course to follow for the coming years. Hence, the weaknesses in the
strategic management process do not lie in an inability of managers to think
strategically, but rather in the lack of strategic deployment from top level down
to the operational level and an insufficient translation of general thrusts into
operationally relevant activities. Communication between different levels of the
organization as well as between different functions needs to be more ambitious
in order for a strategy to be successfully implemented.

The same problems with the deployment of strategies can also be found at the
operating units. As explained in section 6.2 the heads of the units lack a
communication of plans and strategies down to their level. They do, however,
have some directives and guidelines to follow, initiated by any higher level of
the organization. Although they frequently get such directives, the fundamental
problem is said to be a lack of purposes on these directives and a lack of
understanding of their operations from higher levels. Primarily this can be
explained by the fact that heads of operating units are seldom invited to take
part in the formulation of strategies and objectives.

In summary, one can conclude that the most critical weakness of the strategy
formulation process in the Swedish organization is the absence of a translation
of strategies formulated at headquarters into operating plans (with specified
actions) to be followed at operating units. Today this is basically done by
allocating resources to a number of projects with no clear connection to each
ANALYSIS


50
other (often, such project are also initialized to correct problems rather than to
implement strategies). As a result of this, management as of today have to face
such problems as: simultaneous management of a wide range of separate
projects; alienation of the operating units from the overall course of the
company; misunderstandings between different levels of the organization; poor
commitment to general thrusts; and ultimately, the development of an
unbalanced, and far from holistic, performance measurement system.
Market Strategy
Another important part of the strategy process, which will also have an impact
on performance measurement, is the issue of what market strategy one should
follow (see section 3.2). Both heads of divisions in DHL Solutions stated that
the market strategies that best fit their present situation in the company are
customer intimacy and operational excellence (section 6.2). As explained in
chapter 3.4.2 the market strategies followed also enables an organization to
focus its measurement system on a limited set of the perspectives in the
balanced scorecard. Even though it should not be overemphasized, the financial
perspective plays an important role in all measurement systems as a means of
tracking the ultimate results of strategic execution. However, the other three
perspectives (innovation, customer and internal) can be emphasized in line with
the market strategies followed. Due to their focus on being customer intimate
and operational excellent, DHL Solutions in Sweden should, apart from the
financial perspective, integrate the customer perspective and the internal
perspective in their measurement system; while the innovation perspective can
be disregarded in the Swedish organization (see section 3.4.2).

Apart from just providing some simplification of the situation, this conclusion
also involves another important suggestion. In fact, it implies that there is a
congruency between the general thrusts in the organization and the
performance pyramid. That is, the perspectives to focus on (as described in the
balanced scorecard model) match with the dimensions of performance
introduced in the pyramid. First, the financial perspective corresponds to the
market and financial dimensions in the pyramid. Moreover, the customer
perspective is equal to the left part of the pyramid (external effectiveness) in
general and the dimension of customer satisfaction in particular. Finally, the
internal perspective corresponds to right part of the pyramid (internal
efficiency). Hence, the analysis of DHL Solutions market strategy provides a
validation of the performance pyramid model for further use in the
organization.
ANALYSIS


51
7.1.2 View on Performance Measurement
All operating units as well as higher levels of the organization measure
performance in some way. However, the methods of measurement and
reporting as well as the individual measures obtained are quite different
between these parts of the organization. Primarily this can be explained by the
lack of corporate policies on performance measurement which has led to a
culture where measures are developed on an ad hoc-basis by managers in the
organization. Moreover, measures are not analyzed and critiqued on a continual
basis and old measures are seldom dropped. Thus, at any point of time,
operating units typically have more measures instituted than they actually
monitor and act upon, and probably some of the measures used are
dysfunctional or even irrelevant at that time.

As shown in Table 6.1 there are some clear discrepancies between what reasons
for measurement managers claim to have. Although this is not a dangerous fact,
managers obviously use performance measurement for different reasons. This
might be explained by the operational differences among the units and the
special characteristics of the assignments managed at these units. Or, more
likely, it might stem from the fact that managers in the organization have not
come to a consensus on the process of performance measurement. Heads of
operating units are responsible for their own measures and they can establish
measures whenever they feel a need for a specific set of information. Basically,
they are left unguided on the overall process of performance measurement.

The term Key Performance Indicator (section 3.4), although often used by
managers in DHL Solutions, do not have any standardized definition
throughout the organization. There are no requirements on what a KPI should
constitute and the term is sometimes used for ordinary workflow measures.
However, when trying to define it with their own words (section 6.4) the heads
of operating units comes pretty close to the definition mentioned in the
academic literature. In summary, one can say that the KPI-concept is rather
well perceived in the organization but the term is not used accordingly.
However, this thesis argues that all measures instituted (irrespective of
aggregation level) should be relevant to the present strategies pursued. Hence,
all performance measures monitored should in fact be KPIs (except perhaps
some metrics used in accounting or as parameters in contracts or planning
tools). Therefore, the question of whether a measure should be a KPI or not is
temporarily dropped and attention is instead focused on the fact that all
performance measures should be keys to success.
ANALYSIS


52
7.1.3 The PM-system
As explained above, there are no clearly defined policies or guidelines for
performance measurement at DHL Solutions in Sweden. Moreover, as is
apparent from the empirical findings, the measurement of performance is not
incorporated in a system. That is, the company lacks a system-view when it
comes to simultaneously tracking individual measures and understanding the
trade-offs and relationships between them.

When trying to analyze the instituted measures as a system there is also another
difficulty. The problem is that in the organization there are no clear definitions
of the dimensions measured. When talking about dimensions such as quality,
productivity, flexibility, etc. managers talk about different things. Therefore,
this system-analysis is primarily based on what types (i.e. dimensions) of
measures the instituted measures actually can be interpreted as rather than what
dimensions managers claim to monitor.

The measures monitored at each management level (presented in chapter 6.4.1)
are summarized in appendix 6, with a categorization of the measures according
to the dimensions in the performance pyramid (see section 3.4.2). One can
easily see that some dimensions of performance are emphasized more than
others and that there is no standardized measurement portfolio for the operating
units. Consequently, the entity of measures represents a system that is
somewhat unbalanced.

With this and the analysis of DHL Solutions strategic management process
(section 7.1.1) in mind, the organization can be viewed in the context of the
performance pyramid. It then becomes clear that the pyramid for DHL
Solutions is somewhat distorted (i.e. some elements in the pyramid get much
more attention than others). Graphically, but not in scale, the present situation
at DHL Solutions regarding the performance pyramid can be presented as in
Figure 7.1.

ANALYSIS


53

Figure 7.1 A distorted performance pyramid at DHL Solutions
(Source: Authors own construct based on Lynch and Cross, 1995)
The figure above should be seen as an attempt to attack the problems with
performance measurement at the company and not as a detailed explanation of
the present situation. However, the figure addresses the overall problems and
makes further explanations easier.

The reason why the pyramid is askew is that the elements in the four levels are
not equally emphasized. Moreover, the connections between the levels are
weak and the deployment of strategies and objectives down through the
organization is more or less non-existent. These problems will be further
presented below.

At the highest level of the pyramid, DHL Solutions have not sufficiently
defined their visions and corporate objectives. The few objectives that actually
are defined by managers at central levels and communicated down to the
Swedish headquarters are primarily based on economical growth whereas
client-focused goals are totally absent. Moreover, the company lacks a vision
where they define the marketplace in which and the capabilities with which
they are to compete. Consequently, because the visions and corporate strategies
are not clearly defined the business strategies are insufficiently deployed.

Objectives
Measures
External
effectiveness
Delivery
Cycle
time
Waste
Quality
Productivity
Flexi-
bility
CS
Financial
Market
Internal efficiency
Vision
ANALYSIS


54
At the second level, in the pyramid denoted the strategic business unit level (in
this case equal to the Swedish organization), the emphasis in the company is on
financial measures and objectives. This dimension has a long tradition in the
company and is largely based on the accounting culture which has evolved
through the years. The financial dimension and the measures of e.g.
profitability and return on sales are equally emphasized by all management
levels of the company. The market dimension, on the other hand, is not
monitored at all by managers at operating units or headquarters. Knowledge on
this dimension is based on supposition and is probably biased by the present
wants and needs of managers. Hence, on this level of the pyramid, managers in
the organization focus on strictly internal measures of performance while they
totally disregard the external perspective. An unbalanced focus on this level of
the pyramid could affect all subsequent levels in an undesirable way. As a
consequence of this, the whole organization may be infected by an inward-
looking and short-termistic business view.

At the third level, where the measures and objectives for the core business
processes can be found, the pyramid is even more distorted. To begin with, the
core processes are not identified in a plain fashion. The company has not
assigned any of their activities the status of being imperative to their business
in a standardized way. Consequently, there are differences between the units
when it comes to which processes they give most attention, because they have
distinguished these processes based on tradition, belief or clients requirements.
Furthermore, the core process level is distorted because the organization
weighs the importance of productivity much more than the importance of
customer satisfaction and flexibility; at least when it comes to measures and
objectives. Some operating units actually work with the flexibility dimension,
either as a parameter in the planning process or as an analysis based on
information from the business system. Moreover, customer satisfaction is only
measured once a year in a survey carried out by a specialized consulting
company. However, neither of these two dimensions gets any special attention
and the company does not have any defined strategies for them.

At the lowest operational level, the operating units primarily measure what in
the pyramid is denoted the dimension of delivery. In the pyramid, delivery is
one of two building blocks for good performance on customer satisfaction (the
other is quality). This dimension includes the delivery of the right products on
time and in full. Hence, two of the three reasons for claims fall under the
measurement of delivery. The third reason for claims (damaged goods) falls
under the measurement of quality, where the goal is to meet customer
expectations 100 percent of the time through the delivery of defect free
ANALYSIS


55
products. The two building blocks for productivity are the minimizing of cycle
times and waste. Although, the measurement and shortening of cycle times is
non-existent at the company today, some units have measures for the waste
dimension (such as Failures found in control/order line measured at unit A).
In the organization these measures are defined as measures for internal quality
and they primarily focus on the elimination of damaged goods through the
warehousing process and the minimizing of failures in the picking process.
Productivity Measurement at DHL Solutions
The first, and most obvious, flaw with the productivity dimension that becomes
clear when studying the company is that they have not distinctively defined
what it is. When asked to define it, the respondents find this difficult and the
final answers are different among the managers (for example, one manager
state that it is the efficiency of processes, while another argues that it is the
amount of a service you can produce per invested man-hour). This is also the
case for the general purpose of productivity measurement, which is not
uniformly interpreted (the stated purposes range from enable planning of labor
allocations with real figures to increase profit margins and clarify if they are
on the right track). Although this may seem as a small problem, it could result
in a too narrow definition of the concept. At DHL Solutions, managers put
most attention on labor productivity and in the company such measures are
actually synonymous with productivity. Hence, what in fact is only a partial
measure is treated as a total productivity measure. Accordingly, a measure that
at most can explain one part of a dimension of performance at process or
department level is actually used as a means of explaining overall cost
increases for whole operating units.

Although the productivity concept at DHL Solutions is narrowed to only
include labor productivity, the overall view on productivity is output/input-
oriented. When it comes to inputs the operating units typically use resources
such as labor, capital, energy, materials, rent and security; where the only input
considered important in the productivity concept is labor hours. However, this
view is not as narrow as it may seem, because labor costs represent between 50
and 65 percent of the total resource (i.e. input) costs.

From Figure 6.3 it should be clear that the input variables at DHL Solutions can
be identified and hopefully also quantified in a meaningful way. However, this
is not the case for the output parameter. The output of the service production
process is much more difficult to both identify and quantify. Today, DHL
Solutions primarily use outbound order lines as a substitute for the total output
of the warehousing process. In reality, the output is composed of a wider array
ANALYSIS


56
of elements than just order lines and is in the end all things that are of value to
the client.

