Supply Chains

Operating
Performance -
A Financial
Approach To
Measurement
Second Edition

Roger Oakden
 ABOUT THE AUTHOR
TABLE OF CONTENTS A FRAMEWORK FOR SUPPLY CHAINS

ROGER OAKDEN
LEARNING DEVELOPER

I am the owner of Learn About Logistics https://www.learnaboutlogistics.com/, the specialist online

learning provider of practical learning in Supply Chains and Supply Networks, Logistics, Operations
Planning and Procurement. My background as a practitioner, consultant and educator uniquely
qualifies me to provide this service.

At RMIT University in Melbourne, Australia I developed and presented the largest Logistics post-
graduate program in the Asia Pacific region; the program was presented at centres in Melbourne,
Singapore and Hong Kong. While at the University I was part-funded as the Ford Motor Company
Procurement Fellow. I was later engaged as the Deputy Director of the Institute for Logistics and
Supply Chain Management at Victoria University in Melbourne.

My extensive consulting background includes significant high-level roles. As an Associate Director at

a global consulting firm, I led teams that assisted clients to improve their logistics operations,
strategic procurement and associated IT systems.

Earlier, at a multinational computer company I provided analysis of IT requirements for

manufacturing industry customers and project management for implementing ERP/MRP software
applications.

My industrial management experience covered industrial engineering, management accounting,

purchasing and operations in the shipping, chemical, metals and food industries.

I hold a Master degree in Logistics Management and a first class honours degree in Finance and
Accounting. I am certified in Production and Inventory Management (CPIM) and a Certified
Purchasing Manager (C.P.M). I am also certified in Assessment and Workplace Training.

I co-authored the book, published by McGraw-Hill in 2011, titled A Framework for Supply Chains –
Logistics Operations with an Asia Pacific Perspective (in Australia and New Zealand it is titled A
Framework for Supply Chains – Logistics Operations in the Asia Pacific Region). In 2007, I co-
authored the book Working Capital: Business Success and Profitability. I was a contributing author
for the books Dynamic Supply Chain Alignment – a new business model for peak performance in
enterprise supply chains across all geographies (John Gatorna Ed. 2009) and Supply Chain
Management – a Procurement Perspective (Pieter Nagel Ed. 2003). I have written articles for the
business press and presented papers at conferences in Australia, Asia and Europe.

I am a past president of APICS, the society for supply chain professionals in Australia. The
organisation has been renamed the Australian Supply Chain Institute (ASCI).

1
 ABOUT THE AUTHOR ROGER OAKDEN – LEARNING DEVELOPER
OBJECTIVE OF THE APPROACH

Supply Chain professionals need the ability to talk about

supply chains in financial terms - not necessarily
qualified in the discipline, but able to discuss matters in the
language of finance and accounting.

The objective is to provide structured statements that

measure the financial value and performance of the
operational Core Supply Chains. This helps to remove
‘reduction of costs’ as the main measure of success for
functions with the Supply Chains group.

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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS

SUPPLY CHAINS OF AN ORGANISATION

The Supply Chains of an organisation comprise the flow items, money, transactions and
information that commence at mines and farms, flow through a network of suppliers,
move through the organisation and out to customers and their customers.

The immediate suppliers and customers of an organisation are called Tier 1 Suppliers.
They obtain their supplies from Tier 2 suppliers. Likewise, Tier 1 customers may supply to
Tier 2 customers and so on to the end user. A Supply Chain has two parts - Core and
Extended:
1. Core Supply Chain: from Tier 1 suppliers, through the organisation to Tier 1
customers. It comprises the flows of items, money, transactions and information that
are facilitated by the Supply Chains Group. The group comprises responsibilities for at
least Procurement, Operations Planning and Logistics
2. Extended Supply Chain: the flows of items, money, transactions and information from
Tier 2 suppliers and customers to Tier 3 and beyond

A Core Supply Chain

Operations Distribution
Procurement Planning (incl. capacity (incl.
contract mfg.) LSPs)
Suppliers Customers
Tier 1 Tier 1
Logistics

Inbound SC Internal SC Outbound SC

Figure 1 Supply Chains – the Core

A commercial business could have between five and eight supply chains. These are based
on material types, production capability, or constraints that may influence the ability to
provide Availability of product to the customers.

