3.10 Summary of Learning Objectives

1. Describe key financial measures of firm performance. The key financial measures of firm performance include return on equity; return on assets; accounts payable turnover; profit margin; asset turnover and accounts receivable turnover; inventory turns; property, plant, and equipment turns; and cash-to-cash cycle.

2. Identify the major drivers of supply chain performance. The major drivers of supply chain performance are facilities, inventory, transportation, information, sourcing, and pricing.

3. Discuss the role of each driver in creating strategic fit between the supply chain strategy and the competitive strategy. A company achieving strategic fit has found the right balance between responsiveness and efficiency. Each driver affects this balance. Having more facilities generally makes a chain more responsive, whereas having fewer, central facilities creates higher efficiency. Holding higher levels of inventory increases the responsiveness of a supply chain, whereas keeping inventory low increases the chain’s efficiency. Using faster modes of transportation increases a chain’s responsiveness, whereas using slower modes generally increases efficiency. Investing in information can vastly improve the supply chain performance on both dimensions. This investment, however, must be made based on the strategic position supported by the other drivers. Appropriate sourcing decisions raise supply chain profits by assigning supply chain functions to the right party, which brings higher economies of scale or a higher level of aggregation of uncertainty. Pricing can be used to attract the right target customer segment. Differential pricing can be used to attract customers who value responsiveness as well as customers who want efficiency. The supply chain can then be structured to provide responsiveness to some customers while improving overall efficiency.

4. Define the key metrics that track the performance of the supply chain in terms of each driver. Facility-related metrics are capacity, utilization, theoretical flow/cycle time of production, actual flow/cycle time, flow time efficiency, product variety, volume contribution of top 20 percent SKUs/customers, processing/setup/down/idle time, and average production batch size. Inventory-related metrics are average inventory, products with more than a specified number of days of inventory, average replenishment batch size, average safety inventory, seasonal inventory, fill rate, and fraction of time out of stock. Transportation-related metrics are average inbound transportation cost, average incoming shipment size, average inbound transportation cost per shipment, average outbound transportation cost, average outbound shipment size, average outbound transportation cost per shipment, and fraction transported by mode. Information-related metrics are forecast horizon, forecast error, seasonal factors, variance from plan, and ratio of demand variability to order variability. Sourcing-related metrics are days payable outstanding, average purchase price, range of purchase price, average purchase quantity, fraction on-time deliveries, supply quality, and supply lead time. Pricing-related metrics are profit margin, days sales outstanding, incremental fixed cost per order, incremental variable cost per unit, average sale price, average order size, range of sale price, and range of periodic sales. Each of these metrics directly or indirectly affects the financial metrics and the responsiveness to customers.