For decades, supply chain professionals have struggled to convey the direct effect of supply chain design on enterprise value. They may understand it and watch it play out regularly in the marketplace. But the numbers, specifically the critical metrics used for shareholder calls, reflect SCM cost efficiency alone: a vital mistake many c-suite executives awoke to after the devastating impact of COVID-19.
Disruptions are coming harder, faster, and more frequently than before. And supply chain management professionals can no longer shoulder them with creativity and brute force. SCM design must be revamped to balance agility with resiliency. To convince executives and market analysts to act outside of a crisis situation, we need to connect supply chain performance and boardroom metrics.
The COVID-19 pandemic provided a research scenario to do just that.
In the white paper “Advancing E2E Agile Resiliency in Supply Chains,” written by Global Supply Chain Institute Fellows David Demers and Brian Kolek, the pair leveraged a proprietary platform from their company, Avicon, to connect supply chain design efficacy to key financial metrics and visualize companies’ value gains and losses before and during the disruption.
Avicon’s Diamond Analysis uses nine key financial metrics that influence shareholder valuation and boardroom analysis. Firms fall into one of four quartiles on the diamond based on their performance in metrics relating to the critical end-to-end (E2E) value creation areas of customer, cost, capital, and growth.
Definitions and Equations:
An approach to supply chain design that embraces the best attributes of both agility and resiliency. Characterized by responsiveness to changing conditions, adaptability to disruption, coordination across the E2E supply chain, speed, flexibility and a balanced approach to growing and protecting value creation.
- COGS = Cost of Goods Sold (COGS expenditures/net operating revenue)
- SG&A = Sales, General and Administrations (SG&A expenditures/net operating revenue)
- EBITDA = Earnings Before Interest, Depreciation and Amortization (EBITDA/net operating revenue)
- IDS = Inventory Days of Supply: the speed at which inventory can be converted to sales
- DSO = Days Sales Outstanding: the velocity at which sales can be converted into cash through accounts receivable
- C2C = Cash to Cash: the time it takes for $1 to complete the procurement, shipment and collection processes (IDS+DSO-Days Payable Outstanding)
- Revenue: compares the last four quarters with the previous four quarters
- PE Ratio = Price Earnings Ratio: the price of a share of stock at the end of the last quarter/earnings per share
- ROSCA = Return on Supply Chain Assets: measures EBITDA return on working capital (EBITDA/combined inventory and receivable reported value)
Demers and Kolek analyzed performance on these metrics for the top 16-24 organizations across three industries for which COVID-19 exposed pre-existing stress points—consumer packaged goods (CPG), industrial machinery, and medical devices—for two quarters before and during the pandemic.
To demonstrate how each business process reacts to changes in revenue (i.e., its agility), they calculated each metric as a percent of net operating value. For example, while most industrial machinery businesses experienced significant revenue losses during COVID-19, those that also scaled-down COGS or SG&A fared much better. As a company scales these three metrics up or down, other metrics (COGS, SG&A, IDS, DSO, C2C) ideally remain neutral.
Quantifying supply chain resiliency:
ROSCA, a new metric of particular note for supply chain management professionals, measures EBIDTA return on working capital. It does so by dividing EBIDTA by combined inventory and receivable reported value. Maintaining positive ROSCA despite decreasing revenues indicates an agile resilient supply chain. Several top-performing organizations posted positive ROSCA despite revenue reductions and overall market shrinkage, even with high supply chain complexity and high SKU counts.
Supply Chain Performance in Market Context
The supply chain’s effect on these financial metrics exposes the fault lines in current models. Demers and Koleks’ analysis contextualizes market performance within CPG, industrial machinery, and medical devices. While COVID-19 affected each industry differently, each shared successes and missteps.
Significantly Advantaged Performers:
Across the board, to protect market share, top performers prioritized service above cost. CPG and medical device winners surged ahead of the competition by dynamically shifting production to meet demand. Above all else, they strived to protect and increase customer satisfaction.
Significantly Disadvantaged Performers:
COVID-19’s impact was felt strongest by businesses that could not change their operating models. Sales figures were lost without increasing costs and inventory. Increases in IDS tied up much-needed cash flow, compounding underperformance.
Compare these metrics and analysis and you will have an idea of whether your organization’s supply chain is both agile and resilient.
In the two blog posts that follow, we detail the top 10 capabilities that improve agile resiliency in supply chains. We also provide a blueprint for developing these capabilities in your organization.
Supply chain vulnerability is no longer about surviving black-swan event disruptions. E2E agile resiliency creates a clear competitive advantage in increasingly volatile marketplaces. It also helps organizations scale up success during periods of growth. Industry leaders have already adopted a new supply chain design that embraces the best attributes of supply chain agility and resiliency readiness, and shareholder interests are demanding that the rest of the pack follow suit.
Find a full explanation of the Diamond Analysis and industry-specific findings in the white paper, available for free download.
David Demers, Fellow, Global Supply Chain Institute, University of Tennessee, Knoxville
Brian Kolek, Fellow, Global Supply Chain Institute, University of Tennessee, Knoxville