[vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column][vc_column_text]Running a company involves an ongoing evaluation of its business performance. Financial metrics are key to do this and are like a compass, showing the possible \u00a0strategic avenues. As they form the beacons for the company to stipulate the company\u2019s course, there\u2019re well-known by the management levels. Much less known, however, is that they are equally good handles for agreeing on the supply chain strategy.<\/p>\n
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To convert financial metrics into supply chain strategy I\u2019ve developed the Supply Chain Triangle of service, cash and cost<\/strong>. Basically, the Supply Chain Triangle concept captures the idea that organizations deliver different types of service to their customers, which come at a certain cost, and require a certain amount of inventory or, more generically, cash. Even more correct is to express \u2018cash\u2019 as \u2018capital employed\u2019 because, for good insights into their investments, organizations should make the sum of the working capital (inventory + accounts payable\/receivable) and the fixed assets.<\/p>\n The Supply Chain Triangle reveals its true power in three steps:[\/vc_column_text][\/vc_column][\/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css=”.vc_custom_1518693229673{margin-top: 5% !important;}”][vc_column][vc_single_image image=”1428″ img_size=”large” alignment=”center” qode_css_animation=”” css=”.vc_custom_1519209909731{margin-top: 25px !important;margin-bottom: 25px !important;}”][\/vc_column][\/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css=”.vc_custom_1518694601808{margin-top: 5% !important;}”][vc_column][vc_column_text]<\/p>\n <\/p>\n A first step is to understand the balancing act between the three sides of the triangle<\/strong>, service, cost and cash (capital employed), as it is actually the essence of supply chain management. Decisions in one corner of the triangle almost automatically impact the other corners. For example, a broader product portfolio will add value for the customer and will help increase market share but, on the other hand, it will require more inventory.<\/p>\n <\/p>\n <\/p>\n We can link the Supply Chain Triangle fully to financials. Taking the investor\u2019s perspective will also be the solution to avoid massive tension in the triangle<\/strong>. Service is a driver of net sales, but investors are not only concerned about the top-line. They\u2019re also interested in a metric like EBIT<\/strong>, which combines the service and cost aspect. And it does not stop there. If an investor compares two companies, both with \u20ac 100 million of EBIT, than the company with \u20ac50 million of capital employed will be more attractive to invest in than the one with \u20ac75 million of capital employed. In the end, investors are looking at the EBIT generated over the capital employed (cash-side). This is expressed by the financial metric \u2018ROCE<\/strong>\u2019 or Return on Capital Employed.<\/p>\n <\/p>\n <\/p>\n ROCE is more than just a financial metric, it is the ultimate objective. Different supply chain strategies can be seen as various routes to deliver the same shareholder value<\/strong>, using ROCE to measure this. Let\u2019s make it more concrete with an example comparing operational excellence players with product leaders.[\/vc_column_text][\/vc_column][\/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css=”.vc_custom_1518698569311{margin-top: 3% !important;}”][vc_column][vc_single_image image=”1426″ img_size=”full” alignment=”center” qode_css_animation=”” css=”.vc_custom_1519209604359{margin-top: 6% !important;margin-bottom: 6% !important;}”][vc_column_text]An operational excellence (opex) player<\/strong> will work at the lowest possible cost and with a minimal EBIT. The lower EBIT will be matched with a lower capital employed. To guarantee the lowest cost, an opex player will reduce complexity. He will not have a long tail in his supply chain but focuses, instead, on the big volumes. As a result he will have lower inventory and lower total assets or, in short, a lower capital employed.<\/p>\n A product leader<\/strong> will deliver high-end products into high-end niches. His products are more complex. He will need to work with niche suppliers. As a result the product leader will have a higher inventory. He will not be able to use his assets at the same efficiency, as demand is unpredictable, and because of a much higher rate of innovation. As a result he will also have a higher capital employed.<\/p>\n Investors feel comfortable with an opex player having a lower EBIT, as long as he employs less capital. And, vice versa, a product leader can have a higher capital employed, as long as he also generates a higher EBIT.[\/vc_column_text][\/vc_column][\/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” css=”.vc_custom_1519810611664{margin-top: 5% !important;}”][vc_column][vc_column_text css=”.vc_custom_1519812266040{margin-top: 5% !important;}”]<\/p>\n <\/p>\n Different strategies results in specific targets for supply chain metrics, e.g. for working capital. It also means that different strategies lead to other supply chains<\/strong>. In essence, you can reveal and assess a company strategy, and thus the supply chain strategy, by looking at the key financial metrics. Or, vice versa, with a good insight into the\/(or: with a good knowledge of) financial metrics, you can more easily take strategic decisions. And isn\u2019t that what we are all after?[\/vc_column_text][\/vc_column][\/vc_row]<\/p>\n","protected":false},"excerpt":{"rendered":" Financial metrics are key to evaluate business performance. Less well-known is that they are also good handles for agreeing on supply chain strategy.<\/p>\n","protected":false},"author":3,"featured_media":1412,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24],"tags":[],"class_list":["post-363","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/posts\/363","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/comments?post=363"}],"version-history":[{"count":55,"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/posts\/363\/revisions"}],"predecessor-version":[{"id":1603,"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/posts\/363\/revisions\/1603"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/media\/1412"}],"wp:attachment":[{"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/media?parent=363"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/categories?post=363"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bramdesmet.com\/wp-json\/wp\/v2\/tags?post=363"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Step 1: insight into the balancing act<\/strong><\/h3>\n
Step 2: understand the link with finance<\/strong><\/h3>\n
Step 3: make the conversion to strategy<\/strong><\/h3>\n
Paving the strategical path<\/strong><\/h3>\n