SCM in 2025: Defining the Metrics That Matter.

Summary: Aligning strategic decisions with harmonized KPIs like ROCE is essential for navigating complex business landscapes. By integrating real-time data and prioritizing key metrics, organizations can enhance efficiency and resilience. A focused, strategy-driven approach ensures sustainable success in a competitive market.

The first time I heard about ROCE was at an English company: Taylor Wimpey. The economic-financial studies we had to present for the approval of land purchases (the raw material for real estate developers) included Gross Margin, IRR, and ROCE. This was new to me, and it bore some correlation with IRR, though the latter accounted for the time value of invested money while ROCE did not. Fundamentally, Gross Margin focuses vertically on the income statement, while ROCE takes a horizontal view across the balance sheet and income statement. Finally, IRR is calculated based on Free Cash Flow, without considering the effect of financing, which they preferred to include in the ROCE post-interest calculation.

Around that time, I also recall how Javier Ballester, General Manager of TWE (Taylor Wimpey Espa?a), tried to instill in us the importance of the Supply Chain. It was only later that I realized two things: the significance of Cranfield University in supply chain matters and the crucial role the supply chain plays in defining an organization’s success or failure. From the narrow perspective of a regional manager striving to meet annual income statement targets, the supply chain seemed like something distant, tied to "perfidious Albion."

Of course, nothing could be further from the truth. While TWE in the UK held a significant market share, the Spanish market remained fragmented, dominated by small regional developers and numerous local micro-enterprises. It wasn’t the financial crisis but COVID-19 that finally underscored the dry, unyielding value of the supply chain.

Although late to the game, we will now reflect on that importance from the level where everything happens: the strategic level. Coming from the 1990s model—Goals > Strategies > Actions—I soon realized that the supply chain isn’t an administrative matter (like procurement) but rather a company-wide concern. It traverses all economic-financial flows, information flows, and physical goods flows. Not all of these have the same direction; information flows, for example, are bidirectional. It became increasingly clear that the 1990s models were insufficient. It seemed that instead of making strategic decisions with necessary trade-offs, companies were attempting to "go for it all": being leaders in cost, product, and service simultaneously—a perfect storm, as Bram DeSmet pointed out. Additionally, we thought it was enough to compare ourselves with the best using static vertical or horizontal KPIs, selecting just one as the basis for measurement. But nothing more. By the early 2000s, some were already adept at integrating ROCE, which, as we’ll see, harmonizes vertical and horizontal KPIs.

For business matters, it’s worth quoting the adage "Jack of all trades, master of none" to illustrate how attempting to be a leader in cost, product range, and customer service simultaneously is enough to make anyone’s head spin. Yet, at the time, it seemed possible. Companies that committed clearly to a single strategy have fared better over the last 30 years. Even small-scale players have emerged powerfully, like hard-discount retailers in Europe—Lidl, for instance, rising to market leader status—or low-cost airlines in the U.S. and Ireland positioning themselves as market creators.

In upcoming posts, we’ll explore how each strategic decision involves distinct goals, levers, and KPIs, with the potential to harmonize these through ROCE for a better understanding of our efficiency relative to the plan. It’s also worth monitoring process data against forecasts: not waiting for things to unfold but keeping a real-time pulse on the situation—something technology can help us achieve. While we won’t delve into that just yet, we can already outline how combining EBIT versus inventory turnover on one hand, and working capital and non-current assets utilization on the other, feeds a super KPI harmonizer: the much-discussed ROCE.

Thus, we’ll favor EBIT over EBITDA, as the depreciation considerations that don’t add significant value in this case. Similarly, we’ll prefer EBIT over Net Income, which incorporates tax optimizations and the qualitative and quantitative weight of financing. In terms of Capital Employed, we’ll get our hands dirty with inventory management, the CCC, fixed asset utilization, and other key supply chain metrics like OTIF and more. This way, we can build a robust KPI framework to guide us and ensure we know where we’re heading.