Supply chain performance metrics financial

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. 

In this chapter, our goal is to link key financial measures of firm performance to supply chain performance. We introduce the three logistical drivers—facilities, inventory, and transportation—and the three cross-functional drivers—information, sourcing, and pricing—that determine the performance of any supply chain. We discuss how these drivers are used in the design, planning, and operation of the supply chain. We define several metrics that can be used to gauge the performance of each driver and its impact on financial 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. 

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. 

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. 

FACILITY-RELATED METRICS Facility-related decisions affect both the financial performance of the firm and the supply chain s responsiveness to customers. On the financial side, faciUties decisions have an impact on the cost of goods sold, assets in PP E (if facilities are owned), and... 

The majority of supply chain professionals perform well in their functional roles. At the same time, many of these professionals find it difficult to see the company s larger goals or to see how their actions affect other functional areas. Furthermore, supply chain professionals fail to see how their decisions or actions connect to and affect the financial goals and objectives of the firm. Pointing this out is not to degrade supply chain professionals they are measured by operational performance metrics, which, by all accounts, are plastered on most shop walls. These metrics are what they know and live by. Because the management of supply chains is critical to the long-term prosperity and sustainability of any firm, supply chain professionals who intend... 

If you have a conversation with the finance department or on Wall Street, you will hear different views of what value means. The definition of value from a finance person would include, of course, money. Within this book, we will begin to understand different perspectives on what value means and show how supply chain management and operations affect an organization s financial performance. In the next chapter, we will discuss the monetary value of a firm in greater depth, but for now, taken together, firm value includes ROIC, growth rate, and cost of capital. It is incredibly beneficial for supply chain professionals to understand how these factors are affected by supply chain activities. In the end, you will not only know how operational metrics are affected by your decisions but you will also grasp how financial metrics are influenced by your decisions. 

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