The Core Supply Chains can be measured and performance evaluated. The Extended
Supply Chains can only be analysed to better understand their operations, the use of
power in their supply chain and the associated risks that exist.

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 CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS
FINANCIAL PERFORMANCE
MEASURED IN LEVELS

Corporate level
The main financial statements prepared for a Board of Directors and CEO of a brand
organisation (a shipper) are the Balance Sheet, Income (Profit & Loss) and Cash Flow.

The statements are structured to report historical financial information. They are used by
external stakeholders, the organisation’s senior management and finance executives.
Corporate financial statements are not designed to provide an understanding of
operational activities and performance within an organisation’s Supply Chains.

Level 1
Within the financial statements there are elements where the performance of an
organisation’s supply chains can influence the corporate results. Work has been
undertaken for many years by the research firm Supply Chain Insights at
https://supplychaininsights.com/ that provides an analysis of Supply Chain Metrics for
listed American public companies, using published financial reports.

The analysis and index is based on “corporate financial performance, removing subjectivity
from the decision process” which compares “peer groups operating in the same industries with
similar challenges and opportunities present within the business environment”.

The four metrics used are:

Growth is shared with Marketing & Sales because supply chains provide Availability of
products
Operating Margin is calculated using Cost of Goods Sold (COGS)/Cost of Sales, which
supply chains can influence
Inventory Turns is a measure of the inventory held to service the level of sales under
current operating conditions
Return of Invested Capital reflects the investment in assets, which supply chains can
provide a substantial amount

Consider this structure as the ‘Level 1’ Supply Chains - Corporate financial statements.
They could be adopted in any country by businesses that wish to evaluate the financial
performance of their core Supply Chains, using Corporate financial statements. However,
as Supply Chain Insights observes “there is no commonly held definition of supply chain
excellence”.

Both the ‘Corporate’ financial statements and the ‘Level 1’ analysis approach by Supply
Chain Insights provide measures of performance for senior management and external
communities.
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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS

Level 2
The Level 1 measures do not look deeper into the financial performance of supply chains
at the Operations level This level of financial metrics is the ‘Level 2’ Supply Chains –
Operations. It is required to support the management of an organisation’s Core Supply
Chains and contains five statements:
1. Supply Chains Working Capital
2. Cash to Cash cycle time
3. Supply Chains Value Added (VA)
4. Supply Chains Return on Invested Capital (SC-ROIC)
5. Inventory (FG) value (based on CoVM analysis)

Supply Chains Financial Measures

Level Cash Assets Income
Corporate Cash Flow Balance Sheet Income (P&L)
statement

Level 1 Supply Return on Invested Growth in sales

Chains – Corporate Capital (ROIC) value and
Source: Supply Chain Insights
volume
Inventory turns Operating
margin
Level 2 Supply Supply Chains Supply Chains Return Value Added
Chains – Working Capital on Invested Capital (VA) statement
Operations (SC-ROIC)
Source: CoVM: Supply Chain STO Pty Ltd

Cash to Cash Inventory (FG) value

cycle time (based on CoVM
analysis)
Table 1: Comparing financial statements at the three levels

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CORE SUPPLY CHAINS (LEVEL 2)
FINANCIAL STATEMENTS

To gain acceptance by financial executives, boards of directors and senior management,

the Level 2 metrics must utilise the base data collected for the corporate financial
statements. Some reformatting is required so that data is relevant for reviewing and
improving the performance of Core Supply Chains; however, the principles supporting the
corporate financial statements remain.

