Financial performance, supply chain

Shen T (2005) Linking supply chain practices to operational and financial performance. Supply chain 2020 project working paper... 

A small manufacturer of a little-known brand may find it difiScult to attract supply chain members for its existing or new product offerings. Such a manufacturer lacks market power when entering supply chain negotiations. Also, since financial resources determine a manufacturer s ability to perform marketing functions internally, small manufacturers usually cannot afford to distribute directly to retailers or geographically dispersed industrial customers and must rely on wholesalers. Furthermore, in some locations acceptable middlemen may not be available in every line of trade. Firms in this situation include some manufacturers of electrical supplies and small hand tools. 

Retailers exist when they provide convenient product assortment, avaflabflity, price, and image within the geographic market served. The degree of customer preference (loyalty dtre to customer service and price/value performance) that a retailer enjoys in a spedfic area directly affects its abUity to negotiate supply chain relationships. The retailer s financial capahUity and size also determine its degree of influence over other supply chain members. 

While there are several possible measures of performance of a humanitarian relief supply chain, one approach, suggested by Fearon [37], is to compare an actual outcome with the counterfactual outcome. In such an approach, the question is whether the humanitarian intervention did in fact improve the system in terms of lives saved, diseases avoided, crop failure averted, market functionality maintained, and so on. But other suggestions focus on the success of the appeal coverage, lead time between donation and delivery of aid, financial efficiency and assessment accuracy. Each of these metrics focuses on the process of forecasting the aid required and garnering the resources and then efficiently dehvering the aid while respecting the planned humanitarian space. 

Year-over-year performance. This is a year-over-year comparison of how a company performed against its peer group on the supply chain financial measurements of growth, revenue/ employee, asset utilization, days of inventory, and cost of sales as a percent of revenue. To determine supply chain excellence, companies need to compare year-over-year performance of a similar company to its peer group for at least three to five years. 

This was a public admission of demand network failure. With the creation of Coca-Cola Enterprises in 1986, Coca-Cola was the darling of Wall Street. The company divested assets to improve its return on assets and financial fundamentals. What was not obvious then—and is all too clear now—was that when a company sheds assets, it must redesign to sense and shape demand to drive market performance. The more extensive the supply chain and the more third-party nodes, the greater the challenge and the more critical it is to sense demand and service a network. Form needs to follow function. Alignment and strategy are essential. 

We now have the teams in place to work on process iimovation. We need to give them the financial resources to make a difference. Five years ago, fewer than 15 percent of companies had a dedicated team to work on global supply chain practices in a center of excellence (COE). The functions of the team are shown in Fignre 6.6 while the performance gaps are shown in Figure 6.7. 

Given that all performance measures have potential problems, it helps to understand how all the measures selected are related to the firm s and the supply chain s financial success. Gable (1997) illustrated this in Table 3.3. 

While useful for evaluating business unit financial performance, this format is wanting when it comes to supply chain management (SCM). 

With the financial statement, one forecasts the operational performance needed to meet financial goals. A proforma" income statement is similar to a historical income statement. However, it projects the future rather than reports on past performance. This requires defining the supply chain activities needed to support the product. The range of assumptions is broad and will vary depending on the product. Examples are production, distribution, sales force, and revenues. If the product requires a new supply chain, this tool will set financial constraints for its design. Capital costs should be translated into operating costs using the tools described in Section 27.3.2. 

Cash-to-cash cycle time The time between payments for product components to suppliers to the time customers make payments. This parameter has become an important measure of supply chain performance, reflecting both financial and inventory management process performance. Most have negative measures ranging from 30 to 80 days. Some, notably Dell, have a positive cycle time, meaning they collect payments from customers before they have to pay suppliers. 

Rutner, Stephen, Waller, Matthew A., and Mentzer, John T., A practical look at RFID, Supply Chain Management Review, January/February 2004. Schragenhiem, Eli and Dettmer, H. William, Manufacturing at Warp Speed Optimizing Supply Chain Financial Performance, Boca Raton, FL APICS/St. Lucie Press, 2001. 

We will demonstrate in this section that improvement in some selected supply chain metrics also results in improvements in some important financial metrics of the firm, which should, of course, be closely correlated with its overall business performance. To illustrate this relationship, let us consider several interrelated inventory measures—inventory turns, days of inventory, and inventory capital— and how they affect some important financial measures—return on assets, working capital, and cash-to-cash cycle. 

In this chapter, we have defined the term "supply chain engineering" and discussed the types of decisions that are made in managing supply chains. We also demonstrated the close relationship between certain supply chain performance metrics and a company s financial performance. Finally, the importance of supply chain management was illustrated in our discussion of the Supply Chain Top 25 (Hofman et al., 2011) and their essential characteristics. An overview of the topics covered in Chapters 2 through 8 was also presented. 

The goal of many companies has been to shorten C2C, but in this paper, the relationship between C2C and financial performances is tested industry by industry (Fawcett et al. 2007). The C2C is a critical performance measure and was also selected as the measure which has the greatest impact on supply chain practice as it showed the direct financial benefits of SCM (Banomyong 2005 Christopher and Gattoma 2005 Farris et al. 2005 Fawcett et al. 2007). 

The results confirmed that at least within the Supply Chain and Operations Area, Golden Circle was well on the way to establishing an environment that nurtured and enabled organizational learning to occur and to translate these learnings into improved financial performance. 

A good reference line of key performance indicators of a supply chain is the Balanced Scorecard by Kaplan and Norton (1996). Kaplan and Norton argue that a valuation of intangible assets and company capabilities would be especially helpful since, for information age companies, these assets are more critical to success than traditional physical and tangible assets . The Balanced Scorecard retains traditional financial measures, customer services and resource utilization (internal business process) and includes additional measures for learning (people) and growth (innovation). This approach complements measures of past performance with drivers for future development. 

Chapter 19 is our measurement chapter, but as each chapter is designed to stand alone inventory measurements are discussed here. Performance measures are needed to drive continuous improvement, if we do not know how well we are performing, if we do not have measurements, how can we know if we have improved, in terms of client satisfaction, stock outs and stock turns. Measurement is also necessary to set directions and targets for the future. The criteria for performance measures should cover a balanced approach to aU key parameters of the supply chain and should provide operational measures rather than purely financial measures. Measures should be simple, easy to define and easy to monitor. In determining what should be measured it is useful to get away from standard accounting measures. Supply chain management requirements are different from those of the accountants. In determining our own measurements we should ask ... 

All of the above performance measures are at one level of the supply chain, be it first, second, third tier supplier of materials, manufacturer, processor, distributor, warehousing, or retailer. Obviously, the immediate upstream provider and the immediate downstream customer will have an impact on the performance of a supply chain component and in turn each member will be judging the performance of its immediate upstream suppliers. However, the purpose of all the measures listed above, be they financial, operational, marketing or by investors is to achieve internal efficiency and ultimately to achieve an acceptable ROI. 

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