Supply Chain excellence in financial terms

Posted by Tyrone Rennie on 26 Apr 2018 9:00:00 AM
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Supply Chain excellence in financial terms

The Oxford Dictionary defines excellence as the quality of being outstanding or extremely good, and John W. Gardner said: “Excellence is doing ordinary things extraordinarily well”. When it comes to supply chain, excellence is an ideal most organisations strive for, but within the supply chain world, the definition of excellence is harder to express. On a very simple level – supply chain excellence is encapsulated in the oft-repeated phrase – “delivering the right product, in the right quantity, to the right people, at the right place, at the right cost, every time”. While this phrase rolls off the tongue quite easily, achieving this utopia of supply chain performance is slightly more difficult.A study conducted by Supply Chain Insights augmented the above definition of excellence in supply chain, by adding that a truly exceptional supply chain delivers on a metrics closely associated to market capitalisation, namely return on invested capital (ROIC), inventory turn-over and operating margin. The study found that the mantra of right time, right place was for nought if such did not result in a year-on-year improvement in financial metrics versus an organisations peer group and the broader industry.

With the above in mind, supply chain becomes far more than the physical act of moving goods and indeed becomes a valuable business lever when creating stakeholder value. A starting point for delivering an organisations financial metrics is the delicate balancing act of service versus cost. Supply Chain executives have at their disposal processes such as capacity utilisation, asset turn, tailored services and responsiveness to create not only sound financial return but superior customer value.  The ability to minimise inventory costs, free working capital and improve cash flow are but some of the financial performance indicators valuable to any organisation.

Balance, strength and resilience are measurement points that can reflect the likely impact the supply chain will have on financial metrics. Balance is critical within a supply chain; reduced inventory can impact customer service, excessive stock equals high costs – the list is endless. Revenue and ROIC are two metrics that can be used to determine the balance within a supply chain. ROIC represents the use of capital, and when such is improving together with revenue growth, there is a balance within the supply chain, delivering both new customers and appropriate cost levels.

"A successful supply chain is a strong supply chain, and year-on-year improvements in inventory turn and operating margin reflect the strength of the overall chain."

Resilience describes how likely the supply chain is to survive in a volatile world, and while harder to quantify, can have a marked influence on the financial impact to the organisation.

The supply chain strategy is deeply intertwined with business strategy, indeed enabling the commercial aims of the organisation. Determining where to focus strengths and capabilities within the supply chain will efficiently direct the entire organisation's performance and as such supply chain executives and organisational strategists should work closely together to harness the power of the supply chain to deliver strategic objectives and indeed, organisational financial goals.

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