The measure of productivity used at DHL Solutions is, as mentioned before, a
type of labor productivity measure (the output parameter, however, is only
partial). The formula for this measure, with varying definitions of man-hours is:
hours - Man
lines order Outbound
Solutions DHL at ty Productivi =

Based on the general formula for total productivity (total output/total inputs)
this can be interpreted as:
costs)" total the of % 50 tely (approxima input One "
output" total the of Part "
ty" Productivi Labor " =


Another problem with the measurement of productivity at DHL Solutions is
that it requires that the quality of the service produced is not affected by
productivity changes. That is, even if employees work faster or more efficient,
the quality remains constant. However, which is probably evident, this is not
the case for the production of services such as 3PL-warehousing. Evidently, the
trade-offs between the productivity measure and other dimensions of
performance are not fully understood or at least not addressed in a consistent
manner in the organization. The worst case scenario by ignoring to monitor
performance on multiple dimensions simultaneously and to lack understanding
of the trade-offs between these measures is that measures established are in fact
counterproductive and that individual processes or functions are sub-optimized.
7.1.4 Instituted Individual Measures
The lack of organization-wide guiding principles for performance measurement
has resulted in a situation where there are, in the organization as a whole, a
multitude of individual measures. However, there are generally four groups of
performance measures with respect to why the measures were developed and
by whom (see section 6.4.1). The next few paragraphs contain an analysis on
these individual measures (see appendix 6) with respect to the
recommendations presented in Table 3.1 and the performance measure record
sheet (see Table 3.2 as well as appendix 4 and 5).
Title
The first important implication from the performance measure record sheet is
that measures should have clearly defined titles, used by all concerned
throughout the organization. A distinct and unique title for each measure will
simplify understanding and prevent mix-ups with other measures. In DHL
ANALYSIS


57
Solutions this element of the measure development process is not given any
certain attention. Often, formulas (for example, order lines per man-hours) or
general descriptions (i.e. Productivity) act as substitutes for distinctive titles.
These problems are especially intrinsic in the measurement of labor
productivity, where a wide range of different measures with rather similar
definitions are obtained. However, some of the other dimensions include
measures with more appropriate titles. Examples of such are: Manageable
employee turnover reported into the shared company server (without being to
specific, the title says something about what is being measured and maybe also
why); Return on sales at operating result 1 or 2 measured at multiple levels
(without being the actual formula, the title reveals how to measure it by
clarifying what result level to use); and Warehouse denials measured at unit
D (short and clear once explained, then easily understood).
Purpose
It is probably obvious that an established performance measure should be
relevant to the business operations managed. But maybe it is not equally
obvious that to be relevant a performance measure needs to have an explicit
purpose. The purpose of a measure is the actual reason to why it exists.
However, at DHL Solutions, measures are developed without a proper
formulation of purposes. As mentioned, it is sufficient for managers to feel a
need for a measure in order for them to institute it and hence, purposes of
measures are indistinct and subject to change. Consequently, the purpose of a
typical measure is not consistently interpreted throughout the organization.
Relates to
As explained in section 3.4, most academics agree that performance measures
should be derived from strategy. In particular, each measure must relate to one
or more of the business objectives defined for the chosen strategy. If not, one
can question if the measure is relevant and if it should be monitored at all.
Consequently, it is important to identify the objectives to which the measure is
related. In DHL Solutions the problems on this element of the measure
development process runs much deeper than just ignorance of the connections
between measures and business objectives. The true source to these problems is
the lack of a comprehensive strategic management process in the organization
(see section 7.1.1). At DHL Solutions in Sweden, managers do not translate
business strategies into operating plans and hence, they do not define any
strategic objectives. Therefore, when trying to relate for example the labor
productivity measures to business objectives or strategies in the record sheet,
heads of operating units find this task difficult. Often, they are only able to
ANALYSIS


58
identify a connection to some overall requirements on their operations, such as
the need to continuously improve productivity and enhance profitability.
Target
One of the most basic recommendations on performance measurement is that it
should focus on improvement. That is, each measure should have a specific
goal, a targeted level of performance to be achieved in a pre-defined period of
time. These targets for individual measures should be a function of the
capabilities of competitors, the requirements of clients and the capabilities of
the internal operating system on the dimensions measured. Most measures used
in DHL Solutions do have specific targets connected to them. However, these
targets are more based on budgets, fixed improvement goals or clients
demands than on the organizations competition. Hence, it is difficult for
managers to comprehensively assess whether they are improving performance
fast enough.
Formula, Frequency, Who measures? and Source of data
Furthermore, performance measures should provide accurate feedback on
processes in a simple and understandable way and, which is even more
important, measures should be based on variables that can be influenced by the
employees actually measured. These recommendations lead to demands on: the
formula; the source of data; frequency of review; and employees responsible
for measurement.

Managers at operating units and at headquarters have a sufficient knowledge of
the formulas that their measures are based on. However, the formulas are not
necessarily the same throughout the organization. Differences in operating unit
characteristics, history of measurement and culture of accountability have led
to a situation where formulas for measures on some dimensions are not uniform
in the organization. An example of this is the debate on what man-hours to
account for in the labor productivity formula. Some managers state that the
measure is only relevant if all labor hours are included, while others are content
by defining man-hours as only blue collars in the specific processes measured.
When it comes to defining the source of data for the measures used, there are
no apparent shortcomings in the organization other than the fact that all
operating units have not been provided with the same support tools for data
collection. Some units have implemented sophisticated time registration
systems and analysis tools for data processing while others have to rely on
manual collection of data (for instance, counting printed claims by hand).

ANALYSIS


59
The frequency of measurement and review is typically monthly in the
company. Although this is probably adequate for most measures, managers at
some operating units express a need for information with a shorter frequency.
There are measures that would be interesting to monitor on a daily basis as the
monthly reports are long since irrelevant and corrective actions come too late.
Finally, managers in DHL Solutions should identify more clearly the persons
responsible for collecting and reporting data on measures as well as the
employees affected by these measures.
Who acts on the data? and What do they do?
The last part of this analysis of individual measures is concerned with how well
managers in the organization actually close the management loops that the
establishment of measures is initiating. That is, if a measure turns out to be
changing in a positive or negative way, who is supposed to act on that
information and what is that person supposed to do? Basically, one needs to
identify the person (typically a manager) responsible for performance
improvements on the dimensions measured (this person is often referred to as
the owner) and the general management processes to follow when
performance is either acceptable or unacceptable. In DHL Solutions the
identification of owners is achieved in a satisfactory way by typically
appointing the highest responsibility to the head of the unit or the warehouse
manager. The identification of management processes, on the other hand, is
generally overseen as managers are too unspecific about what they do when
performance is changing. Most of the respondents, while filling in the
performance measure record sheet, could only specify a procedure of meetings
or discussion and obviously lacked knowledge on management actions and
accountabilities. Consequently, there is an apparent risk that the management
loop for some of the measures is not closed. As a summary one can say that
some instituted measures are merely tracked whereas performance on them is
not managed.
7.2 Summary of Main Weaknesses and Flaws
The above analysis is now summarized on the main weaknesses and flaws
instituted in DHL Solutions strategic management process and their PM-
process. In this thesis, the term PM-process is used as an overall denotation of
the whole issue of performance measurement, integrating the elements of: the
view on performance measurement, the PM-system and instituted individual
measures.


ANALYSIS


60
Strategic Management
By just concluding that the whole process of strategic management at DHL
Solutions is seriously flawed, would be to simplify the situation too much.
Although they have many problems in this area, there are also great
possibilities to improve. In Table 7.1 below, the present situation in the
organization on the issue of strategic management is presented with regard to
strengths, weaknesses, opportunities and threats (a SWOT-analysis).
Table 7.1 SWOT-analysis of the present strategic management process

(Source: Authors own construct)
The PM-process
The main weaknesses and flaws instituted in the present PM-process at DHL
Solutions are summarized in Table 7.2 below. This table examines the current
process of performance measurement in general and the set of individual
performance measures and the performance measurement system in particular.

Strengths
Skilled managers
Experience on the development of
plans based on internal and external
conditions (i.e. the market plan)
An external environment which is
quite stable
Weaknesses
Poor communication of strategic issues
Weak connections between different
management levels
Weak relationships between activities
and measures on the operational level
and overall strategies and objectives
Opportunities
The possibility to provide the
information that will engender
understanding
Boost commitment to strategic
implementation
More adequate resource allocations
The opportunity to develop a relevant
and balanced PM-system
Threats
Alienation of operating units from the
overall objectives
Misunderstandings between managers
Poor commitment to general thrusts
The use of a PM-system which is
unbalanced and not connected to
strategies
ANALYSIS


61
Table 7.2 Main weaknesses and flaws with the present PM-process

(Source: Authors own construct)
7.3 A New Performance Measurement Regime
With the analysis of the current situation as a background one may now
conceptualize the ideas presented in chapter 3 in a new measurement regime for
DHL Solutions in Sweden. However, at this point one must stress that the
following analysis is only based on a limited set of information from the
organization as a whole and should primarily be seen as a support for how to
develop such a measurement regime in the company.

First, prior to the development of a new measurement regime, DHL Solutions
should overlook their whole strategic management process. However, since this
is a rather complex process where one must include all management levels and
businesses in the company this falls outside of the delimitations of this thesis.
Second, DHL Solutions in Sweden should try to translate their strategies and
objectives (often on the form of interpreted directives from higher levels of the
organization) into defined action steps for the operational level in a more
systematic way. That is, they should develop an operating plan for the Swedish
organization. However, since this is a quite comprehensive process (see
appendices 7 and 8 for a presentation of how to develop an operating plan) the
following analysis will be more of a translation of the general thrusts and
objectives identified at the Swedish headquarters into generic objectives for the
different management levels in the organization.


Lack of consensus on the overall subject of performance measurement
Instituted measures are not derived from strategic objectives
Lack of standardized guidelines and policies on the subject
Ambiguous directives from different levels of the organization
Poor definitions of different dimensions of performance
Lack of unified focus on what measures to track (wide range of measures used)
Lack of system-view on the subject of performance measurement:
o Unbalanced emphasis on the different performance dimensions
o Insufficient knowledge of the trade-offs between measures
o Lack of simultaneous measurement of multiple dimensions
Individual measures are not continually criticized and they are seldom dropped
Certain elements of the performance measure record sheet are not sufficiently
defined for some measures. Including:
o Titles
o Purposes of measures
o Relations to strategic objectives
o What do they do? (i.e. definitions of management actions)
ANALYSIS


62
A new measurement regime for DHL Solutions in Sweden would first include a
reconsideration of Figure 6.2 and an adjustment of the present view on
objectives setting and measurement feedback. Figure 7.2 displays a new view
on how the accountability of objectives and measures should be managed in the
Swedish organization. The client-specific measures (group 4 in Figure 6.2) are
disregarded in this model due to the delimitations of this thesis but basically,
managers should try to incorporate such measures into the internal
measurement system by redesigning them or substituting them with measures
instituted in the internal system.


Figure 7.2 A new view on objectives setting and measurement feedback
(Source: Authors own construct)
This new view entails several differences compared to the present view and
will probably (if implemented) simplify the processes of information handling
and performance measurement. The first obvious implication is that all
measures calculated at the operational level are actually reviewed by managers
at the operating units and then a selected set of those measures are aggregated
and reported up to the Swedish headquarters. Hence, there is no possibility for
information to take the VIP-lane directly from the lowest level to the highest
Internal Processes
Objectives for core
processes and
processes
Managers at Swedish headquarters
Managers at central levels
Managers at operating units
Objectives and
strategies for the
Swedish organization
Overall unit measures
and core process
measures
Total performance
measures
Objectives for
operating units
C
l
i
e
n
t

C
u
s
t
o
m
e
r

Overall unit measures,
core process measures
and process measures
ANALYSIS


63
level in the organization, surpassing all intermediate management levels (as is
now the case in Figure 6.2). Furthermore, there are three management loops
embedded in the model; one for each adjacent pair of management levels.
These loops are explained in more detail below.

When setting objectives and strategies for the Swedish organization, the
regional headquarters (or corporate headquarters) should do this in cooperation
with representatives from the Swedish headquarters. These overall objectives
are then translated by managers at the Swedish headquarters together with
operating unit managers into objectives for the operating units. The operating
unit managers (maybe with support from resources from the headquarters) then
start to detail these unit objectives into specific objectives or actions for their
core processes and individual processes.

After all objectives have been deployed down through the organization,
identifying the work that needs to be done at each level, managers need to
decide on what measures that should act as feedback on these objectives from
the bottom up. First, operating unit managers (with support from headquarters)
identify the measures they need as feedback on how well they are meeting
objectives on their core processes and processes. Then operating unit managers
together with managers at the Swedish headquarters can aggregate some of
these measures into overall operating unit measures and finally, Swedish
headquarters can report their total performance to central levels.

The above procedure will ensure that each management loop is closed and that
managers from all levels of the organization take part in this process, enabling
managers to see the overall course of the company. Also, the process entails a
more distinctive culture of accountability for objectives and measures
compared to the current situation.

The new model presented in Figure 7.2 also shows a striking resemblance to
the model of the performance pyramid (presented in section 3.4.2). Therefore,
the rest of this analysis will be based on the dynamics and dimensions of the
performance pyramid.
A New PM-system
The below presentation of a new measurement system rests upon three critical
assumptions. First, the following performance measurement system presumes
that a corporate strategy and a business strategy have already been formulated
in the organization in some fashion. Here, these overall strategies will only be
identified and interpreted. Second, the system also presume that the Swedish
ANALYSIS


64
organization is more or less a strategic business unit (SBU), whose strategic
execution will not affect (or be affected by) other parts of the company to a
great extent. In reality, a more sufficient definition of the SBU would probably
be the regional organization (i.e. Nordic/UK) or DHL Solutions as a whole.
Third, the model is somewhat based on the assumption that the production of
the services DHL Solutions provide are simple enough to enable a delimitation
of the model to not include a set of different core processes (in which case one
would have to develop more than one bottom half of the pyramid).

In order to be able to use the performance pyramid successfully, managers in
the organization first need to reach a unified understanding of its dimensions
and components. Since this has not been done at DHL Solutions in Sweden,
proposed definitions of the different parts of the pyramid are presented in
appendix 9, along with summaries on the present situation of each dimension.

