Chapter 5: Supply Chain Performance Measurement and Financial Analysis

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Chapter 5 Supply Chain Performance Measurement
and Financial Analysis

• Learning Objectives
• After reading this chapter, you should be able to
  do the following
• 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.
• 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.

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• Introduction
• The purpose of this chapter is to
• (1) introduce the dimensions of supply chain
  performance metrics,
• (2) discuss how supply chain metrics are
  developed,
• (3) offer some methods for classifying supply
  chain metrics, and
• (4) use quantitative tools to show how these
  metrics can be linked to the financial
  performance of the organization.

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• Questions about a metric
• Is it quantitative?
• Is it easy to understand?
• Does it encourage appropriate behavior?
• Is the metric visible?
• Does the metric encompass both outputs and
  inputs?

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• Questions about a metric
• Does it measure only what is important?
• Is it multidimensional?
• Does the process use economies of effort?
• Does it facilitate trust?

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Figure 5-2 What Supplier Performance Metrics Do
Companies Use?

• On-time delivery 90
• Quality of goods/services 83
• Service capability/performance 69
• Price competitiveness 55
• Compliance with contract terms 51
• Response 50
• Lead time 44
• Technical capability 34
• Environmental, health, and safety performance 30
• Innovation 29

Source Logistics Management (January 2006)
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• Supply Chain Performance Metrics
• The focus upon a least total cost system requires
  measuring the tradeoff costs when a suggested
  change is made in one of the components or
  elements of the system.
• Cost has long been recognized as an important
  metric for determining efficiency.
• The important point to remember is that
  successful supply chain performance measurement
  relies on appropriate metrics that capture the
  entire essence of the supply chain process.

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• Developing Supply Chain Performance Metrics
• The development of a metrics program should be
  the result of a team effort.
• Second, involve customers and suppliers, where
  appropriate, in the metrics development process
• Develop a tiered structure for the metrics
• Identify metric owners and tie metric goal
  achievement to an individuals or divisions
  performance evaluation.

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• Developing Supply Chain Performance Metrics
• Establish a procedure to mitigate conflicts
  arising from metric development and
  implementation.
• establish a procedure to mitigate conflicts
  arising from metric development and
  implementation.
• establish top management support for the
  development of a supply chain metrics program

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• Performance Categories
• Four major categories
• time,
• quality,
• cost, and
• supporting metrics.

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• Supply Chain Council Developed
• The Supply Chain Operations and Reference (SCOR)
  Model
• The metrics categories used to measure the
  performance of Process D1 Deliver Stocked
  Product
• five major categories of metrics
• reliability
• responsiveness
• flexibility
• cost
• assets

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• 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 sellers cash flow and profit.

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• The Supply ChainFinance Connection
• Focusing attention on the supply chain is a means
  to improving financial performance.
• Cost of providing logistics service affects the
  marketability of the product and impacts
  profitability.
• Financing inventory affects the amount of capital
  required to fund the inventory.

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• The RevenueCost Savings Connection

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• 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 organizations financial performance is also
  judged by the profit it generates in relationship
  to the assets utilized, or return on assets
  (ROA).
• The supply chain plays a critical role in
  determining the level of profitability in an
  organization.

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• ROA
• An organizations financial performance is also
  judged by the profit it generates in relationship
  to the assets utilized, or return on assets
  (ROA).
• The supply chain plays a critical role in
  determining the level of profitability in an
  organization.
• The level of inventory owned by an organization
  in its supply chain determines the assets, or
  capital, devoted to inventory.

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• Supply Chain Service Financial Implications
• The results of supply chain service failures are
  added to the cost to correct the problem and lost
  sales.
• When service failures occur, some customers
  experiencing the service failure will request
  that the orders be corrected and others will
  refuse the orders.
• 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.

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Figure 5-19 Supply Chain Service Failure
Annual orders
Rehandling cost
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• Summary
• Performance measurement for logistics systems,
  and especially for supply chains, is necessary
  but challenging because of their complexity and
  scope.
• Certain characteristics should be incorporated
  into good metricsbe 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.

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• Summary (cont.)
• 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 organizations profit margin.
• Supply chain management impacts ROA via decisions
  regarding channel structure management, inventory
  management, order management, and transportation
  management.

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• Summary (cont.)
• Alternative supply chain decisions should be made
  in light of the financial implications to net
  income, ROA, and 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 rehandling costs. The financial impact
  of modifications to supply chain service can be
  analyzed using the SPM.