An organisation’s Supply Chains group measures of financial performance using five

financial statements:
1. Supply Chains Working Capital
2. Cash to Cash cycle time
3. Supply Chains Value Added (VA)
4. Supply Chains Return on Invested Capital (SC-ROIC)
5. Inventory (FG) value (based on CoVM analysis)

1. Supply Chains Working Capital

The lifeblood of an organisation is cash - while profits increase shareholder wealth, cash
provides for an ongoing business. Financial viability for an organisation therefore
requires the management of Working Capital.

Supply Chains Working Capital is a measure of time, which is an operational measure:

• The longer a process takes, the more money is consumed by the organisation
• Items must be received and supplied in the most effective timeframe to maintain and
potentially improve an organisation’s profit margins

Activities of the Supply Chains Group support business relationships with suppliers and
customers and have a direct role in the timely collection and payment of cash. The
financial performance measures for Supply Chains should therefore reflect this objective,
together with responsibility for the quantity of Working Capital required by the enterprise.

Responsibility for Working Capital allows the Supply Chain Group to make a range of
decisions and improvements that meet the objective of Logistics. This is ‘to satisfy customer
needs by providing Availability of goods and services, through the time-related positioning of
internal and external resources, at the lowest total cost’.

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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS
Challenge of the Corporate Working Capital statement
Working Capital at the corporate level is structured as:
current assets less current liabilities (that is: cash + inventory + accounts receivable – accounts
payable)

The corporate Cash Flow metric encourages organisations to delay payment to suppliers,
because doing so improves the corporate Working Capital position. But using suppliers’
funds to even partially finance an organisation is damaging to the overall success of its
Supply Chains.

Extended payments can mean that Tier 1 suppliers are forced to extend payment terms to
their suppliers, who are even less able to fund the revised terms. Extending payment
terms can result in bankruptcies of suppliers in a supply chain, causing follow-on problems
for their customers; especially those in ‘just in time’ (JIT) situations.

Areas to address in organisations that delay payment to suppliers

Working Capital performance is not just a finance challenge; poor results are a symptom
of failings in operational business processes. Table 2 lists some of the symptoms to be
addressed.

Working Capital Element Supply Chain Factors Affecting Working Capital

Inventory Inventory management (policy, planning and control)

 Relationship with suppliers
 Sourcing strategies
 Sourcing lead times
 Order cycle time
 Forecast methods
 Delivery lead time
 Inventory location + form and function
 Inventory shrinkage costs
 Slow and Obsolescent (SLOB) inventory valuation

Accounts Receivable Collection of money from customers

 Credit management and invoice dispute resolution
processes
 Invoice accuracy
 Invoice terms
 Credit check process = non- shipment of goods
 Letter of credit clauses
 Delivery windows by customers

Account Payable More efficient processes with suppliers

 Terms & conditions (T&C) in contracts
 Discounts taken for early payment
 Late payment due to process failure
Table 2: Areas to address in organisations that delay payment to suppliers

Key elements of managing Working Capital

• Segmentation and analysis of customers (the ‘Cost to Serve’)
• Segmentation and analysis of suppliers and inventory
• Implementing Sales & Operations Planning (S&OP) and
• IT applications to assist in tracking, consolidation and measurement of Working Capital

7
Supply Chains Working Capital structure
A more accurate representation of Working Capital requires two changes to the Corporate
statement:
1. Accounts Payable is added to Accounts Receivable, not subtracted. When an order is
placed with a supplier, it established an obligation to pay – that is cash out. Allocating
cash to suppliers (through raising purchase orders) means that cash is not available
for ongoing operations.
2. Recognise the cost of holding inventory. This is not a line item in the Corporate Income
Statement, nor the Corporate Working Capital statement. However, to present a
realistic picture within the Supply Chains Working Capital statement, the Inventory
Holding Cost is incorporated.

