Linking Supply Chain Measures with Financial Performance: A Framework

IV
Executive Summary
In today’s open, global and competitive marketplace, leading companies build
their competitive advantage on supply chain management.
A number of metrics have been proposed over time to measure supply chain
efficiency, but still most “traditional” high-level corporate metrics focus on
financial impact and outcomes. Yet, financial metrics seem to be inadequate
to measure supply chain performance. Since they are historical measures they
do not provide a forward-looking view and they can be very difficult to tie to
operational effectiveness. Nor do they provide an insight into strategic non-
financial performance and customer service level.
A number of operational metrics have also been developed over time.
However, most of the metrics developed are fragmented within and across
organisations and are not linked with companies’ financial success. A major
concern for supply chain professionals is to link supply chain performance to
financial decisions. Although the implications of supply chain management are
fully understood, little research has been devoted to find the links between
operational execution and financial improvements.
The lack of links between supply chain operations and financial performance
seems to be related to the Board perception of the supply chain function and
to the alignment between supply chain and finance functions.
With little academic research in this area, this research, aims to uncover the
alignment between supply-chain and finance function, in particular regarding
performance measures.
Two different methodologies have been adopted: external interviews to survey
supply chain executives and questionnaires to survey finance executives.
Due to the poor response rate obtained to the questionnaires during the month
of August, the results collected as part of this study are of questionable
validity.
The preliminary results of both interviews and questionnaire suggest that
despite the fact that the economic impact of the supply chain is now widely
Vrecognised across organisations, poor alignment and communication exist
among functions on supply chain measures.
In particular the respondents highlight the need for a standard framework able
to answer the following questions:
 What supply chain metrics at the operational level reflect the financial
value?
 What metrics translate financial targets into operational measures?
This project aims to answer the above questions by constructing a framework
that links operational metrics with income statement, balance sheet items, and
shareholder value in the form of the Economic Value Added (EVA) and with
supply chain processes.
For this framework metrics and processes defined by the Supply Chain
Operations Reference Model (SCOR) have been used.
The main advantages of the SCOR model are that it provides descriptions of
standard processes, a framework for the relationships among processes,
performance metrics and standard alignment to features and functionality.
The SCOR model can be effectively used as a benchmarking tool for supply
chain operations. Furthermore, under the condition that corporate executives
seek solutions based on industry standards and deployed by independent
associations, a great deal of value can derive by exploiting the principles and
guidelines of the Supply-Chain Council.
The framework can be effectively used by finance executives to translate
financial targets into operational metrics and by middle management to tie
these metrics to operational processes to be implemented at lower levels of
the organisation.
Also, the framework can help supply chain executives to develop an
awareness of the impact of processes on operational and financial measures
which can be used to assess the viability and the financial impact of proposed
changes.
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This framework represents a first attempt to link operational metrics to
shareholder value. The adoption of such an approach requires a financial
orientation within organisations across all levels and functions.
Further research needs to be undertaken in order to validate and refine the
model and in order to explore some methodologies to understand the trade-
offs implicit in operational decisions and metrics.
Alessandra Cantu Introduction
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1
Introduction
In today’s open, global and competitive marketplace, leading companies build
their competitive advantage on supply chain management. Goods and
information are moving faster and faster across networks and supply chains
span a large number of organisations.
A number of metrics have been proposed over time to measure supply chain
efficiency, but still most “traditional” high-level corporate metrics focus on
financial impact and outcomes. This seems mostly to be a consequence of the
facts that financial reporting is done on a regular basis, financial metrics are
relatively easy to obtain and, at least in the US, the Sarbanes-Oxley Act
obliges companies to establish robust and sound internal control mechanisms.
Yet, financial metrics seem to be inadequate to measure supply chain
performance. Since they are historical measures they do not provide a
forward-looking view and they can be very difficult to tie to operational
effectiveness. Nor do they provide an insight into strategic non-financial
performance and customer service level.
A number of operational metrics have been developed over time. A major
concern for supply chain professionals is to link supply chain performance to
financial decisions. As confirmed by analyst Adrian Gonzalez at ARC Advisory
Group (in Camerinelli, 2005, p 1): “the flow of money and the role of finance
are playing a greater role in logistics and supply chain management,
especially in global trade”. However, models of the Financial Supply Chain
(FSC) available in the literature represent financial supply chains as pure
correspondences between Supply Chain Management (SCM) processes and
financial transactions. The two domains are still considered separate entities.
Supply chain processes represent the flow of goods and related information
while financial supply chain processes are used to map the flow of funds.
As highlighted by Camerinelli (2005, p2) the “limit of this representation
appears evident when flows of funds are blocked because documents are not
well drafted or regulations are not complied with”.
Alessandra Cantu Introduction
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2
Also, supply chain trade finance structure is moving away from documentary
based trade (e.g. letters of credit) in favour of open account methods (source:
Emerging Trends in Supply Chain Finance, August 2005 in Camerinelli, 2005).
This shift highlights the need of optimising supply chains from both a physical
and a financial perspective.
A literature review conducted on supply chain performance measures,
presented in Chapter 2, has revealed that most of the metrics developed are
fragmented within and across organisations and are not linked with
companies’ financial success.
As highlighted by Gardner (2004), although the implications of supply chain
management are fully understood, little research has been devoted to find the
links between operational execution and financial improvements. He argues
that the next step for the legitimisation of the concept of Supply Chain
Management requires the identification of the implicit ties between operating
activities and financial performance and the creation of consistent measures
across fragmented business models. He argues as well that finance and
accounting should be established as the translator and unifier of the multiple
activities carried out by firms.
Supply chain processes and activities must be linked with financial
performance. In order to develop such links, correlations between best
practices and operational measures and between operational measures and
top-level financial metrics must be defined. The identification of these
correlations would allow the C-suite (CEOs, COOs, CFOs) to translate
financial targets into operational metrics and middle management to tie these
metrics to operational processes to be implemented at lower levels of the
organisation.
On the other hand, the knowledge of the impact of processes on operational
and financial measures can help supply chain executives to assess the
viability and the financial impact of proposed changes before submitting them
to the Board.
Alessandra Cantu Research questions & methodology
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Research questions & methodology
This study has been designed to provide a first answer to the issues
highlighted above. The research, conducted in collaboration with Enrico
Camerinelli, Director and Chief Analyst of the Supply-Chain Council Europe,
represents the first step of an ongoing study undertaken by the Council with
the collaboration of its member companies.
The objectives of this study are detailed below:
1. Verify whether the supply chain and finance functions are aligned in
terms of agreement on performance measures and perceived
correlation between operational and financial metrics
2. Assess the need of a model that links supply-chain measures with
income statement and balance sheet items as well as with financial
indicators (e.g. cost of capital, ROI etc.)
3. Create a framework that links financial performance with operational
metrics
4. Validate this model with the finance function within organisations
The objectives listed above are considered in the research in a sequential
order.
The main hypothesis underlying the research is that the two separate entities
of supply chain and finance are getting closer and more aligned in terms of
understanding of the respective issues, performance measures and trade-offs.
The number and the complexity of the research questions require the use of
different approaches to the study.
Following the research questions set above, this project consists of four main
parts.
In order to satisfy objectives 1 and 2, two different survey methods have been
adopted: interviews and questionnaires.
Alessandra Cantu Research questions & methodology
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Results from the interviews, together with the results of a literature review (see
Chapter 2) are used to develop a model that links supply chain operational
measures with financial performance.
The third step of the project involves the construction of the framework
mentioned above.
The last step of the research is focused on testing the model in actual
business settings in order to validate it.