The new performance measurement system developed in this analysis will now
be presented from the top down in the pyramid.

The first step in developing this PM-system is to formulate a vision for DHL
Solutions as a whole. The vision as it was interpreted by the author of this
thesis is presented in Figure 7.3.


Figure 7.3 DHL Solutions vision
(Source: Authors own construct based on a statement by the head of division industrial)
Once the vision is recognized and established, managers in the Swedish
headquarters can identify the objectives and strategies set by central levels in
the organization. Figure 7.4 presents some generic strategies that DHL
To provide superior 3PL-
solutions for warehousing and
related services that enhance our
clients business capabilities, in a
way that we are perceived as the
leading supplier of such services
by companies in the industry-
specific sectors we operate.
Vision
ANALYSIS


65
Solutions in Sweden follow today. The feedback through measures on the
execution of these strategies is presented in Figure 7.5.


Figure 7.4 Generic strategies for the Swedish organization
(Source: Authors own construct)


Figure 7.5 Feedback through measures to central levels
(Source: Authors own construct)
Strategies for the core processes at the operating units are presented in Figure
7.6 and the corresponding feedback is displayed in Figure 7.7.
Market Financial
Vision
Vision and Business Strategy
Corporate level and Nordic/UK
The Swedish organization
Core processes
Individual Processes
DHL Solutions in Sweden should
contribute to DHLs overall image
in a positive way!
DHL Sols (SE) should deliver a
x % profit by every month-end!
DHL Sols (SE) should provide
state-of-the-art services to their
clients in a way that strong
relationships develop!
DHL Sols (SE) should focus on
cost-efficiency!
DHL Sols (SE) should
consolidate their operating units
into fewer, larger multi-user units!
Market Financial
Vision
Vision and Business Strategy
Corporate level and Nordic/UK
The Swedish organization
Core processes
Market Share (%)
Market position
No. of new sales
Overall client retention
Market Measures
Financial Measures
Individual Processes
Profit
Return on Sales
Return on Assets
ANALYSIS


66

Figure 7.6 Strategies and objectives for the core processes at operating units
(Source: Authors own construct)


Figure 7.7 Feedback through measures on core process performance
(Source: Authors own construct)
The final management loop in this PM-system is closed by setting process
objectives (see Figure 7.8) and deciding on what measures that should act as
feedback on those objectives (see Figure 7.9).

CS Flex.
Prod.
Market
Vision and Business Strategy
Corporate level and Nordic/UK
The Swedish organization
Core processes
Individual Processes
Financial
General Thrusts
Reduce costs
Improve quality of services
Increase flexibility for large
volume variations

Specific Strategies
Improve work methods and
procedures
Increase standardization in
operations
Develop a workforce with
multiple flexible skills
Improve communications
CS Flex. Prod.
Market
Vision and Business Strategy
Corporate level and Nordic/UK
The Swedish organization
Core processes
Individual processes
Financial
Surveys (index)
Client retention (%)
Contract time (mean)
No. of complaints
On-time delivery for
rush orders (%)
On-time delivery for
large-volume orders
Time to implement new
assignments or VASs
Revenues/Costs
(SWOT/Net Sales)
Customer Satisfaction
Productivity
Flexibility
ANALYSIS


67

Figure 7.8 Generic strategies and objectives for the operational level
(Source: Authors own construct)


Figure 7.9 Feedback through operational measures to operating unit managers
(Source: Authors own construct)
CT Waste Delivery Quality
CS Flex.
Vision and Business Strategy
Corporate level and Nordic/UK
The Swedish organization
Core processes
Individual Processes
Prod.
Increase ability to meet or
exceed clients expectations
in each process
Enhance all processes
capabilities to work
together in a way that
correct orders are delivered
on-time
Focus attention on all
processes cycle times and
increase the proportion of
hands-on time in each
process
Concentrate on reducing
wasteful activities in all
processes
CT Waste Delivery Quality
CS Flex.
Vision and Business Strategy
Corporate level and Nordic/UK
The Swedish organization
Core processes
Individual Processes
% problem-free deliveries
Ability to meet clients expectations (index)
% of services meeting specification
% on-time deliveries (to
customers in-full and
correct orders)
% of orders completed
on-time for shipment
Delivery
Quality
In-process scrap (cost)
Cost of inspection and control
Cost of rework (due to claims etc.)
Cycle Time
Time to complete each
process
Hands-on time
Tot. cycle time
Waste
Prod.
ANALYSIS


68
7.3.1 Implications for the Organization
Although, the above performance measurement system should only be seen as
an example of how the measure development process could turn out, the new
performance measurement regime presented in this analysis would probably
involve a number of interesting implications for the organization with regard to
the weaknesses of the current situation. Including:
Stronger connections between management levels (see Figure 7.2)
More distinctive communication of objectives
Consensus on the issue of objectives setting as managers at multiple
levels take part in this process
A clearly defined culture of accountability
Enhanced overall understanding of the performance measurement
process
Provided definitions of different dimensions
A more holistic and balanced system-view
A portfolio of measures established as an entity (including the possibility
to critique old measures in a more comprehensive context)
However, questions can still be raised whether or not:
Measures in the system are truly derived from strategies?
Individual measures are well-designed?
The first question touches upon the issue of strategic management and the lack
of such a systematic approach in the above analysis. The objectives and
measures established in the new measurement system are based upon a limited
set of information and can not be seen as being derived from strategy.
However, the result would probably be better if the same process would be
followed by managers inside the organization. The second question, regards the
fact that the individual measures presented in the system have not been
validated though the use of for example the performance measure record sheet.
Hence, at this point one can not tell whether the measures are well-designed or
not.

CONCLUSIONS


69
8. CONCLUSIONS
This chapter repeats and summarizes the general conclusions drawn from the
analysis with respect to the purpose of this thesis.
8.1 General Conclusions
This thesis argues that the issue of performance measurement is and must be
closely related to the concept of strategic management. That is, the
development and establishment of performance measures should be an
integrated step in a much more comprehensive process where managers
formulates the strategies and objectives for their future business. Measures
should act as feedback on those objectives and enable managers to monitor how
successfully they are executing their selected strategies.

Today, DHL Solutions do not follow such a systematic process as the strategic
management process and they separate the issues of strategy formulation and
performance measurement. Consequently, it is impossible to say if the
instituted measures are truly derived from strategic objectives or if the
measures used are irrelevant for the current thrusts of the organization.
8.2 The Performance Measurement Process
The most important conclusion regarding the overall process of performance
measurement is that managers in the Swedish organization of DHL Solutions
have not reached a consensus on the issue. Reasons for measurement are
different among the managers and heads of operating units lack standardized
procedures for the establishment of measures. Also, the organization would
benefit from instituting clear accountabilities and reporting structures for
performance measures.

When viewing the set of measures used in the organization as a system, the
situation gets quite problematic. Definitions of the different dimensions of
performance are missing and the measures used add up to a seriously distorted
and unbalanced measurement system when viewed as an entity (see DHL
Solutions pyramid in Figure 7.1). The internal efficiency-perspective in
general (the right side of the pyramid) and the financial and productivity
dimensions in particular are heavily overemphasized; whereas the dimensions
of cycle time, quality (as defined in the pyramid), customer satisfaction and
market are almost entirely overseen. Moreover, trade-offs between the
dimensions measured are not fully understood. Hence, the conclusion is that
DHL Solutions should examine what dimensions of performance they want to
CONCLUSIONS


70
measure, clearly define these dimensions and integrate them in a system (such
as the performance pyramid), before they develop any new individual measure.

From the investigation of individual measures by using the performance
measure record sheet one can draw some general conclusions. First, it should
be clear that a future use of this tool for the establishment of measures in the
company can enhance the probability that developed and instituted measures
are relevant and well designed. Secondly, for the measures used today, there
are a couple of distinctive weaknesses on some of the elements in the record
sheet. The major gaps are:
Titles of measures are insufficiently defined
Purposes of some measures are not sufficiently formulated
Measures are not explicitly related to strategic objectives
Management actions (when changes in measures occur) are not defined

RECOMMENDATIONS


71
9. RECOMMENDATIONS
This chapter contains a set of recommendations for DHL Solutions to follow in
order to improve their process of performance measurement.
9.1 Four General Recommendations
The results from this thesis add up to four general recommendations for the
company under investigation. These four recommendations are (with
decreasing complexity):
1. DHL Express and Logistics should incorporate a comprehensive
strategic management process in their whole corporation.
2. DHL Solutions in Sweden (or Nordic/UK) should translate their
Business Strategy into an operating plan (including a tailored
measurement package) in order to implement the selected strategies and
align measures to strategies.
3. DHL Solutions in Sweden should make use of the performance pyramid
as a framework for PM in order to simplify the process of developing a
PM-system.
4. DHL Solutions in Sweden should make use of the performance measure
record sheet for all their instituted measures as well as every time they
develop a new measure in order to keep track of the entity of measures
and insure that each measure is well-designed.
These four recommendations are briefly repeated and described below in
sections 9.1.1 through 9.1.4.
9.1.1 Implement Strategic Management in DHL
Since the process of strategic management, as being a very powerful steering
and control mechanism for managing an enterprise with multiple businesses,
has not been implemented in the corporation, the most obvious
recommendation for DHL on the basis of this thesis would be to present an
action-plan for doing this. See figure 3.1 for a repetition of the strategic
management process. However, the delimitation of the project to only concern
the Swedish operations of DHL Solutions contradicts such a recommendation
because it would primarily be directed towards corporate top management.
Therefore, it will not be further elaborated here.
9.1.2 Develop an Operating Plan for DHL Solutions in Sweden
DHL Solutions in Sweden should translate their business strategy into
operationally relevant actions in an operating plan; including the issues of how
and why they should measure performance. See appendices 7 and 8 for a
comprehensive presentation of how this can be done at DHL Solutions. A
RECOMMENDATIONS


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major danger by implementing this recommendation separately from the first
recommendation, is that the use of the operating plan will most likely be
superimposed on top of existing management processes and systems rather than
being an integrated step in the strategic management process. However, the
author of this thesis is of the opinion that the positive effects (e.g.
organizational learning and the possibility to relate performance measures to
strategies) of using this process overweighs the risks of having a too narrow
demarcation on the scope of the process.
9.1.3 A Framework for a PM-system at DHL Solutions in Sweden
Generally in business research, the issue of performance measurement is quite
underdeveloped and it still includes a number of serious flaws and dangers.
However, the best way to evade these dangers inherited in the monitoring of
individual measures is to follow two basic recommendations. The first
recommendation is to focus on measuring improvement in system performance
rather than absolute levels of performance. The second recommendation is to
measure multiple dimensions and levels of performance in a system instead of
attempting to focus on a single measure or even a group of the same kind of
measures. Thus, one needs a framework for a performance measurement
system to use in order to assure that a holistic view on the operations is
established every time a new measurement package is developed. An advantage
with such a framework is that the framework itself can be standardized, even
though individual measures in it as well as focus and emphasis on dimensions
may change over time. In this thesis, the framework used for system
development is the performance pyramid (presented in section 3.4.2). The
following paragraphs present important issues and examples of how DHL
Solutions can use the performance pyramid to develop a performance
measurement system which is aligned with the strategies selected in the
operating plan (if one is used). See also section 7.3 for the authors view on
how a tailored measurement system for DHL Solutions in Sweden might turn
out when analyzing the current situation.

When managers in DHL Solutions have decided upon what strategies they are
to pursue in the future, and developed an action-plan for each strategy, they can
determine what measures that should be included in the measurement package
for tracking the progress of the strategies. The framework for performance
measurement discussed above (the performance pyramid) acts as a supporting
tool in this process. Managers want to find a holistic and multi-dimensional
measurement system, aligned with the strategies executed in the operating
system. Measures on the second level of the pyramid (the market and the
financial dimensions) are reviewed at the top of the Swedish organization (and
RECOMMENDATIONS


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probably by higher levels of the organization) as a means of tracking the
ultimate success of all strategy implementations in combination. Measures on
the lower two levels are tailored for each operating strategy that is to be
implemented and therefore, managers need to establish as many sets of
measures on these levels as there are strategies. Each specific set of measures
are reviewed by those affected by the strategy implementation for which
progress that set is instituted to track. However, top managers in the Swedish
organization should apart from the measures on the second level probably only
track the core process measures (customer satisfaction, flexibility and
productivity) and not the process or department measures for each strategy. An
important point is that although the final measurement package needs to be
holistic, all dimensions do not have to be exactly equally emphasized.
Depending on the strategies selected some dimensions will be more focused
than others.

