Financial Measures of Performance

In Chapter 1, we discussed how growing the supply chain surplus is the ultimate goal of a supply chain. Our premise was that increasing the surplus allows for a growth of supply chain profitability, which facilitates an improvement in the financial performance of each member of the supply chain. In this section, we define important financial measures that are reported by a firm and affected by supply chain performance. In later sections, we link supply chain drivers and associated metrics to the various financial measures. The definitions of financial measures in this section are taken from Dyckman, Magee, and Pfeiffer (2011). To illustrate the various financial measures, we use the financial results reported in 2013 by Amazon.com and Nordstrom Inc. and assume a tax rate of 0.35. 

From a shareholder perspective, return on equity (ROE) is the main summary measure of a firm s performance. 

Whereas ROE measures the return on investment made by a firm s shareholders, return on assets (ROA) measures the return earned on each dollar invested by the firm in assets. 

Earnings before Interest Net Income + [Interest Expense X (1 - Tax Rate)] 

Consider the financial performance shown in Table 3-1 for Amazon.com and Nordstrom Inc. In 2013, Amazon Nordstrom achieved ROE = 274/9,746 = 2.81 percent (613/1,913 = 32.04 percent) and ROA = [274 -l-141 X (1 - 0.35)1/40,159 = 0.91 percent [613 -I-160 X (1 -0.35)1/8,089 = 8.86 percent). The difference between ROE and ROA is referred to as return on financial leverage (ROFL). In 2013, Amazon (Nordstrom had ROEL = 2.81 - 0.91 = 1.90 percent (32.04 — 8.86 = 23.18 percent). ROFL captures the amount of ROE that can be attributed to financial leverage (such as accounts payable and debt). In Amazon s case, a significant portion of the financial leverage in 2013 came from accounts payable rather than debt. Thus, an important ratio that defines financial leverage is accounts payable turnover (APT). 

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