Cost to hold inventory

The cost to hold inventory uses one of three approaches:
1. The cost for the organisation to borrow money
2. The organisation’s ‘weighted average cost of capital’, which is the after tax cost of debt
and equity for the organisation
3. Calculated inventory carrying costs as shown in Table 3

Inventory Carrying Costs

Cast Category Expenditure
Capital Cost to borrow money to purchase items
Inventory financing – opportunity cost
Servicing Inventory insurance premiums
Government (central, state/province, local) taxes and charges
Administration
Out of stock replenishment costs
Storage space Company owned, rented and public
Inventory risk Obsolescence of items held in inventory
Damage to inventory
Shrinkage of inventory value through theft
Reduction in inventory value through age e.g. use-by date
Reduction in inventory value through reduced potency i.e.
chemicals

Table 3: Inventory carrying costs parameters

Calculate each line item within a category as a percentage of the Cost of Goods Sold
(COGS), located in the Corporate Income (P&L) statement. The total cost of holding
inventory could be more than 20 percent, depending on the industry and the cost of
borrowing money.

The revised Working Capital required statement is therefore:

cash + inventory value + cost of holding inventory (inventory value * inventory holding costs) +
accounts receivable + accounts payable

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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS

2. Cash to Cash cycle time

The Cash to Cash cycle time (also called the cash conversion cycle (CCC)) is the Working
Capital performance measure. The CCC determines the days of cash required to fund
ongoing operations - investment in inventory and providing credit to customers against
the payments made for purchases.

Table 4 is an example of the time taken for cash invested as inputs to flow back into the
organisation. Due to differences in how each industry operates, organisations will have
different cash to cash cycle outcomes.

Cash to Cash Cycle example calculation

Month Month
Commencing Ending
Balance sheet
Accounts receivable $30m $29m
Inventory at cost $7m $6m
Accounts payable $14m $13m
Profit & Loss statement
Sales $20m
Cost of Goods Sold (COGS) $14m
Gross profit $6m
Cash to Cash days
Inventory days of supply ($7m + $6m)/2) / ($14m/30days) 13.93
Days receivable outstanding (+) ($30m + $29m)/2) / ($20m/30 days) 44.25
Days payable outstanding (-) ($14m + $13m)/2) / ($14m/30 days) 28.93
Cash to Cash cycle days 29.25

Table 4: An example Cash to Cash Cycle calculation

Like most performance measures used in Supply Chains, CCC results should not be viewed
in isolation; instead consider the trend. Measure and plot the standard deviation to know
whether the variable results are ‘in control’.

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3. Supply Chains Value Added (VA) Statement
This statement has similarities to the Corporate Income (P&L) statement. It reflects the
money spent with suppliers and the Value Added to those purchases by the organisation.

Income statement & Supply Chains Value Added statement compared

Corporate Income Supply Chain
P & L Statement % VA Statement %
Volume Related
Sales Revenue 100.0 Sales Revenue 100.0
Cost of Goods Sold 68.8 Supply Market Spend 51.4
Gross Profit 31.2 Value Added 48.6
Time Related
Operating Expenses 10.0 Employee Share (equal to 50% of 48.6) 24.3
Organisation Share 3.1
Operating Profit 21.2 Operating Profit (EBITDA) 21.2
Tax / Interest 15.9 Finance Share 15.9
Net Profit 5.3
Shareholders Dividend 3.0 Shareholders Share 3.0
Retained Earnings 2.3 Retained Earnings 2.3
Table 5: Value of Supply Chains to an organisation

The Corporate Income (P&L) statement has all supply related expenditure grouped under
the general heading of ‘Cost of Goods Sold’ (COGS). For retail and wholesale businesses
this is called Cost of Sales, as purchases are generally for goods ready for resale.

Supply Markets spend

The COGS measurement does not indicate how the expenditure is used. For example: in a
manufacturing organisation, which payments have been made for purchased materials,
components and products; or payments for service contracts, such as logistics service
providers (LSPs). In the Supply Chains VA statement, the expenditures in supply markets
(the Supply Markets Spend) are traced and consolidated by each supplier.