Appendix 9 presents proposed definitions for the dimensions in the
performance pyramid, along with summaries on the present situation of each
dimension. The general recommendations on how DHL Solutions can improve
their system-view on the overall issue of performance measurement based upon
this summary are presented below.
DHL Solutions needs to integrate a continual measurement on the
dimensions of market, customer satisfaction, flexibility, quality and cycle
time into their PM-system and gain experience of measuring these
dimensions.
For the financial dimension, they need to distinguish more clearly the
actual tracking of financial performance from financial metrics in
accounting and budgets.
DHL Solutions should tune down their high emphasis on the productivity
dimension (unless it is clearly related to a selected strategy) and
distinguish between tracking the overall core process performance on
this dimension and the productivity metrics used as parameters in
contracts and planning tools.
DHL Solutions must overlook their definition of the quality dimension
and avoid mix-ups between the externally oriented quality concept and
the internally focused waste concept.
Regarding the waste dimension, DHL Solutions must start to analyze the
cause-and-effect relations in their operations in order to learn which
activities that are actually non-value-added (i.e. waste) and what
activities that are the causes for them.

RECOMMENDATIONS


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When consensus have been reached on the definitions in the performance
pyramid DHL Solutions must assess their history and culture of performance
measurement system-thinking. That is, they must attain a uniform
understanding of their present and previous focus on instituted measures. As
this thesis concludes, their view on performance measurement is quite
distorted. Consequently, this view should be balanced before any new measures
are established. They must learn the benefits of measuring multiple dimensions
on multiple levels of the organization simultaneously, but at the same time take
advantage of their experiences of measurement on some of the dimensions (e.g.
financial, productivity and delivery measurement).

One important issue for DHL Solutions (briefly outlined in section 7.1.2 when
discussing the KPI-concept) is that they must separate strategically derived
measures from other types of metrics. The former are those incorporated in the
tailored measurement package and are: the information base for decision
making; the means of focusing efforts; continually monitored; the way of
tracking strategy implementation; reviewed and discussed at meetings; and
displayed on notice boards, in newsletters, etc. for all employees concerned.
Such measures should be highly focused and be of concern to the operating
system as a whole. The latter, on the other hand, may be those metrics
operating units are required to calculate because they are: variables in support
tools or management systems; parameters or standards to be met in
assignments; cost-drivers in contracts; measures on specific deviating activities
for some operating units. Such metrics should fall under the responsibility of
the operating unit managers and should not be integrated in a performance
measurement system or regarded by other members of the operating system.
9.1.4 Establish Guidelines for Individual Measures
Even after reviewing the recommendations for and the analysis of the PM-
system, there are still some general recommendations to put forward on the
issue of individual performance measures. As stated in the conclusions, DHL
Solutions would probably benefit from an implementation of the performance
measure record sheet for the design of new performance measures. That is,
every time managers are to institute a new measure (either as a step in the
operating plan formulation process or as they are using the PM-concept today)
they should be able to precisely define all elements of the record sheet for that
measure. If they do not succeed in this, the specific measure must be
redesigned before evaluated again. DHL Solutions could also use the
performance measure record sheet on all their established measures in order to
review them on actual relevance for the present operations. Managers at the
Swedish headquarters should push the heads of the operating units to deliver
RECOMMENDATIONS


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record sheets for all the measures they use today, irrespective of how successful
they are in completing the record sheets. The best result with this process will
probably be achieved if a skilled and analytic facilitator (for example from the
headquarters) helps operating unit managers to complete the record sheets
before sending them to headquarters. Then managers at headquarters can use
this information to analyze their wide spectrum of measures as an entity in
order to be able to: drop irrelevant measures; improve dysfunctional measures;
learn from the use of well-designed measures; and standardize similar
measures. The process for how DHL Solutions can use the record sheet for
their management of measures is presented in Figure 9.1.


Figure 9.1 How DHL Solutions should use the performance measure record sheet
(Source: Authors own construct)

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Order lines/man-hour
Claims per order line
Failures in picking
ROS
In-process scrap
Warehouse denial
Customer fill
Idle capacity
Accidents in work




Measures monitored
at operating units
1. Develop a
record sheet for
each measure
2. Gather all
record sheets
in a document
?
Establishment of
new measures
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Dispose of
irrelevant
measures
3. Analyze the
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DISCUSSION


76
10. DISCUSSION
This chapter ends the thesis by providing a discussion on how DHL Solutions
could use the recommendations presented and how these recommendations, if
implemented, would affect the organization. Furthermore, the chapter contains
a presentation of the results from the benchmarking session at CFI Group.
10.1 External Environment and Planning Horizon
During the past decade, the business of logistics has faced lots of changes in the
external environment. First, globalization and the merge of companies into
large corporations have affected logistics services in that they have to cover
more widespread geographical areas with their distribution networks. Second,
new companies have entered the market, which have led to prize pressures and
tougher competition between the different actors. Moreover, during the 90s,
the advances on information technology had great impacts on logistics
companies. Nowadays, to be able to stay competitive, they are often required to
have sophisticated warehouse management systems, track and trace-
applications and EDI-interfaces towards the clients.

Although, all these changes may imply that a company such as DHL Solutions
is in a volatile market, the empirical study of this thesis points in the other
direction (see primarily section 6.1). Innovation is no longer focused to the
same extent and the process of merging and takeover has slowed down. Also,
the entry barriers on the global market are quite high, but the potential market
has not reached its saturation point. New assignments can be found; primarily
from companies who manage their own warehouses today. Also, government
regulations are not that tough on the business of 3PL-warehousing (DHL
Solutions core business) and the general business climate is promising. Hence,
all these factors point to the conclusion that DHL Solutions (at least in Sweden)
is operating in a rather stable external environment.

DHL Solutions external environment will probably have an impact on the
issue of strategic management and, ultimately, also on performance
measurement. Primarily, the external environment affects such variables as
length of planning horizon and requirements on performance (i.e. targets). For
DHL Solutions, as being in a rather stable environment, the planning horizon
could be quite long, presumably up to 3 years.
10
That is, every third year, the
company needs to reinvestigate their strategies and, hence, also redesign their
performance measurement system in order to keep up with changing
environments and new competitive conditions. Furthermore, targets on
individual performance measures should be set with regard to the present skills
of competitors on the dimensions measured. This, however, is a later step in the
DISCUSSION


77
process of establishing strategically driven performance measures and falls
outside the scope of this study.
10.2 How to Use the Recommendations?
This thesis presents four general recommendations for how DHL Solutions can
overcome their weaknesses in the present performance measurement process
and develop a new holistic and balanced performance measurement system
consisting of relevant and well-designed measures. The four recommendations
are quite different from each other regarding their complexity and how
complicated they would be to implement. Figure 10.1 presents a matrix where
the four recommendations expected impact on the overall success of the
organization is plotted against the probability to successfully implement a
particular recommendation.


Figure 10.1 A probability/impact-matrix for the recommendations
(Source: Authors own construct)
The four recommendations can be used separately or as a group depending on
what available resources there are in DHL Solutions and what level of ambition
they have for the performance measurement issue. If the recommendations are
used separately, DHL Solutions would probably benefit from starting out with
recommendation number four and then work their way up towards
recommendation number one. If implemented in the organization and used
according to Figure 9.1, the performance measure record sheet (recommen-
dation number 4) will presumably enhance the understanding of what measures
Rec. no. 2
Rec. no. 3
Rec. no. 4
Recommendation no. 1
Impact on
overall success
of organization
Less
More
Probability of implementation success
High Low
DISCUSSION


78
they should use in the future and a limitation and standardization of the existing
set of measures, making the situation more comprehensible.

However, the record sheet as it is presented in section 3.4.1 probably needs to
be slightly altered to really fit the situation at DHL Solutions. Managers in the
organization ask for some other elements that should be integrated in the record
sheet. Such elements are: reporting structure (once instituted, to whom
should the measure be reported); implementation (if establishing an entirely
new measure, what are the costs and efforts required when implementing it);
and human behavioral aspects (a discussion of how the measure will affect
the behavior of the people concerned).

Recommendation number three involves both the integration of the established
measures in a system (the performance pyramid) and a reconsideration of the
new performance measurement regime (presented in section 7.3). Even though
DHL Solutions choose not to follow recommendations number one and two in
order to implement a new way to manage strategies and objectives they should
try to formulate objectives (even though they do it on an ad hoc-basis) for the
different organizational levels and identify the individual measures that
corresponds to these objectives. Furthermore, these identified measures should
be integrated in a system (such as the performance pyramid) in order for
managers to be able to analyze the entity of measures and find missing links
between organizational levels or dimensions.
10.3 Customer Satisfaction A Wider Perspective
This thesis also takes into account the results from a brief benchmarking
session carried out at a consultancy firm (CFI Group) in the business of
customer satisfaction management. Here the results from this benchmark is
presented and basically, they can be seen as an additional research into the
customer satisfaction dimension but also, due to the methodology used by the
consultancy firm, it can be viewed as an alternative way to handle strategy
formulation and objectives setting (a view that is somewhat simpler than the
systematic and internal approach presented in appendices 7 and 8).

CFI Group is a consultancy firm based in Ann Arbor (Michigan) with 14
offices throughout the world, including one in Stockholm. Their services have
faced growing demands ever since they were founded in 1988 due to many
organizations increased focus on non-financial measures. CFI Groups
methodology is based on the principle that satisfied customers are economic
assets that yield future cash flows. Below follows a presentation of the
DISCUSSION


79
methodology used by CFI Group to measure and manage the customer
satisfaction dimension.
35


The methodology used by CFI Group aims at optimizing the customer
satisfaction dimension for their clients and answers the following questions:
36

What factors of our organizations should we focus on in order to increase
customer satisfaction?
What are the costs for the improvements required?
Will the benefits exceed the costs?

At the outset of the process CFI Group determines what driving forces for
customer behaviour that will ultimately affect customer satisfaction. Such
driving forces might be product quality, service, customer support or price.
Then they investigate the correlation between these driving forces and customer
behaviour due to changes in customer satisfaction, and ultimately to financial
performance such as profitability. After these connections have been identified,
CFI Group continues by executing comprehensive surveys on the current
customer satisfaction. This is both done for satisfaction on the different driving
forces and as the total satisfaction of the company. However, CFI Group argues
that only customer satisfaction rankings for the driving forces or for the whole
company are insufficient pieces of information and might enhance the risk to
make faulty management choices (for example, the price factor tend to be
bottom ranked irrespective of how satisfied customers really are). Therefore,
CFI Group uses a patented methodology for analyzing the results from the
surveys in order to investigate each driving force on its effect on overall
customer satisfaction.
36


CFI Groups methodology to use cause-and-effect analysis on the customer
satisfaction dimension will generate interesting results for the company. First,
they will provide information on what driving forces (or organizational factors)
that should be focused and improved in order to enhance customer satisfaction.
Also, they will identify the relations between customer satisfaction and desired
behaviour from the customers and profitability of the organization.
36
Appendix
10 presents a sketched relationship-figure for the driving forces that could be at
place for DHL Solutions in Sweden and the customer behaviour these driving
forces could engender. However, obviously the figure does not present any
rankings or effect parameters for these elements.


35
Homepage www.cfigroup.se
36
Interview Magnus Creutz, CFI Group


80
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Books:
7
Bell, J. (2000). Introduktion till forskningsmetodik. 3 ed. Studentlitteratur.
Lund. ISBN: 91-44-01395-7

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Brassington, F. and Pettitt, S. (2000). Principles of Marketing. 2 ed. Pearson
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6
Ejvegrd, R. (1996). Vetenskaplig metod. 2 ed. Studentlitteratur. Lund.
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2
Fitzgerald, L., Johnston, R., Brignall, T. J., Silvestro, R. and Voss, C.
(1991). Performance Measurement in Service Businesses. CIMA. London.
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10
Judson, A. S. (1996). Making Strategy Happen: Transforming Plans into
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55786-721-6

1
Lynch, R. L. and Cross, K. F. (1995). Measure Up! Yardsticks for
Continuous Improvement. 2 ed. Blackwell Business. Cambridge,
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5
Walln. G. (1996). Vetenskapsteori och forskningsmetodik. 2 ed.
Studentlitteratur. Lund. ISBN: 91-44-36652-3
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Bititci, U., Carrie, A. and McDevitt, L. (1997). Integrated performance
measurement systems: a development guide. International Journal of
Operations & Production Management, Vol. 17, Issue 5/6, p522.

8
Brignall, S. and Ballantine, J. (1996). Performance measurement in service
businesses revisited. International Journal of Service Industry Management,
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3
Flapper, S., Fortuin, L. and Stoop, P. (1996). Towards consistent
performance management systems. International Journal of Operations &
Production Management, Vol. 16, No. 7, pp. 27-37.



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Grnroos, C. and Ojasalo, K. (2004). Service productivity: towards a
conceptualization of the transformation of inputs into economic results in
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19
Kanji, G. (2002). Performance measurement system. Total Quality
Management, Vol. 13, Issue 5, p715.

20
Kaplan, R.S. and Norton, D.P. (1992). The balanced scorecard: measures
that drive performance. Harvard Business Review, January-February, pp.
71-9.

22
Nachum, L. (1999). Measurement of productivity of professional services.
International Journal of Operations & Production Management, Vol. 19,
No. 9, pp. 922-950.

13
Neely, A., Gregory, M. and Platts, K. (1995). Performance measurement
system design: a literature review and research agenda. International
Journal of Operations and Production Management, Vol. 15, No. 4, pp. 80-
116.

