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Supply

Chain Drivers &


Metrics
Learning Objectives
1. Describe key financial measures of firm
performance
2. Identify the major drivers of supply chain
performance

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Financial
Data for
Amazon and
Nordstrom

TABLE 3-1
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Return on Equity (ROE) Is Shareholders
Measure of Firm Performance

Net Income
ROE =
Average Shareholder Equity

Amazon ROE = 2.81%


Nordstrom ROE = 613/1,913 = 32.04% (better)

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Return on Assets (ROA) Captures
Operations Impact on ROE

Earnings before interest


ROA =
Average Total Assets

Net Income + [Interest Expense (1 Tax Rate)]


=
Average Total Assets
Amazon ROA = 0.92%
Nordstrom ROA = 8.81% (better)
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ROA Decomposes to Profit Margin and
Asset Turnover
Earnings before interest Sales Revenue
ROA =
Sales Revenue Total Assets

= Profit Margin Asset Turnover


ROA Profit Margin Asset Turnover
Amazon 0.92% 0.50% 1.85 (better)
Nordstrom 8.81% 5.86% (better) 1.50
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Asset Turnover Explained by Turnover
of Key Components
Accounts receivable turnover (ART); inventory turnover (INVT);
property, plant, and equipment turnover (PPET)
Sales Revenue Cost of Goods Sold
ART = ; INVT = ;
Accounts Receivable Inventories

Sales Revenue
PPET =
PP & E
Asset Turnover ART INVT PPET
Amazon 1.85 (better) 15.62 (better) 7.31 (better) 6.80 (better)
Nordstrom 1.50 5.16 5.46 4.71
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Return on Financial Leverage (ROFL)
Captures Finances Impact on ROE
Includes impacts of financial decisions:
accounts payable, accounts receivable, debt,

Amazon ROFL = 1.89%


Nordstrom ROFL = 23.24% (better)
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An Important Financial Leverage Ratio:
Accounts Payable Turnover (APT)
Cost of Goods Sold
APT =
Accounts Payable

Amazon APT = 2.48 (better)


Nordstrom APT = 5.25

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Cash-to-Cash (C2C) Cycle Measures
Time from Cost to Revenue

C2C = Weeks Payable (52/APT) + Weeks in


Inventory (52/INVT) + Weeks Receivable (52/ART)

Amazon C2C = -10.50 weeks (better)


Nordstrom C2C = 9.70 weeks

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financial performance. In 2010, one of the biggest improvements in financial performance for
GM was its ability to sell its cars with much smaller discounts because the supply chain had
far less excess inventory. Lost sales represent customer sales that did not materialize because
of the absence of products the customer wanted to buy. Every lost sale corresponds to product
margin that is lost. Both markdowns and lost sales reduce net income and arguably represent

Metrics Vary Across Industries


the biggest impact of supply chain performance on the financial performance of a firm. Firms
such as Walmart and Zara have achieved strong financial performance in large part because
their supply chains allow a better matching of supply and demand, thereby reducing mark-
downs and lost sales.
20002012
TABLE 3-2 Selected Financial Metrics Across Industries, 20002012
Average Average Average Average
Operating C2C Inventory SG&A Cost/
Industry Margin Cycle Turns Revenue
Pharmaceutical 0.25 190.3 2.0 0.31
Medical device manufacturers 0.18 211.6 2.2 0.36
Consumer packaged goods 0.17 28.3 5.6 0.31
Food 0.16 37.4 6.2 0.23
Consumer electronics 0.12 9.3 43.8 0.14
Apparel 0.10 127.7 3.2 0.35
Chemical 0.09 78.1 5.3 0.09
Automotive 0.04 75.9 9.9 0.13
Source:"EBQUFEGSPN"CCZ.BZFS i4VQQMZ$IBJO.FUSJDT5IBU.BUUFS"$MPTFS-PPLBUUIF$BTIUP$BTI$ZDMF
(20002012). Supply Chain Insights LLC report, November 11, 2013.

TABLE 3-2
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Two Critical Supply Chain Measures
Not in Financial Statements
Markdowns: discounts required to convince
customers to buy excess inventory
Lost sales: represent customer sales that did
not materialize because of the absence of
products the customer wanted to buy

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Drivers of Supply Chain Performance
to Be Covered in Future Lectures
1. Facilities 4. Information
The physical locations in the Data and analysis concerning
supply chain network where facilities, inventory,
product is stored, assembled, transportation, costs, prices,
or fabricated and customers throughout
2. Inventory the supply chain
All raw materials, work in 5. Sourcing
process, and finished goods Who will perform a particular
within a supply chain supply chain activity
3. Transportation 6. Pricing
Moving inventory from point How much a firm will charge
to point in the supply chain for the goods and services
that it makes available in the
supply chain

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Summary of Learning Objectives
1. Describe key financial measures of firm
performance
2. Identify the major drivers of supply chain
performance

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