Value Added
The Supply Chains Value Added (VA) is volume related and calculated by deducting the
Supply Markets Spend from the net Sales revenue (revenue after paying royalties,
commissions and allowing for bad debts). The VA is available to pay time related costs of
the organisation – employees, the organisation, finances and shareholders.

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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS

Employee share
In the Supply Chains VA statement, the ‘Employee share’ is the total people costs of the
organisation (the 50 percent of VA in the Table is for illustration); it incorporates the total
cost of employing all paid staff (including senior executives). Included in the ‘Employee
Share’ are: direct cost per department of salaries and wages, annual leave, sick pay and
superannuation levies. In addition are total employee benefits, with examples being:
company supplied vehicles, baby crèche, staff dining or meals subsidy and training.

The people costs figure can be further broken down to the costs within each function,
department or group. This includes the Supply Chain Group, comprising (at least)
Procurement, Operations Planning and Logistics.

Organisation share
In the Supply Chains VA statement, the ‘Organisation Share’ comprises the costs incurred
to legally establish and maintain the organisation, such as registrations, licences,
professional audit fees etc.

Final measurements
In the Supply Chains VA statement, the figure that remains after deduction of the
‘Employee Share’ and ‘Organisation Share’ is ‘Earnings before Interest, Tax, Depreciation
and Amortisation’, or EBITDA.

In both the Corporate Income statement and Supply Chains VA statement, the following
remain the same:
• Tax/Interest or Finance share;
• Shareholders dividend or Shareholders share and
• Retained Earnings

Summary
The Supply Chains VA statements contain no estimates or calculations - all costs are directly
assigned. Purchases within ‘Supply Markets Spend’ are identified by supplier; employee
costs are identified within the ‘Employee Share’ under each functional group and
‘Organisation Share’ expenses can be extracted.

The Supply Chains VA statement does require some re-structuring of the Corporate
Income or P&L statement. This is to enable identification of the:
• Supply Market spend by supplier
• Employee share, including direct costs by department and total employee benefits by
type of expenditure

11
4. Supply Chains Return on Invested Capital (SC-ROIC)
The Strategic Profit Model (also called the DuPont chart) provides a structure at the
Corporate level for the calculation of Return on Investment (ROI); Return on Assets (ROA)
and Return on Equity (ROE).

Figure 2 illustrates the Supply Chains Return on Invested Capital (SC-ROIC), incorporating
the measures of Supply Chains Working Capital and EBITDA. As with other Supply Chain
financial measures, the absolute ROIC value at a point in time is less important than the
trend.

Strategic Profit Model structure for the SC-ROIC metric

Inputs to SC-
ROIC

Supply Chains
Net Sales
VA statement

minus
Supply Operating
Supply Chains
markets Profit
VA statement
spend (EBITDA)
Operating
minus
divided by Profit
margin
Employee Supply Chains
Supply Chains Net Sales
share + Return On
VA statement
Org. share multiply by Invested
Capital
Supply Chains Supply Net Sales (SC-ROIC)
Invested
Working Chains
divided by Capital
Capital Working
turns
statement Capital
Invested
plus Capital

Corporate Fixed
Balance Sheet Capital

Figure 2: Supply Chain Return on Invested Capital (SC-ROIC)

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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS

5. Inventory Value of finished goods (based on CoVM volume analysis)

The overriding reason to hold finished goods inventory under a Make to Stock policy is to
provide Availability of products for customers. The measure of Availability is the
probability of Delivery In full, On time, with Accuracy (DIFOTA).

To plan sufficient inventory that meets the Availability target has three elements:

1. Identifying the form and function of inventory by location

2. Planning inventory buffers (or safety stock) to provide Availability
3. Objective:
a. to improve the forecasts and controls for fast selling SKUs and hold limited
inventory
b. hold sufficient safety stock for low selling SKUs
c. the savings in inventory for fast selling SKUs will more than pay for the
additional safety stock for low selling SKUs

Analysing inventory
The ABC ranking of products, based on the Pareto or 80:20 rule has a limitation. All SKUs
within a group are considered to have the same characteristics and behaviours and can be
planned in the same way. This is not correct.