15
Neely, A., Richards, H., Mills, J., Platts, K. and Bourne, M. (1997).
Designing performance measures: a structured approach. International
Journal of Operations & Production Management, Vol. 17, No. 11, pp.
1131-1152.

11
Parker, C. (2000). Performance measurement. Work Study, Vol. 49, No. 2,
pp. 63-66.

17
Sinclair, D. and Zairi, M. (2000). Performance measurement: a critical
analysis of the literature with respect to total quality management.
International Journal of Management Reviews, Vol. 2, Issue 2, p145.

16
Slater, S., Olson, E. and Reddy, V. (1997). Strategy-based performance
measurement. Business Horizons, Vol. 40, Issue 4, p37.

21
Stainer, A. (1997). Logistics: a productivity and performance perspective.
Supply Chain Management: An International Journal, Vol. 2, No. 2, pp. 53-
62.

18
Tangen, S. (2003). An overview of frequently used performance measures.
Work Study, Vol. 52, No. 7, pp. 347-354.


82

12
Vuorinen, I., Jrvinen, R. and Lehtinen, U. (1998). Content and
measurement of productivity in the service sector: a conceptual analysis
with an illustrative case from the insurance business. International Journal
of Service Industry Management, Vol. 9, No. 4, pp. 377-396.
Homepages:
35
CFI Group, http://www.cfigroup.se 2004-11-29

DHL, http://www.dhl.se 2004-07-19

4
Forskningsmetodik, Avdelningen fr allmnmedicin vid Gteborgs
Universitet, http://www.infovoice.se/fou/ 2004-08-18
Internal Documents and Brochures:
Facts & Figures 2003 DHL Solutions (Brochure)

34
Logistical Process Flow for DHL Solutions in Sweden (Power Point), April
2004.

31
Market Plan for DHL Solutions in Sweden (Power Point), January 2004.

We move the world DHL (Brochure)
Personal Interviews:
24
Head of Operating Unit A. DHL Solution. 2004-07-21

36
Creutz, Magnus Team Leader. CFI Group, Stockholm. 2004-10-07

26
Head of Operating Unit C (and Nordic coordinator of the MORE-project
initiative on Warehouse Productivity). DHL Solutions. 2004-07-27

30
Head of Division Industrial. DHL Solutions, Swedish Headquarters,
Stockholm. 2004-09-10

32
Controller, Division Industrial. DHL Solutions, Swedish Headquarters,
Stockholm. 2004-10-11

29
Head of Division Consumer. DHL Solutions, Swedish Headquarters,
Stockholm. 2004-07-08



83
25
Head of Operating Unit B. DHL Solutions. 2004-09-13

28
Production Support Manager (at Unit D). DHL Solutions. 2004-08-20

27
Head of Operating Unit D. DHL Solutions. 2004-08-20

33
Controller, Division Consumer. DHL Solutions, Swedish Headquarters,
Stockholm. 2004-10-11



84

APPENDICES




Appendix 1 Interview Guide, Heads of Divisions
Appendix 2 Interview Guide, Division Controllers
Appendix 3 Interview Guide, Heads of Operating Units
Appendix 4 Elements in the Performance Measure Record Sheet
Appendix 5 The Record Sheet for Measures Used at DHL Solutions
Appendix 6 Measures Monitored at DHL Solutions in Sweden
Appendix 7 Development of an Operating Plan
Appendix 8 Generic Strategy Options for the Operating Plan
Appendix 9 Definitions in the Performance Pyramid for DHL Solutions
Appendix 10 Customer Satisfaction at DHL Solutions





1 (3)
Appendix 1

85
Interview Guide, Heads of Divisions

1. Date:
2. Respondents name and title:
3. Operating units under the respondents responsibility:
4. Number and type of clients to these operating units:
5. Short description of DHL Solutions (e.g. type of company, organization and
operations):

Present situation External environment

6. From the perspective of DHL Solutions, what is the general situation
regarding the overall business climate?
7. Which government regulations particularly affect the business at DHL
Solutions?
8. Who are your main competitors and on what are the competition based (e.g.
cost, quality, time or flexibility)?
9. Are the threats from entries of new companies large in the market (what are
the entry barriers)?

Present situation Corporate and business strategy

10. Shortly describe the visions, goals and strategies of the organization?
11. These four market strategies are described in the theory, which (one or
more) fits the present situation at DHL Solutions best?
16

Product leaders seek to identify emerging opportunities and
continuously strive to develop and deliver new products that exceed
existing performance boundaries. The key task for product leaders is
to maintain an environment in which focused creativity can flourish.
A typical product leader is Intel.
Customer intimacy is the strategy of companies such as IBM. They
focus their efforts on building strong relationships with a select group
of customers whose needs they understand deeply and who are
willing to pay a premium for the service or special attention they
receive. Accompanying this orientation is a focus on the lifetime
value of a relationship, not just the profit from an individual
transaction.
Brand champions are the mass market counterparts of customer-
intimate businesses. Companies such as Coca-Cola and Procter &
Gamble invest heavily in advertising to build up the value of their
2 (3)
Appendix 1

86
brands. Superior marketing capabilities are the foundation skills of
the brand champion.
Operational excellence is the discipline of business that offer the
lowest total cost to their customers. In many cases, such as with Wal-
Mart and Southwest Airlines, this may mean the lowest price. In
other cases, though, it means identifying other critical costs to
customers, reducing them, and avoiding price competition. Two
operating characteristics are common to most of these businesses.
The first is a commitment to standardization and simplicity. The
second characteristic, and one that is invisible to most customers, is
the use of information technology.

Present situation Internal environment

12. What type of company is DHL Solutions with respect to the style of
headquarters/operating unit relationship?
8

Centralized (that is, one-business companies which determine
operating unit strategy at the centre and apply tight operational
controls)
Strategic planning (companies whose centers have a high degree of
influence over operating unit planning, but use flexible controls)
Strategic control (companies which have low influence over
operating unit planning but tightly control the implementation of the
operating units chosen strategy)
Financial control (companies which use tight financial controls over
operating units but take little interest in their strategic planning)

Present situation Performance measurement

13. What measures of performance (KPIs) do you use today to monitor the
operating units?
14. What are these measures used for? That is, why do you, as head of a
division, want to monitor these measures?
11

To be able to identify success
To be able to identify if you are meeting clients requirements
To help understand your processes
To identify where problems, bottlenecks or waste exist
To ensure decisions are based on fact
To show if improvements planned, actually happened
Other reasons:
15. According to you, what dimensions of performance do you monitor today?
3 (3)
Appendix 1

87
16. Do you think that all important dimensions of performance are covered with
the measures you use today for your division (if not: which are missing)?
17. Does the existing measurement portfolio include measures which relate to
both long- and short-term objectives of the business?
18. Do you use any measures that focus on customer satisfaction?
19. Do you use any measures that focus on what the competitors are doing?
20. Name one measure frequently used at your operating unit (afterwards, let
the measure go through the performance measure record sheet below)?
21. Answer the following questions about the stated measure in the performance
measure record sheet:
15

Title:
Purpose:
Relates to:
Target:
Formula:
Frequency of measurement:
Frequency of review:
Who measures?
Source of data:
Who acts on the data?
What do they do?
Notes and comments:

Present situation Productivity measurement

22. According to you, what is the definition of productivity?



1 (2)
Appendix 2

88
Interview Guide, Division Controllers

1. Date:
2. Respondents name and title:
3. Short description of the controllers assignments:

Present situation Internal environment

4. Describe the information systems used in the organization and how
communications between units and headquarters are managed:
5. Explain how, why and when budgets are set:
6. Are there any reward or punishment systems in place for managers at units
or headquarters?
7. What type of company is DHL Solutions with respect to the style of
headquarters/operating unit relationship?
8

Centralized (that is, one-business companies which determine
operating unit strategy at the centre and apply tight operational
controls)
Strategic planning (companies whose centers have a high degree of
influence over operating unit planning, but use flexible controls)
Strategic control (companies which have low influence over
operating unit planning but tightly control the implementation of the
operating units chosen strategy)
Financial control (companies which use tight financial controls over
operating units but take little interest in their strategic planning)

Present situation Performance measurement

8. Briefly describe the culture and strategies concerning performance
measurement at DHL Solutions:
9. What measures of performance are you responsible for as controller?
10. According to you, what dimensions of performance do these measures
cover?
11. Do you think that all important dimensions of performance are covered with
the measures you monitor today (if not: which are missing) and what are the
weaknesses with the existing measurement system?
12. According to you, do the heads of units have an appropriate level of
understanding on measurement issues in general and the established
measures in particular?
2 (2)
Appendix 2

89
13. What would you say: are heads of units resistant or adaptable to change on
measurement related issues?
14. Do managers in the organization critique and analyze existing measures
continually (are irrelevant measures dropped)?
15. Briefly explain the culture of accountability regarding measures in the
organizations (e.g. sponsors, owners, responsibilities):

1 (2)
Appendix 3

90
Interview Guide, Heads of Operating Units

1. Date:
2. Respondents name and title:
3. Name and division of operating unit:
4. Clients to the operating unit:
5. Short description of the operating units business:

Present situation Internal environment

6. What type of company is DHL Solutions with respect to the style of
headquarters/operating unit relationship?
8

Centralized (that is, one-business companies which determine
operating unit strategy at the centre and apply tight operational
controls)
Strategic planning (companies whose centers have a high degree of
influence over operating unit planning, but use flexible controls)
Strategic control (companies which have low influence over
operating unit planning but tightly control the implementation of the
operating units chosen strategy)
Financial control (companies which use tight financial controls over
operating units but take little interest in their strategic planning)

Present situation Performance measurement

7. Briefly describe the culture and strategies concerning performance
measurement at DHL Solutions:
8. Define what a key performance indicator (KPI) is or should be:
9. What measures of performance are used at your operating unit today (for
internal use and for reporting to headquarters)?
10. What are these measures used for? That is, why do you, as head of a unit,
want to measure performance at your unit?
11

To be able to identify success
To be able to identify if you are meeting clients requirements
To help understand your processes
To identify where problems, bottlenecks or waste exist
To ensure decisions are based on fact
To show if improvements planned, actually happened
Other reasons:
2 (2)
Appendix 3

91
11. According to you, what dimensions of performance do you measure at your
operating unit today?
12. Do you think that all important dimensions of performance are covered with
the measures you use today at your operating unit (if not: which are
missing)?

Present situation Productivity measurement

13. According to you, what is the definition of productivity?
14. What measures of productivity do you use today at your operating unit?
15. Do these measures cover all interesting aspects of the productivity concept?
16. What is the primary purpose with productivity measurement, according to
you (e.g. increase the profit margin or reduce the price)?
17. Are there, stated in the organization, any management strategies concerning
the work with productivity and productivity measurement?
18. What are the outputs of your unit (that is, what is produced or generated)?
19. What are the inputs to the production of these outputs (that is, resources
consumed in order to produce the outputs)?
20. Historically, how are costs distributed between these inputs?
21. How is it intended that you should increase your productivity (e.g. increase
the output or decrease inputs)?
22. Name one measure of productivity frequently used at your operating unit
(afterwards, let the measure go through the record sheet below)?
23. Answer the following questions about the stated productivity measure in the
performance measure record sheet:
15

Title:
Purpose:
Relates to:
Target:
Formula:
Frequency of measurement:
Frequency of review:
Who measures?
Source of data:
Who acts on the data?
What do they do?
Notes and comments:
24. Describe the dynamics behind this measure as well as the factors that
influence the outcome of the measure:
1 (2)
Appendix 4

92
Elements in the Performance Measure Record Sheet
This appendix contains an explanation of the elements in the performance
measure record sheet as provided by Neely et al. (1997).
Element 1 Title (Recommendations 2, 8 and 15)
The title of the measure should be clear. A good title is one that, in a simple
way, explains what the measure is and why it is important.
Element 2 Purpose (Recommendations 6 and 10)
If a measure has no purpose then one can question whether it should be
introduced. Hence, the underlying principle of the measure has to be specified.
Typical purposes include to:
Enable us to monitor the rate of improvement, thereby driving down the
total costs
Ensure that all delayed orders are eliminated
Ensure that the new product introduction lead time is continually reduced
Element 3 Relates to (Recommendations 1, 5, 6 and 9)
As with purpose, if the measure being considered does not relate to any of the
business objectives then one can question whether the measure should be
introduced. Hence, the business objectives to which the measure relates should
be identified.
Element 4 Target (Recommendations 4, 5, 6, 7, 9 and 10)
The objectives of any business are a function of the requirements of its owners
and customers. The levels of performance (i.e. the target) the business needs to
achieve to satisfy these objectives are dependent on how good its competitors
are. Without a clear target, which specifies the level of performance to be
achieved and a time scale for achieving it, it is impossible to assess whether
performance is improving rapidly enough and whether the business is likely to
be able to compete in the medium to long term. An appropriate target for each
measure should therefore be defined. Typical targets include:
20 percent improvement year on year
Achieve 98 percent delivery performance (on time, in full) by the end of
next year
Element 5 Formula (Recommendations 2, 4, 8, 11, 12, 14, 15 and 16)
This is one of the most challenging elements to specify because the formula
the way performance is measured affects how people behave. The goal is to
define the formula in such a way that it encourages actions which are good for
2 (2)
Appendix 4

93
the business. One of the golden rules of performance measurement is that there
is no point in measuring someone on something over which they have no
control.
Element 6 Frequency (Recommendation 3)
The frequency with which performance should be recorded and reported is a
function of the importance of the measure and the volume of data available.
Some organizations may have to split this element in two parts: frequency of
measurement and frequency of review.
Element 7 Who measures? (Recommendations 4 and 13)
The person who is to collect and report the data should be identified.
Element 8 Source of data (Recommendations 11, 12, 13, 14 and 15)
The source of the raw data should be specified. The importance of this question
lies in the fact that a consistent source of data is vital if performance is to be
compared over time.
Element 9 Who acts on the data? (Recommendations 4 and 5)
The person who is to act on the data should be identified. There are companies
who make a difference between someone who acts on the data and someone
who owns the measure.
Element 10 What do they do? (Recommendations 4 and 5)
This is probably the most important element in the performance measure record
sheet, not because it contains the most important information, but because it
makes explicit the fact that unless the management loop is closed, there is no
point in having the measure. It is not always possible to detail the action that
will be taken if performance proves to be either acceptable or unacceptable, as
this is often context specific. It is, however, always possible to define in general
the management process that will be followed should performance appear to be
either acceptable or unacceptable. Typical entries for this box include:
Set up a continuous improvement group to identify reasons for poor
performance and to make recommendations as to how performance can
be improved
Publish all performance data and an executive summary on the shop
floor as a means of demonstrating commitment to empowerment.

