The prime determinant of your company’s supply chain metrics is the level of your understanding about how your supply chain impacts your customers, and specifically how it impacts a customer’s EVA (Economic Value Added). EVA is a true measurement of the financial health of a company's supply chain.
This is based on the principle that a company’s financial health is measured by how much net profit exceeds the cost of invested capital. Net profit is derived by subtracting cost of goods sold (COGS), general and administrative cost, and taxes from sales. The total cost of invested capital is the result of multiplying the cost of capital by total company assets. EVA is the result of subtracting the total cost of capital from net profit. The SCOR model recognized the need to measure supply chain performance and, therefore, developed a list of cross-industry performance attributes to guide us in selecting KPIs.
The elements of this calculations can be viewed starting at the net profit box in the following diagram:
There is clear alignment between EVA and SCOR performance attributes, e.g. a supplier’s delivery reliability can have an impact on customers’ lost sales, lost customers, and lost sales opportunities. If a promised delivery fails to arrive on time, has unacceptable quality, or is late, the customer may not be able to fulfill their customers’ orders. Poor delivery performance also affects inventory levels. Unreliable delivery causes customers to compensate by carrying extra inventory. A similar comparison can be made among the other four performance attributes and EVA drivers.
Just like an automobile dashboard that has many gauges and lights but is missing an oil pressure indicator everything seems to be running fine until low oil pressure results in engine failure. Similarly, metrics or KPIs need balance to ensure that all-important areas of performance are in focus. Once specific drivers of customer value are understood, metrics aligned to those drivers and their required performance standards can be defined and validated by customers.
This is based on the principle that a company’s financial health is measured by how much net profit exceeds the cost of invested capital. Net profit is derived by subtracting cost of goods sold (COGS), general and administrative cost, and taxes from sales. The total cost of invested capital is the result of multiplying the cost of capital by total company assets. EVA is the result of subtracting the total cost of capital from net profit. The SCOR model recognized the need to measure supply chain performance and, therefore, developed a list of cross-industry performance attributes to guide us in selecting KPIs.
The elements of this calculations can be viewed starting at the net profit box in the following diagram:
There is clear alignment between EVA and SCOR performance attributes, e.g. a supplier’s delivery reliability can have an impact on customers’ lost sales, lost customers, and lost sales opportunities. If a promised delivery fails to arrive on time, has unacceptable quality, or is late, the customer may not be able to fulfill their customers’ orders. Poor delivery performance also affects inventory levels. Unreliable delivery causes customers to compensate by carrying extra inventory. A similar comparison can be made among the other four performance attributes and EVA drivers.
Just like an automobile dashboard that has many gauges and lights but is missing an oil pressure indicator everything seems to be running fine until low oil pressure results in engine failure. Similarly, metrics or KPIs need balance to ensure that all-important areas of performance are in focus. Once specific drivers of customer value are understood, metrics aligned to those drivers and their required performance standards can be defined and validated by customers.
(Reference: "Fix Your Supply Chain" by Paul C Husby and Dan Swartwood)
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