A group of SKUs can each have similar sales. But the need is to measure the volatility in
demand and assess the predictability of a demand pattern, or how well (or if at all) the
SKU can be forecast

The tool to use is the Coefficient of Variation (CoV), calculated as Coefficient of Variation =
Standard Deviation / Mean. This requires for each SKU:

• the historical data of annual units sold, listed in descending order

• sales per year in 52 weekly buckets
• calculate the mean of sales and the standard deviation

The more consistent the sales pattern of an SKU, the lower will be the CoV.

13
Analyse inventory by Group, Class and Category
For each SKU in a group A-E, the CoV is within a Class range of ‘a to f’.

The table shows that cells Aa, Ba, Ca and Da are within a Category that has similar
patterns. This also applies to cells Ab, Bb, Cb and Db) and so on.

In the spreadsheet, the value of planned inventory for each SKU is calculated and
measured against the actual finished goods inventory and actual Stock Turns.

Annual
% of sales in Class by CoV result
% of SKU sales @ units Mean (Std. Deviation/Mean)
within each COGS (most to value of Std.
Group value SKU list least) sales Dev.
Based on Net of a: b: c: d: e: f:
ABC rule profit </= 0.25 >0.25, >0.50, > 0.75, >1.0, >1.5
(80:20) margin <0.50 <0.75 <1.0 <1.5

Group A 15 70 – 80 Grey 14,601 1217 756 .6212

– 20%

Pink 14,576 1215 1217 1.00

Blue 14,414 1201 300 .2498
Yellow 14,286 1191 1155 .9698
Green 14,267 1189 381 .3204
Black 13,990 1166 554 .4751
Red 13,923 1160 165 .1422
Group B 20 10 - 15
– 30%

Group C 5 - 15
40 – 65%

Group D 5 - 10
10 – 15%

Group E Nil
<3%

Table 6: Finished Goods Sales Pattern using CoV

Adapted from data supplied by Tom Rafferty Supply Chain STO Pty. Ltd

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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS

Planning inventory
The gains for a business from analysis using CoV come from improved planning and
execution of the Plan. The CoV Management (CoVM) table shows the range of planning
decisions to consider for each Category - Steady, Variable, Erratic, Irregular, Lumpy and
Dead.
Source Planning
Category Sales (Demand) Planning Make (Operations Planning) (Procurement)

STEADY: Low variation in sales – MAPE 10- Tracking signal <4.0 for OK Rate based (Just in Time) where
15% situation possible

VARAIABLE: Variable forecast ‘error’; verify Tracking signal >7.0 for review Short lead times; responsive
sales data with market of safety stock; Postponement; suppliers able to scale. Vendor
information; change service Quick machine changeovers Managed Inventory VMI
levels

ERRATIC: Some SKU can be high volume, Identify cause of Erratic Annual or seasonal buy of
but seasonal. Low number of demand; season pre-build i.e. dedicated materials
customers to liaise with Make To Stock (MTS)

IRREGULAR: Slow & Obsolete No standard forecast; Product Contract production to Tend to low quantity PO;
SLOB Category; no sales in 6 rationalisation; review service specialised company; standardise materials used.
of the previous 12 months) level and minimum order Postponement at late stage – Vendor Managed Inventory
quantity if imported SKU Assemble To Order (ATO) if (VMI)
possible

LUMPY: Slow & Obsolete - No standard forecast method. Quick changeovers: finite Short lead times; responsive
SLOB Category. (up to 70% of Product rationalisation needed scheduling: review constraints suppliers able to scale. Hold
SKUs, 5-7% of sales) and decoupling points consignment stock

DEAD: Eliminate if no sales in New product launch or Sales market data convert to Initial buy from responsive
past 12 months Promotion. Volume high, then inventory plan; contract suppliers able to scale
New product launch; could become LUMPY category. packing for promotions
Promotion giveaway

Table 7: Planning your business using CoVM

Based on CoVM categories supplied by Tom Rafferty Supply Chain STO Pty. Ltd.