1 (4)
Appendix 5

94
The Record Sheet for Measures Used at DHL Solutions
This appendix contains a performance measure record sheet for one
productivity measure at each operating unit.
Operating Unit A
At operating unit A, the author of this paper agreed with the head of the unit to
carry out a deeper investigation of the productivity measure used for client x.
The performance measure record sheet for this measure, storage position lines
per man-hour, is presented below.




Elements Details

Title Storage position lines (moves) per man-hour.
Purpose To control the efficiency of the internal processes for client
x and to continuously improve them.
Relates to No clearly defined strategies other than the demand for
continuous improvement of productivity and its relation to
the financial objectives in the company.
Target Fixed improvement target (in percent) related to goals in the
budget.
Formula Storage position lines (moves)/man-hour (blue collar
man-hours for the specific process).
Frequency The frequency of measurement and review is monthly.
Who measures? The head of the unit
Source of data Storage position lines from production statistics (in
ProLogs) and man-hours from time registration system
(CASA) in combination with manual time allocations.
Who acts on the data? Production supervisor and head of operating unit
What does he do? Hard to define - he has not acted in a structured way before.
Notes and comments: According to the head of the unit, the operations at the unit
are stable and well-known, which results in a situation
where he seldom is surprised when reviewing measures.
The measures are more of verifications to him.
2 (4)
Appendix 5

95
Operating Unit B
For further investigation, the head of the unit was asked to define the
productivity measure used at the operating unit in more detail. The performance
measure record sheet for this measure, Cost per unit, is presented below.




Elements Details

Title Distribution and terminal expenses (cost per unit).
Purpose Not exclusively defined. In essence, it is supposed to act as
an incentive for improved behaviour and to control costs.
Relates to Since it is a measure related to transportation activities there
is no connection to an overall strategy in DHL Solutions.
Target Not defined.
Formula All costs connected to the distribution and terminal
activities divided by total handled units.
Frequency The frequency of measurement and review is monthly.
Who measures? The financial manager at the unit.
Source of data Costs in the financial system (they have not been integrated
in DHL Solutions business system yet) and units in the
transportation system.
Who acts on the data? The head of the unit and the warehouse manager.
What do they do? First they double check the data. Then they control if there
has been any changes on the wages or volumes. The
explanation for poor performance can be that labor is not
sufficiently planned or that the situation is different from
what they thought regarding volumes and order structures.
Notes and comments Performance on this measure is primarily supposed to be
improved by lowering the costs (by price negotiations with
haulage contractors or by employee management) or by
increasing the number of handled units (by new sales
etc.).
3 (4)
Appendix 5

96
Operating Unit C
To reach a closer understanding of the measures actually used at unit C, the
head of the unit was asked to explain in detail the elements of one of his
productivity measures, outbound boxes per man-hour. This measure is
presented below, on the form of the performance measure record sheet.




Elements Details

Title Boxes per man-hour
Purpose To support planning and to represent a feedback to the
employees (rewards etc.).
Relates to No overall strategies are defined but the measure is related
to the demand for cost-efficient internal processes.
Target The target is 90 boxes per man-hour (both on individuals
and as a total). The standard objective is to raise the target
by one box per year by developing more efficient processes.
Formula The number of picked boxes (outbound) divided by the
number of hours consumed (blue collars only).
Frequency The frequency of measurement is daily and the frequency of
review is weekly and monthly.
Who measures? Production supervisors.
Source of data Manual counting of boxes in the order papers and hours
from manual time reports.
Who acts on the data? The warehouse manager.
What does he do? Discuss performance on operating meetings and on
occasion develop action-plans.
4 (4)
Appendix 5

97
Operating Unit D
At operating unit D, further investigation was carried out for the measure
outbound order lines per man-hour (blue collars). The production support
manager tried to define this measure on the elements in the performance
measure record presented below.





Elements Details

Title Productivity or order lines per man-hour
Purpose Through feedback, motivate the employees to improve.
Also, it is a way for managers to see what conditions they
give their employees and to find structural changes in the
assignment.
Relates to Not defined.
Target 37 order lines per man-hour. New targets are set each year
based on last years performance. The client wants to see an
improvement year-on-year.
Formula Number of outbound order lines divided by total consumed
labor hours for picking and loading.
Frequency The frequency of measurement is weekly and the frequency
of review is monthly.
Who measures? A combination of persons.
Source of data ProLogs for the order lines and CASA for the hours.
Who acts on the data? Primarily the warehouse manager, but the head of the unit is
in the end responsible for the outcome.
What do they do? Discussions among the managers and initiate improvement
plans.
1 (1)
Appendix 6

98
Measures Monitored at DHL Solutions in Sweden

HK Managers at headquarters C Operating unit C
A Operating unit A D Operating unit D
B Operating unit B

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1 (7)
Appendix 7

99
Development of an Operating Plan
This appendix presents a systematic approach for the development of an
operating plan for the operating system (for example the Swedish organization
of DHL Solutions). First, a model for the development is presented and then
each step in the model is detailed in a formulation process. This appendix is
primarily based on Judson (1996).

The figure below displays a model for the formulation of an operating plan.


The operating plans primary purpose is to translate the generic outside-in view
of the business strategy (i.e. it is oriented primarily to the firms external
Business
strategy
Define and describe
operating system
Analyze system
Target high-leverage
opportunities for
change/improvements
Review/select generic
operating strategies
Formulate tailored
operating strategies
Develop actions for
operating plan
Determine expected
gains, metrics and
monitoring
Revise plan according
to monitoring
experience
Set internal goals
and priorities to
implement
business strategy
Critique recent plan
implementation and
improvement efforts
Inventory strengths
and weaknesses
Assess
management
and
organization
2
3
4
5
6
7
8 9
10
11
12
1
13
2 (7)
Appendix 7

100
environment), into detailed action steps, based on the firms internal
environment. This will enable a successful execution of the strategies selected
for the strategic business unit, as a carefully formulated and systematically
implemented operating plan will enhance the probability of a successful change
in the operating system and the behavior of the people in it in a desired
direction. The model above presumes that a preliminary strategic business plan
has already been formulated for the strategic business unit (step 1). At least,
managers who are to develop the operating plan need to know: the
requirements of corporate management; the overall strategic objectives of the
business; and the resources they can make use of to achieve these objectives.

The model presented in the figure above will now be elaborated as well as
adjusted to DHL Solutions on the form of a structured process for managers to
follow in order to formulate and implement an operating plan.

To set the stage for the formulation of an operating plan, decisions must first be
made about its scope, planning group and Sponsor. Then, a number of work
sessions follow in which the planning group addresses several issues of interest
(including performance measurement). The entire process is sketched in the
figure on the next page and further explanations for the activities are presented
below.

The first activity, prior to the actual start of the formulation process, is to
determine the scope of the operating plan. That is, one should define the
operating system to be addressed by the plan (this corresponds to the first half
of step 2 in the figure on the previous page). Determining the scope is a matter
of first setting the boundaries of the system and then establishing what must be
addressed within these boundaries. In the case for DHL Solutions, the operating
system regarded in this project is simply the entire Swedish organization with
all its functions, business processes and supporting systems. However, further
research into the connections between this system and other parts of the
organization (especially the support functions at regional headquarters) is
probably required to fully understand the scope of the operating system.

Once the scope of the operating plan has been defined, a planning group which
will be responsible for formulating the operating plan should be assembled (the
second activity prior to the start of the formulation process). This group should
contain the collective knowledge and understanding of all significant
components of the operating system. For DHL Solutions in Sweden such a
group could be composed of between 15 and 25 managers and supervisors,
representing all levels and functions of the organization.
3 (7)
Appendix 7

101

The third activity, prior to the work done by the planning group, is the
designation of a Sponsor for the operating plan and the definition of the
Sponsors role in formulating and implementing the plan. In this case, such a
person would typically be someone positioned at the top of the Swedish
organization with power to launch the planning process and with management
qualities to establish the climate of accountability required for the plan to be
successfully implemented. Furthermore, a planning group leader, or organizer,
should be appointed.


Before the planning group meet for their first session, two critical inputs are
prepared in order to engender group consensus and uniform understanding of
the operating system and the current reality at the outset of the process. One of
these inputs is a preliminary situation characterization (corresponding to the
Situation
characterization
Business strategy
imperatives
Work session I
Task groups
Proposed issues and actions
Work session II
Draft summary and plan
Loose ends
- Gains
- Timing
- Responsibilities
- Resources
Review session
Proposed summary and plan
Sponsor review and approval
High-leverage targets
of opportunity
Priorities/objectives
Strengths and
weaknesses
Options/strategies
Barriers/obstacles
Issues
Actions
Responsibilities
Timing
Resources
Gains
Measures
Monitoring plan
Assumptions
Issues
Risks
Implement!
Tasks
Formal reviews
Revise/update strategy,
actions and measures
Integrate with reward
systems
Integrate with budgets
1. Define the scope of the operating plan
3. Designate a Sponsor for the operating plan
2. Form a planning group
4 (7)
Appendix 7

102
second half of step 2 in the first figure). This is a proposed description of the
operating system that lays out in detail:
The context in which the system operates
Its components and elements
How the system works as an entity
This proposed situation characterization should be developed from research
based on interviews with representatives of the organization. The questions this
situation characterization should be able to answer, some of which this paper
answers briefly, is presented in the table below (with questions touched upon in
this report marked with an asterisk).



Questions for a Situation Characterization

What is the scope of the SBUs business and operating system?

What is the business context for the SBU? *

What is the role or mission of the operating system? *

What organization structure is in place? *

What management characteristics predominate? *

What cross-functional collaboration exists?

What are the characteristics of first-line supervision?

What are the characteristics of the workforce?

What is the nature of training and development?

What are the characteristics of the work climate?

What is the nature of planning/scheduling?

What are the characteristics of management information within the operating system
and between it and other corporate departments? *

What performance measures are in use? *

What is the nature of communications within the operating system and between it and
other corporate departments? *

What rewards and compensation are used? *

What is the operating systems relationship with other corporate departments? *

How would one characterize the performance of the operating system?

What are the characteristics of the operating systems culture? *
5 (7)
Appendix 7

103
The other input to the first working session is an analysis of the demands made
on the operating system by the business strategy and how these demands are
being perceived by operating system managers.

When the business strategy is well understood by the planning group, they set
out on the process that will result in the choice of operating strategies (not more
than six) and the formulation of action programs to support these strategies.
The choice of these operating strategies (steps 9 and 10 in the first figure)
should be based on the three analyses (steps 4, 5 and 8) presented below.

In the initial working session, the planning group devotes the first part of the
time to review, modify and validate the situation characterization. As they do
this they also generate a list of potential high-leverage targets of opportunity.
This is the first of the three analyses and corresponds to step 4 in the first
figure. The term high-leverage refers to those elements of the operating
system where the application of resources will generate an exceptionally
powerful impact in changing the entire system in the desired direction. This
analysis is done by first defining and describing the internal operating system
and then comprehensively analyzing this system (steps 2 and 3). See the table
on the next page for an example list of high-leverage targets as it might turn out
for DHL Solutions.

6 (7)
Appendix 7

104

After the planning group has completed this list they try to develop consensus
on what priorities that should be driving the operating system in its support of
the business strategy. This is the second of the three analyses and corresponds
to step 5 in the first figure. The input on business strategy imperatives prepared
prior to the working session is used to stimulate this discussion. Once the
planning group has determined the priorities for the operating system, these are
applied to prioritize the list of high-leverage targets of opportunity generated
earlier in the session. The highest priority targets are later on translated into
objectives for the operating plan.

