The Link Between Supply Chain and Financial Performance

1
The Link Between Supply Chain and Financial
Performance

• From DAvanzo, von Lewinski, and Van Wassenhove,
  SCMR, 2003

2
Objectives of Study

• Determine impact of SC on financial performance
• Identify the drivers of financial performance
• Identify the capabilities that lead to SC
  leadership
• Ascertain how companies achieve SC excellence

3
Study Methodology

• Statistical analysis of publicly available data
  on 636 Global 3,000 companies covering 24
  industries
• Consultation with industry analysts, academic
  experts, and Accenture execs
• In-depth interviews with gt 75 executives from 60
  companies
• Survey of 100 leading executives in North America
  and Europe

4
Key Finding 1

• Senior executives at leading companies view
  supply chains as critical drivers of shareholder
  value and competitive differentiation.

5
SC Performance Financial Success

• Classified 636 firms based on SC performance on
  three measures over two time periods
• Inventory turns
• COGS as percentage of revenue
• Return on assets

6
Classifications of SC Performers

• Superior performance top third for at least 2
  of the 3 performance metrics
• Leaders superior SC performance across both
  time periods
• Transformers SC performance improved to
  superior range over time
• Decliners SC performance deteriorated from
  superior range to below it
• Laggards superior SC performance was not
  achieved in either time period

7
Cross-Tabulation of SC and Financial Performance

• Developed similar classification of financial
  performance
• Based on better-than-average CAGR (compound
  average growth rate) of market capitalization
  within an industry
• Ran a cross-tab to determine relationship between
  SC and financial performance

8
Financial Category Laggards
Decliners Transformers Leaders

• Leaders
• SC Transformers
• Category
• Decliners
• Laggards
• Upper Percentage
• Lower Percentage

• 1 7 1
  9
• (5) (5) (4)
  (4)
• 2 2 3
  3
• (2) (2) (2)
  (2)
• 3 5 1
  2
• (3) (3) (2)
  (2)
• 22 13 19
  9
• (17) (16) (15)
  (14)
• Actual percent of respondents
• Percent that would result from random
• distribution (i.e., no relationship)

9
Result Strong Relationship

• Same categorization on both performance measures
  found (main diagonal)
• Companies in any particular SC category are most
  likely to be classified in the corresponding
  financial category (across row)
• Chi-Square (plt0.0001) shows relationship is
  statistically significant

10
Market Capitalization Growth by SC Performance
Category

• SC leaders showed market capitalization CAGR
  between 7 and 26 percentage points higher than
  industry average growth rate.
• SC transformers market cap. CAGR increased by 8
  percentage points over time
• SC decliners showed average drop of 25 percentage
  points
• SC laggards trailed industry average by 2 to 5
  points

11
Key Finding 2

• Leading companies incorporate supply chains into
  their business strategies and devote significant
  attention to designing integrated operating
  models.

12
How do the most successful companies leverage
their supply chains?

• Financial Performance Drivers
• Reducing cost about 65 cite as most important
• Enhancing revenue about 25 cite as most
  important
• Reducing working capital about 10 cite as most
  important

13
Operational Performance Drivers

• Reducing SC cost 1 by about 38
• Improving speed and efficiency 29
• Improving service quality 18
• Product innovation 5
• Expanding channels and markets 5
• Improving product quality 4
• Service innovation 1

14
Key Opportunity Areas (in descending order of
importance)

• SC Planning
• Linkages w/customers
• Linkages w/suppliers
• Outbound transport. and fulfillment
• Procurement and sourcing
• Inbound transport. and fulfillment

• Linkages to channels and other partners
• Manufacturing
• New product design
• Post-sales service management, warranty, and
  returns

15
Winning SC Strategies

• Integrated operating models based on world-class
  business practices in
• Customer relations
• Supplier management
• New product design
• Core logistics operations

16
Key Finding 3

• Leading supply chain companies build innovation
  into their operating models, with particular
  regard to outsourcing, internal/external
  integration, and matching supply and demand.

17
Capabilities that foster innovation and supply
chain leadership

• Matching supply and demand via
• Ultra-high-frequency deliveries
• Dynamic pricing coupled with customized assembly
• Collaborative forecasting inventory mgmt.
• Next generation efficiency gains i.e., on leading
  edge of strategy and technology
• Organizational integration both internal and
  external

18
Key Finding 4

• Leading supply chain companies rigorously
  execute against their strategies and
  capabilities, and they constantly adapt them to
  changing market needs.

19
Doing the basics well

• Drive end-to-end process excellence across the
  operating model.
• Foster process-oriented, collaborative cultures
  within and across organizations.
• Develop corporate-wide, high-level metrics.

20
Implications and Insights for Decision Makers

• Three SCM strategies common to most business
  leaders
• Relentlessly shorten the overall SC to reduce
  costs and enhance profits.
• Flawlessly execute SC capabilities internally and
  with partners.
• Continuously evolve strategies and operating
  models in anticipation of new market conditions.