15
METRICS USING VALUE ADDED
Value of the Supply Chain Group
The Supply Chains VA statement assists in building the perception of Supply Chains as an
investment in supplier and customer relationships. The statement enables measurements
of performance.

The total costs associated with the Supply Chain Group are:

• Employment of the Supply Chain Group people (from the ‘Employee Share’)
Plus the
• ‘Supply Markets Spend’ on goods and services
The total cost is also shown as a percentage of Net Sales.

Performance measures for the business are::

• The ratio of VA per full time equivalent employee
• This metric can be used as an overall performance measure for the
organisation. It provides an ongoing (trend) measure to identify the
capability of all employees in the organisation to generate Value.
• Demonstrate the outcomes from changes to the VA ‘cake’. For example
• As employees wish to increase their share of VA, positive discussions can be
held concerning the actions required. Examples are:
• An increase in the VA (through increases in sales or prices)
• A reduction in the total cost of ownership (TCO) for goods and
services; achieved through reduced: total people costs, company
costs, finance costs or the shareholder’s share

Where reductions in the TCO can be achieved:

• Sales:
• Management of incoming order flow
• Customer service levels by category of customer
• The probability of ‘perfect order’ (calculation of: delivery in full, on time,
with accuracy or DIFOTA)
• Actual order fill rate and order cycle time
• Cost to Serve (CtS) calculations by Group A customers
• Improved co-ordination of promotions and new product releases
• Supply markets spend:
• Supply Markets Intelligence gathering
• Storage and transport cost analysis
• Bill of Materials (BOM) accuracy and process improvements
• Outsourcing policy
• Employee share:
• Planning and scheduling capability e.g. poor planning leads to excessive
overtime payments for warehouse staff

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CHAPTER ONE THE ENTERPRISE, ITS LOGISTICS AND SUPPLY CHAINS

CHALLENGES TO SUCCESSFUL
IMPLEMENTATION

The challenges for implementing Core Supply Chains (Level 2) financial measures are in
three main areas:
1. Acceptance and support by the Finance and Accounting groups
2. Acceptance by senior management
3. Implementing changes to ERP and other IT applications by internal IT and software
suppliers. An example is:

Supply Market Spend application

The chart of accounts means that the structure of the general ledger, cost centre and
other codes are created to facilitate Accounting procedures. To assist Procurement
knowledge and their capability to work with suppliers, there is a requirement for a Spend
Analysis Application that is:
• Capable of operating across multiple systems (head office and subsidiaries/divisions) to
gather transactions and reformat them to enable a ‘Supply Markets Spend’ analysis
• The requirement is to consolidate the total spend within each supplier entity, which
takes account of the following situations:
• Suppliers can trade under multiple divisions and businesses
• The supplier’s name can be entered differently in the buying organisation’s
accounts payable files
• Multiple general ledger and cost centre names
• Categories and standard industry (SIC) codes may be used in one part of the
organisation, but not others
• Descriptions of the product or service can vary, depending on the user’s
understanding

Overcoming the challenges

A successful implementation of the Level 2 Supply Chain financial statements requires
Supply Chain professionals that have a capability to ‘sell’ the approach to senior
management and the Finance and Accounting groups. This requires Supply Chain
professionals to have a reasonable understanding of and be comfortable when discussing
finance and accounting principles and implementation.

17
USE THE MEASURES DISCUSSED
This discussion outlines an approach for measuring the financial performance of your
organisation’s Core Supply Chains. The proposal can be used by organisations and within
education institutions as a starting point for change and improvement to the
measurement of performance for Core Supply Chains.

Use the Level 2 measurements in conjunction with Corporate financial statements and the
Level 1 Supply Chain measures. The three levels of financial statements will provide a
comprehensive picture for management of an organisation and its Supply Chains.

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