The third analysis contains of an assessment of the operating systems
capability to deliver what is required to implement the business strategy. This
step consists of a systematic assessment of the strategically relevant strengths
and weaknesses in the operating system (step 8 based upon steps 6 and 7).

High-Leverage Targets of Opportunity

How can we compare the operating units with each other and learn from best
practice?

What can we do in order to be able to continue to charge higher prices than some of
our competitors?

How can we strengthen our brand on the Swedish market and erase the governmental
label?

How do we resolve differences between clients desires and operational capabilities?

In what way can we use performance measurement in order to deal effectively with
poor performance and encourage superior performance?

How can we provide a service that is flexible to large volume variations but at the
same time holding down our costs?

How can we increase our clients willingness to extend their contracts by focusing on
customer satisfaction?

What can we do when it comes to support tools and information systems in order to
assist all operating units with superior, as well as equal, operating conditions?

How can we motivate managers and employees to work in a proactive way with focus
on improvements?

Do we need to focus more on training and education for our employees? If so, in what
areas?

What can we do in order to shorten the time it takes to implement a new client
assignment?

How can we continue to cut our costs?
7 (7)
Appendix 7

105

Once the planning group has completed the three analyses outlined above
(corresponding to steps 4, 5 and 8 in the first figure in this appendix), they
devote the remaining time of the initial working session to select the strategy
options on which to base their operating plan (appendix 8 presents a quite
comprehensive list of 33 generic strategy options companies typically choose
between at this level of the organization). By limiting their choice to fewer than
six options, they ensure that the operating plan will be sharply focused. The
strategies selected should describe the general routes by which management
intend to achieve the strategic objectives of the operating plan. The planning
group should then form one task group for each selected strategy, whose tasks
before the next session will be to develop plans of proposed action steps
specifying the work required to implement them.

The second working session is primarily devoted to formulating detailed action
programs. Using the task groups proposals as a point of departure, the
planning group agrees on specifications of the tasks, deliverables and possible
management assignments for the work required to implement each strategy.
Then the planning group develops a tailored measurement package and a plan
for monitoring so that implementation progress can be tracked for the operating
plan as a whole and for each of its strategies (see section 7.3 for further
discussions on the issue of performance measurement).

Prior to the final working session, small groups formed from the planning
group should complete three tasks. First, they should prepare a draft Proposed
Operating Plan Summary document containing the elements of the plan already
agreed upon by the planning group. Second, they estimate the expected
quantifiable gains that will be achieved if the action programs are completed
successfully. Third, they complete the action programs and integrate them in a
master action program that specifies: any relationships between the tasks; the
time spans for each action step; and managerial accountability for each task.
Then, in their final working session, the planning group review and complete
the draft Proposed Operating Plan Summary document before a final plan
document is submitted to the Sponsor for review and validation or modification
(if the Sponsor has not participated in the planning group). Then the plan is
distributed to managers and supervisors in the operating system and
implementation can begin.


1 (11)
Appendix 8

106
Generic Strategy Options for the Operating Plan
This appendix contains three lists that support the selection of operating
strategies. The identification of one general emphasis option in the first list and
a focus on two or three of the thrust options in the second list, makes the
decision of which (a maximum of six) operating strategies to follow much
easier (the third list). The 33 generic strategy options are presented in the
order of their relative demand on the operating system (from low to high);
where strategies 1 through 9 are quite traditional in nature, whereas strategies
26 through 33 make special and stringent demands on any operating system.
The lists are adopted from Judson (1996).

Emphasis Options
1 External emphasis
The business we are in is at the stage where the most important things are
happening outside the company, in the marketplace where our customer and
competitors are. If we are to maintain or increase our share of the market, we
have to be successful in playing a fast-moving highly competitive game in
which we can take full advantage of quick turns and opportunities at the right
moment. For example, our products and services have to be either in tune with
what customers want, or available when wanted, or noticeably better than the
competitors, or all of these even if it increases the challenges internally.
2 Internal emphasis
The business we are in has settled down to the point where either our position
in the market is acceptable and reasonably secure and stable, or where there is
little opportunity to improve our position. We need to put more emphasis on
how well we function internally, improving our controls, costs and margins, as
well as the consistency and smoothness of our operations. This kind of
productivity improvement is now the main part of our business plan.
3 Mixed external and internal emphasis
The business we are in is at the stage where we have to pay close attention to
both external and internal affairs. Our internal operating effectiveness is the key
to keeping our margins up, but that alone is not enough to ensure success. We
also have to be alert and responsive to changes in the marketplace if we are to
remain competitive. This situation requires continual trade-offs between
internal and external considerations.


2 (11)
Appendix 8

107
Thrust or Theme Options
1 Improve quality of products/services
The main thrust should be to improve the conformance to customer
requirements of our product/service quality. If our customers can see and value
our superior quality, we can improve our competitive position in the
marketplace by bettering the level and/or uniformity and/or reliability of our
quality.
2 Improve fixed-asset utilization
The main thrust should be to improve utilization of our facilities and equipment
by:
Improving the layout of our facilities
Improving planning and scheduling
Making use of idle capacity/wasted space
Reducing downtime caused by breakdowns, setups, changeovers, etc.
Increasing throughputs
Redesigning equipment
3 Increase flexibility for changes in products and services
The main thrust should be to improve the organizations ability to respond
quickly and flexibly to market requirements for product/service innovations;
introducing market-oriented improvements and features that meet the
requirements of time, cost and specification.
4 Reduce costs
The main thrust should be to cut all our costs to the lowest practical level. This
will either improve profit margins, or allow us to adopt new pricing strategies
aimed at improving our market share.
5 Increase flexibility for changes in volume (capacity)
The main thrust should be to improve the organizations ability to respond
flexibly to market requirements for substantial changes in volume for products
and/or services. This includes managing our capacity in relation both to growth
demands and to seasonal and cyclical changes.
6 Improve ability to meet scheduled commitments
The main thrust should be to improve the organizations ability to deliver
existing products/services with reliable predictability on time, in accordance
with promises to customers and planned schedules.

3 (11)
Appendix 8

108
7 Increase capacity for short-cycle delivery
The main thrust should be to improve the organizations ability to respond very
quickly and flexibly to customers requirements for product/service delivery
cycles shorter than the normal cycle for manufacturing or service response to
customers orders. This includes both increases and decreases in volume and
unexpected demands for specials.
8 Improve materials utilization
The main thrust should be to improve the utilization of materials by:
Reducing scrap, waste and obsolescence
Improving process yields
Recycling
Redesigning products, services and packaging
9 Improve people utilization
The main thrust should be to improve the utilization of employees capabilities,
with particular emphasis on:
Management style
How decisions are made
Communications
Ways of resolving conflicts
Training and development
Rewards
Motivation
Selection and placement
Clarifying and simplifying roles, accountabilities and interrelationships

Strategy Options
1 Simplify the product line and/or range of services
Invest in narrowing the product line/range of services and/or in standardizing
products/services and components. Prune out products and services; reduce the
number and diversity of market offerings so that efficiencies can be realized in:
Marketing
Inventories
Selling
Distribution
Processing
Servicing
Operations
Accounting

4 (11)
Appendix 8

109
2 Upgrade existing physical facilities
Invest in improving existing physical facilities in order to:
Improve product/service quality/reliability
Improve the work environment so that employee motivation might be
enhanced
Reduce operating costs
3 Improve equipment and process technology
Invest in better equipment or processes to:
Improve product/service performance/quality/reliability
Increase throughout and yields
Increase flexibility for product and/or volume changes
Reduce set-up and changeover costs
Reduce labor intensiveness
Reduce maintenance costs
4 Increase mechanization
Invest in substituting machines for people employed wherever possible and
economically attractive, in order to:
Reduce payroll costs
Achieve better, more consistent quality
5 Increase capacity
Invest in increasing capacity by expanding the plant, increasing throughput or
expanding service capability in order to:
Increase responsiveness to market demands
Provide more comprehensive services or service coverage
Reduce overtime
Reduce wear and tear on equipment
Improve plant layout and housekeeping
Increase economies of scale
6 Optimize make/buy mix
Either invest in making or providing materials, components and/or services
currently being purchased in order to:
Increase value added
Improve quality/reliability
Reduce total costs
5 (11)
Appendix 8

110
Use available capacity
Improve material/component/service availability for planning and
scheduling
Or increase amount of work/materials/services purchased from vendors in order
to:
Decrease value added
Improve quality/reliability
Reduce total costs
Free up capacity
Reduce overtime
Improve material/comp./
service availability
7 Improve vendors quality
Invest in working with vendors of materials, components and services to
improve the quality of purchased goods and services in order to:
Improve the quality of market offerings
Improve reliability/predictability of purchased goods and services
Reduce total costs
Improve delivery reliability
8 Improve distribution
Invest in reshaping product/service distribution network policies and practices
to:
Increase responsiveness to market and/or coverage
Focus on highest profit outlets
Reduce inventory, transportation and warehousing costs
Improve productivity of the distribution system
9 Improve energy/utilities efficiency
Invest in improving energy/utilities efficiency by:
Replacing existing facilities and equipment with more energy/utilities
efficient facilities and equipment
Reducing energy/utilities losses by insulation, recycling, etc.
Instituting/refining control systems
Converting to lower-cost energy sources
10 Reduce material losses
Invest in systems, procedures and methods to:
Reduce scrap and waste
Reduce material obsolescence
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Lower purchased material costs
11 Improve work methods and procedures
Invest in improving work methods and procedures to streamline and increase
the efficiency of how work gets done by applying:
Industrial engineering concepts and techniques
Manufacturing engineering concepts and techniques
Operations-research concepts and techniques
Group technology
12 Improve equipment utilization
Invest in improving the utilization of existing equipment to increase throughput
and return on investment by:
Improving planning and scheduling to achieve longer runs and fewer
changeovers
Coordinating with marketing/sales to improve use of any excess capacity
Ensuring conformance to operating standards
Arranging for share use
Introducing or upgrading preventive maintenance
13 Increase standardization in operations
Invest in standardizing operations to:
Simplify operating processes, procedures and practices
Reduce inventories
Improve quality and reliability
Improve responsiveness to customers
Reduce maintenance costs
Increase flexibility in moving products among manufacturing facilities
14 Improve information handling
Invest in improving efficiency of information handling and data processing by
streamlining methods and procedures in order to:
Reduce clerical costs and errors
Improve response time between data inputs and outputs
15 Improve design of product/service
Invest in developing new or modified designs for products/services that will:
Improve responsiveness and conformance to customer requirements
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Improve quality and reliability
Lower total costs (design, manufacturing, marketing, delivery,
packaging, distribution, warranty, repair)
Increase market acceptance
16 Improve management information, financial and operating systems,
controls and reports
Invest in system design and information technology to improve relevance,
comprehensiveness, accuracy and timeliness of management decision support
information including:
Business models
Budgeting, planning and control
Market research/industry and competitive analysis
Forecasting
Purchasing/procurement
Inventory control
Operations planning and control
Quality control/assurance
17 Apply rewards and penalties
Invest in improving employee motivation by systematically and consistently:
Encouraging desirable activities by incentives and rewards (cash, prizes,
citations)
Discouraging undesirable activities by penalties (discipline, layoffs,
shutdown)
18 Improve communications
Invest in improving employees understanding of what they are doing and how
this fits the companys goals and needs by:
Making goals, priorities, decisions and instructions more clear and
specific
Opening up new vertical and lateral channels
Listening more attentively
The investment may be to improve:
Media (newsletters, audio-visual presentations, etc.)
Development of content
Meetings

