Supply chain performance measurement and financial analysis learning Objectives



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SUPPLY CHAIN PERFORMANCE MEASUREMENT AND FINANCIAL ANALYSIS

Learning Objectives

  • Understand the scope and importance of supply chain performance measurement.
  • Explain the characteristics of good performance measures.
  • Discuss the various methods used to measure supply chain costs, service, profit, and revenue.
  • Understand the basics of an income statement and a balance sheet.

Demonstrate the impacts of supply chain strategies on the income statement, balance sheet, profitability, and return on investment.

  • Demonstrate the impacts of supply chain strategies on the income statement, balance sheet, profitability, and return on investment.
  • Understand the use of the strategic profit model.
  • Analyze the financial impacts of supply chain service failures.
  • Utilize spreadsheet computer software to analyze the financial implications of supply chain decisions

Dimensions of Supply Chain Performance Metrics

  • Measures
    • Require no calculations and are uni-dimensional
  • Metric
    • Requires calculation and often contains several measures
  • Index

Figure 5.1 Characteristics of a Good Measure

  • Source: Koebler, Durtsche, Manrodt, & Ledyard, Keeping score: Measuring the business value of logistics in the supply chain (Univ. Tennesee Council of Logistics Management, 1999) p8

Figure 5.2 Distribution Center Metrics

  • Source: 2010 Metrics Report, WERC, (May 26, 2010).

Figure 5.3 Raising the Performance Bar

  • Source: Koebler, Durtsche, Manrodt, & Ledyard, Keeping score: Measuring the business value of logistics in the supply chain (Univ. Tennesee Council of Logistics Management, 1999) p8

Developing Supply Chain Performance Metrics

  • Establish top management support for the development of a supply chain metrics program
  • Establish a supply chain metrics consistent with corporate strategy
  • The development of a metrics program should be the result of a team effort.
  • Involve customers and suppliers in the metrics development process, when appropriate.
  • Develop a tiered structure for the metrics.
  • Identify metric “owners” and tie metric goal achievement to an individual’s or division’s performance evaluation.
  • Establish a procedure to mitigate conflicts arising from metric development and implementation.

Figure 5.4 Process Measure Categories

  • Source: Koebler, Durtsche, Manrodt, & Ledyard, Keeping score: Measuring the business value of logistics in the supply chain (Univ. Tennesee Council of Logistics Management, 1999) p8

Performance Categories

  • Time
  • Cost
    • Captures the efficiency dimension
  • Quality
    • Captures the customer service dimension
  • Other / Supporting
    • Supply chain operations & reference (SCOR) model by the Supply Chain Council (SCO)
    • Order cycle time (OCT)
      • Once an expected order cycle time is established for customers, service failures can be measured.
      • OCT influences product availability, customer inventories, and seller’s cash flow and profit.

Figure 5.5 SCOR Model: Delivery Process Metrics (D1)

  • Source: Adapted from Supply Chain Council 2011

Figure 5.6 SCOR Model: Delivery Process Metrics (D1.3)

  • Source: Adapted from Supply Chain Council 2011

Figure 5.7 Logistics Quantification Pyramid – another categorization of performance metrics

  • Source: R.A. Novak, Center for Supply Chain Research, Penn State University (2010)

The Supply Chain – Finance Connection

  • Focusing on the resources the supply chain utilizes is an effective means to improving financial performance.
  • Inventory levels affect the amount of capital required to finance the inventory.
  • Supply chain efficiency impacts time to process an order in its order-cash cycle time.

The Revenue – Cost Savings Connection

Table 5.1 Sales Equivalent of Cost Savings

  • Source: Edward J. Bardi, Ph.D.

Table 5.2 Equivalent Sales with Varying Margins

  • Source: Edward J. Bardi, Ph.D.

The Supply Chain Financial Impact

  • A major financial objective for any organization is to produce a satisfactory return for stockholders.
  • The absolute size of the profit must be considered in relation to the stockholders’ net investment, or net worth.
  • An organization’s financial performance is also judged by the profit it generates in relationship to the assets utilized, or return on assets (ROA).
  • Return on assets (ROA) is a metric that is used as a benchmark to compare management and organization performance to that of other firms in the same or similar industry.
  • The supply chain plays a critical role in determining the level of profitability in an organization.

Figure 5.9 Supply Chain Impact on ROA

  • Source: R.A. Novak, Center for Supply Chain Research, Penn State University (2010)

Figure 5.11 Supply Chain Decisions and ROA

  • Source: R.A. Novak, Center for Supply Chain Research, Penn State University (2010)

Financial Statements

  • Two most important financial statements:
  • Income statement
    • details income and cost.
  • Balance sheet
    • details assets and liabilities

Figure 5.10 Supply Chain Impact on Balance Sheet

  • Source: R.A. Novak, Center for Supply Chain Research, Penn State University (2010)

Financial Impact of Supply Chain Decisions

Figure 5.14 Impact of 10% Transportation Reduction

  • Source: Edward J. Bardi, Ph.D.

Figure 5.15 Impact of 10% Warehousing Reduction

  • Source: Edward J. Bardi, Ph.D.

Figure 5.16 Impact of 10% Inventory Reduction

  • Source: Edward J. Bardi, Ph.D.

Figure 5.18 Strategic Profit Model & Reduced Transportation Costs

  • Source: Edward J. Bardi, Ph.D.

Supply Chain Service Financial Implications

  • The results of supply chain service failures are added to the cost to correct the problem and lost sales.
  • At the occurrence of a service failure, some experiencing the service failure will request that the order be corrected, while other customers will refuse the order.
  • The refused orders represent lost sales revenue that must be deducted from total sales.
  • For the rectified orders, the customers might request an invoice deduction to compensate them for any inconvenience or added costs.

Figure 5.19 Supply Chain Service Failure

  • Source: Edward J. Bardi, Ph.D.

Figure 5.20 Financial Impact of Improving On-Time Delivery

  • Source: Edward J. Bardi, Ph.D.

Figure 5.22 Strategic Profit Model & On-Time Delivery Improvement

  • Source: Edward J. Bardi, Ph.D.

Summary

  • Performance measurement for logistics systems and especially for supply chains is necessary but it is challenging because of their complexity and scope.
  • Certain objectives should be incorporated into good metrics – be quantitative, be easy to understand, involve employee input, and have economies of effort.
  • Important guidelines for metric development for logistics and supply chains include consistency with corporate strategy, focus on customer needs, careful selection and prioritization of metrics, focus on processes, use of a balance approach, and use of technology to improve measurement effectiveness.
  • There are four principal categories for performance metrics: time, quality, cost, and miscellaneous or support. Another classification for logistics and supply chains suggests the following categories for metrics: operations cost, service, revenue or value, and channel satisfaction.

The equivalent sales increase for supply chain cost saving is found by dividing the cost saving by the organization’s profit margin.

  • The equivalent sales increase for supply chain cost saving is found by dividing the cost saving by the organization’s profit margin.
  • Supply chain management impacts ROA via decisions regarding channel structure management, inventory management, order management, and transportation management. be analyzed using the strategic profit model (SPM).
  • Alternative supply chain decisions should be made in light of the financial implications to net income, return on assets (ROA), and return on equity (ROE).
  • The SPM shows the relationship of sales, costs, assets, and equity; it can trace the financial impact of a change in any one of these financial elements.
  • Supply chain service failures result in lost sales and re-handling costs. The financial impact of modifications to supply chain service can be analyzed using the SPM.
  • Summary, continued


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