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19 Develop a workforce with multiple, flexible skills
Invest in sharpening employee selection procedures and methods and in
enhancing and upgrading employees skills and understanding in order to:
Decrease employee specialization and optimize the ability to use
employees flexibly
Develop multiple skills
Increase knowledge of technology, products, operating methods and
processes
Increase potential for higher, knowledge-based pay
20 Improve selection, training and development of managers,
supervisors and employees
Invest in improving selection procedures and methods, and training and
development activities, for management and supervisory personnel in order to:
Upgrade overall quality and competence of people
Increase particular skills and skill levels
Develop new skills
Increase knowledge of technology, products, operating methods and
processes, and of other organizational functions
Increase potential for advancement
21 Reduce lost work time
Invest in development and improvement of policies, systems, procedures and
the manner in which these are implemented to minimize the time employees
spend away from their jobs for such reasons as:
Illness (personal and family)
Accidents
Personal reasons
Grievance and complaints
Union business
22 Re-engineer business processes and redesign jobs
Invest in re-engineering business processes and the redesign of jobs to make
them more challenging and satisfying by either or both:
Enlarging the number/range of tasks and responsibilities
Incorporating functions being handled by other groups
In order to:
Reduce total costs
Improve quality
Enhance employee motivation
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Increase organizational responsiveness and flexibility
23 Improve performance of individual departments
Invest in improving the quality of personnel, organization and/or operating
methods and procedures and measures in each department (or in selected
departments) in order to:
Upgrade the effectiveness of the organization as a whole
Strengthen a particular function in the organization
24 Change organization structure design/focus
Invest in restructuring the formal organization by:
Changing the relative status of functions
Regrouping functional responsibilities
Eliminating organizational levels
Clarifying chains-of-command
Reducing spans of control
In order to:
Enhance market responsiveness
Improve organizational effectiveness
Reduce total costs
Provide more business focus
25 Improve integration among departments/functions
Invest in breaking down walls between departments/functions in order to:
Improve coordination and cooperation among departments
Provide ways for functions to reconcile conflicting interests, goals and
criteria
Establish common goals and language
Improve how interdepartmental processes function (e.g. new product
introductions, new business proposals and program project management)
Upgrade the effectiveness of the organization as a whole
26 Improve union management relations and chip away at workforce-
related productivity problems
Invest planning time and managerial and supervisory effort to improve union-
management relations, chipping away at workforce-related productivity
problems little by little by:
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Placing on the contract bargaining agenda items that can improve
productivity, achieving gains through normal bargaining
Attempting by direct management action to eliminate or modify
restrictive practices that have developed over time
27 Shorten time-to-market for new products/services
Invest in designing processes, systems and procedures (re-engineering) to
shorten the time required from the initial concept of a new product/service to its
delivery to the first customer, so as to improve responsiveness to market needs
and opportunities. This may involve:
Improvements in crystallizing product/service specifications
Better design methods and tools
Closer collaboration among marketing, technical groups and operations
Simplifying and making more efficient the sequence of steps required
Using autonomous task teams
28 Shorten order-to-delivery time for existing products/services
Invest in designing processes, systems and procedures (re-engineering) to
shorten the time required from the placement of an order by a customer to the
delivery to that customer of the product or service, so as to improve
responsiveness to customers and reduce inventory costs. This may involve:
Redesigning work units and workflows
Simplifying and making more efficient the sequence of steps required
Closer collaboration among relevant functions
Improvements in equipment and processes
More standardization
More flexibility in the workforce
Instituting just-in-time operations processes
29 Shorten provisioning time
Invest in redesigning internal processes (re-engineering) and in working with a
reduced number of suppliers of materials, components and services to minimize
the time between provisioning and actual need, so as to minimize inventories
and throughput time. Institute just-in-time purchasing and delivery of materials
and components.
30 Engage in productivity bargaining
Invest in preparing a comprehensive, one-shot this-for-that bargaining
package to eliminate/modify either (or both) formal contractual provisions or
informal custom and practice understandings to open up new opportunities
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for productivity improvement based on specific activity changes by the
workforce:
Price potential gains: offer to pay out some when achieved in order to
induce the union and employees to agree to desired changes
Invest in developing managements capability (including supervisors) to
capitalize on the opportunities created by the changes achieved
31 Establish a program for total quality management/improvement
Invest in developing, training for, and applying systems, procedures and
methods aimed at:
Establishing that everyone is responsible for quality (not only quality
control/inspection)
Achieving maximum employee involvement in pursuing perfection
with regard to quality
Applying such techniques as statistical process control
32 Encourage employee involvement
Invest in setting up and training joint voluntary employee/management councils
(or quality circles) to identify and recommend changes both in the way work
is done and in the work environment so as to:
Improve the quality of the time spent working
Improve the quality of the product or service
Improve productivity
Increase employee satisfaction
33 Institute employee involvement with productivity gains-sharing
Invest in establishing an on-going formal program to generate labor cost (and
related) savings through voluntary participative problem-solving groups
involving both employees and management. Share frequently the cash benefits,
if any, with everyone in the entire unit (including support functions) on the
basis of a formula agreed upon with the unions and/or employees involved.

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117
Definitions in the Performance Pyramid for DHL Solutions
This appendix contains a discussion on the different levels and dimensions in
the performance pyramid in the context of DHL Solutions Swedish
organization. Also, it presents proposed definitions for the nine dimensions of
performance to be used by DHL Solutions in the future.
The Strategic Business Unit Level
This level of the pyramid, in the context of DHL Solutions, is equal to the
whole operating system in the Swedish organization. The head of DHL
Solutions in Sweden and the heads of divisions manage this operating system
from the headquarters in Stockholm. It includes 18 operating units and also
support functions such as Key Account Managers (KAMs), Human Relations,
IT-support, Operations Support Engineers and Controllers.
The Core Business Process Level
For DHL Solutions this level of the organization can be translated into those
parts of the operating system that is connected to the strategies of the operating
plan. One core business process includes all functions, people, procedures, etc.
required to execute a single strategy. Hence, if DHL Solution is implementing a
strategy to shorten the time between a new clients approval of doing business
until the assignment is up-and-running, this level of the pyramid for that
strategy would include all parts of the organization needed to understand the
needs of the client and then to fully execute that need in the operations.
The Departmental Level
For DHL Solutions in Sweden, as being an organization with quite few
departments, this level can primarily be interpreted as the processes being
executed at the operating units. The performance of such processes as: picking,
administration, customer services, unloading and value added services needs to
be monitored in order to ensure that all functions are moving in the same
direction.
Corporate Vision
This part of the pyramid, in the context of the Swedish organization as being a
SBU, represents all levels of the organization higher than the head of DHL
Solutions in Sweden. Hence, the connection between this level and lower levels
includes the visions, corporate strategies and policies channeled down from
Global as well as Nordic headquarters and measures reported up. Today this
connection is somewhat flawed; because, some measures are reported upwards
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(i.e. the measures reported into the shared company server) but there is a lack
of deployment of strategies to which these measures can be aligned.
Market
This dimension of performance should be measured for the operating system
(i.e. the Swedish organization) as a whole in order to track overall progress on
implementation of the operating plans strategies and performance on general
thrusts. It is an externally focused dimension of performance which should be
tracked hand-in-hand with the internally focused financial dimension. The
market dimension should monitor DHL Solutions position on the marketplace
and the rate of growth as well as changes of the client base. Measures on this
dimension are mostly aggregated to the highest level of the operating system.
Today, DHL Solutions in Sweden only analyze this dimension occasionally
when laying out new courses to follow. Hence, it is not followed continuously
in order to track implementation success of new actions.
Proposed definition: The client-driven market dimension gives us the results
of how our previous decisions and actions have affected
our competitiveness on the marketplace.
Financial
The financial dimension of performance should provide half the information
needed on the operating system as a whole in order to track the strategic
success of the business. Financial measures are exclusively based on economic
performance and they are important for tracking the overall results of decisions
and actions. However, they only reflect a short-term view and must, therefore,
be regarded with some care. Sometimes, negative financial performance must
be accepted today in order to secure positive performance tomorrow. Although
this is an important dimension of performance, managers in DHL Solutions
must not overemphasize it. Today, much focus is put on the financial
performance of the units. This emphasis must be balanced by equally tracking
the market dimension as well as the core process dimensions.
Proposed definition: The internally driven financial dimension gives us the
results of how our previous decisions and actions have
affected our economical success.
Customer Satisfaction
This dimension is one of three instruments for tracking the overall
implementation progress of individual operating strategies. Customer
satisfaction can be measured both directly by surveys and customer satisfaction
indexes, and indirectly by e.g. aggregated number of complaints, client
retention or repeat sales. See also the presentation of CFI Groups customer
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satisfaction concept (section 10.3). The customer satisfaction dimension is
more or less overseen at DHL Solutions as of today. A routine annual survey
based on absolute rankings and one or two measures reported (but not
reviewed) into the shared company server (for example customer net change),
are the only efforts made on the dimension. Hence, there have been no attempts
to use this dimension to continually track the external effect of strategy
implementation.
Proposed definition: The customer satisfaction dimension tells us how well
customer expectations, primarily regarding quality and
delivery, are managed in the core process.
Flexibility
Regarding this dimension, the most important aspects of it for DHL Solutions
is probably volume flexibility (the ability to respond quickly to large variations
in demand). This implies that they must either focus on having a flexible
workforce whose activities are meticulously planned or that they try to level out
the variations by incorporating several clients with different demand cycles in
the same warehouse. Either way, they must track the effects of an implemented
strategy on this dimension. Today, DHL Solutions in Sweden do not monitor
flexibility to any greater extent. Only through occasional analysis carried out at
some units (congruence between workforce size and actual volumes handled)
do they come anywhere near to a measurement of this dimension.
Proposed definition: The flexibility dimension addresses the responsiveness
of the core process in general and the capabilities to
handle volume changes in particular.
Productivity
As explained in this paper (see section 3.4.3), the productivity concept is quite
difficult to handle and it is often overemphasized. In DHL Solutions, the
productivity dimension has historically been heavily focused and productivity
measures have served as the primary means of explaining financial results on
the operational level. This thesis argues that DHL Solutions should re-evaluate
this somewhat flawed view on the productivity dimension. First, they should
rethink their use of the labor productivity metric used today (i.e. order
lines/man-hour) and not attempt to aggregate it above the operational level.
Although, DHL Solutions is a labor intensive organization and the fact that the
labor productivity metric is an important parameter in most contracts and labor
planning tools, the metric should not be as emphasized as it is if not being part
of a measurement package for tracking implementation of a certain strategy.
Also, this metric must be used with more care, due to its complex dynamics.
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For example, negative changes in the measure are often explained (or
excused!?!) by factors that lie outside of the operating units power (for
example, changes in the assignment). Moreover, the employees whose
productivity that is actually being measured (i.e. the blue collars), can not affect
the ultimate outcome of the measure in a comprehensible way. So the question
is: Why are they measured on it? Hence, as insinuated by academics and as
concluded in this thesis, measurement on the productivity of a core process
should be measured on a more aggregated level in accordance with the strategy
executed for that core process.
Proposed definition: The productivity dimension gives us overall information
on how efficiently we are managing our resources and
activities. That is: Are we doing the right things well?
Quality
The concept of quality at an operational level is one building block for
customer satisfaction. As being a customer oriented (i.e. external) dimension,
quality should be concerned with the delivery of defect-free services to clients
in order to meet their expectations 100 percent of the time. For DHL Solutions
it is imperative to distinguish external quality (as it is perceived by clients)
from what they call internal quality (the measurement of e.g. faults in picking
or in-process scrap). Measures sorted under internal quality should actually
be seen as waste measures. They must also separate the three reasons for claims
used today, where damaged products fall under the quality dimension whereas
the other two fall under the delivery dimension (see section 6.4.1).
Proposed definition: The quality dimension tells us how well our services
meet our clients expectations.
Delivery
Delivery is the second building block of customer satisfaction. For DHL
Solutions, this dimension should include the delivery of ordered products: to
the correct address; on-time (not late or early); in-full (correct quantities of
articles); and with the correct types of articles. Today, operating units measure
the last two in their claims per order line-measure and the first is reported in the
shared company server. Hence, they have a sound basis to build upon when
they are to measure performance on this dimension in the future.
Proposed definition: The delivery dimension tells us if we are delivering
correct and complete orders, on-time to our clients
customers; and if we are delivering the correct service,
on-time to our clients.

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121
Cycle Time
The measurement of the cycle time dimension (along with the measurement of
waste) is a good way to circumvent the problems inherited in the complex
dynamics of productivity measures on the operational level. Cycle time can
basically be interpreted as the time it takes to perform a certain action or
process. For example, if DHL Solutions is pursuing the strategy to shorten the
time it takes to implement new client assignments (mentioned above under core
process level), they must obviously track the cycle times for every such
implementation process. To shorten this time they must focus their attention
on: changing the management of actions; increasing the proportion of hands-
on time; rearranging activities; and improving inter-functional collaboration.
However, DHL Solutions do not have any measures on this dimension today.
Proposed definition: The cycle time dimension provides information on how
we manage the important resource of time and focuses
our attention on increasing the proportion of value-added
time.
Waste
Waste is the dimension that account for all unproductive activities that add no
value to the current business. For DHL Solutions it includes all costs associated
with failures, appraisals and surpluses. Hence, it consists of: scrap (in-process
damage of articles); administration of claims; excess personnel in workforce;
quality control (if there were no failures this would not be necessary); inbound
inspection; and badly planned picking routes. Some operating units focus much
attention on measuring failures in the picking process by controlling picked
orders before shipment. However, one important conclusion here is that what
they actually achieve is an increase of in-process waste by allocating resources
to a non-value-added activity (control). Although, they probably hope to
minimize their use of this activity in the long run, what they actually do is to
substantiate a control environment rather than putting attention on managerial
actions and changes of the operating conditions in order to eliminate the actual
waste.
Proposed definition: The waste dimension gives us important information on
how much money we spend on non-value-added
activities and resources.

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Appendix 10

122
Customer Satisfaction at DHL Solutions
This appendix presents an example of how the relations between driving forces,
customer satisfaction, client behavior and profitability could turn out for DHL
Solutions in Sweden when using CFI Groups methodology. The below figure is
developed by the author in cooperation with Magnus Creutz at CFI Group.



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