The Supply Chain Triangle: Service, Cost, and Cash – A Balanced Symphony

When exploring the Supply Chain Triangle—with its three corners of service, cost, and cash—one might be tempted to delve into the philosophical musings of Krishnamurti in his dialogues with Bohm and Shainberg, pondering the eternal question: Why does humanity live in conflict? In business, this conflict is ever-present, particularly within organizations where competing objectives often clash.

The modern supply chain reflects this paradox beautifully. It’s in vogue to talk about "cradle-to-grave" operations, and the responsibilities of a supply chain leader seem to span the entirety of the company—almost like a CEO managing every function from end to end. Naturally, this creates friction: diverse teams in different roles, each with their own, sometimes opposing, goals.

This dynamic is perfectly illustrated in the Supply Chain Triangle, adapted here from Bram Desmet’s book "Supply Chain Strategy and Financial Metrics" (p. 18). The triangle maps out the interplay between service, working capital, and cost. Its brilliance lies in showing the inherent impossibility of optimizing one vertex without affecting the others—an interconnected system where isolating one factor disrupts the rest.

As Krishnamurti might put it: "If you block any possibility, there’s nothing to be done." Yet, in the world of supply chain, there is a way to align the orchestra of egos and complexities to play the challenging score harmoniously.

The Solution Lies with the Shareholder’s Lens

The secret to balancing the triangle lies in adopting the mindset of the shareholder, the one who provides the capital. But this isn’t about the “win-at-all-costs” ethos of 1980s Welch-style management. Instead, it’s about sustainable, long-term growth, as Desmet eloquently explains. Let’s unpack this:

1. The Service Corner

Marketing and Sales teams are naturally incentivized to prioritize growth, aiming for bonuses tied to sales targets and portfolio expansion. Growth is fantastic—but only if it’s grounded in measurable returns on investment over the long term.

From the shareholder’s perspective, growth is only valuable when linked to metrics like EBIT (Earnings Before Interest and Taxes) and ROCE (Return on Capital Employed). For example:

• Adding more products to the portfolio often ties up cash in inventory and increases costs for production, storage, and distribution.
• Excellent service levels are critical for customer satisfaction, but they must be weighed against the potential to overinvest in stock or inflate costs unnecessarily.

Before chasing growth at all costs, we should ask:

• What impact will this have on working capital?
• Are we introducing products that are profitable, sustainable, or aligned with market needs?
• How do these decisions affect long-term ROCE?

2. The Cost Corner

Costs are often the most tangible concern in supply chain discussions. Reducing costs might seem like an obvious win—but at what price? A sudden mandate to cut inventory by 30-40%, for example, can disrupt service levels, leading to stockouts and unhappy customers.

This is where complexity must be managed thoughtfully:

• Good complexity drives ROCE by supporting differentiated services or profitable growth.
• Bad complexity erodes ROCE by introducing inefficiencies or misaligned investments.

Detecting and eliminating harmful complexities is a key practice for maintaining balance in the triangle.

3. The Cash Corner

Cash—especially working capital—sits at the heart of supply chain decisions. ROCE provides a powerful mindset here, encouraging leaders to consider the funds required for operations (current assets) and the production assets needed for the business (non-current assets). These are then compared to EBIT to determine overall efficiency.

It’s a return to basics:

• Selling is essential, but selling with margin and balancing the necessary investment are just as critical.
• Investments in inventory, new products, and production facilities must be justified by the returns they generate.

Bringing It All Together

The Supply Chain Triangle, as Desmet suggests, challenges us to navigate the inherent complexities of the supply chain with wisdom. Measuring and managing the trade-offs between service, cost, and cash requires clarity, strategic focus, and alignment with shareholder expectations.

It’s not about eliminating complexity—it’s about embracing the right kind of complexity, the kind that creates value rather than erodes it. So, let’s approach the triangle not as a problem to be solved but as a balancing act, orchestrating the various moving pieces to achieve sustainable, measurable success.

In the words of Desmet: "There are good complexities and bad complexities—those that generate ROCE and those that erode it." Identifying the difference is where the magic happens.

And just like that, we’re back to basics, with a dash of shareholder pragmatism and a symphony of coordinated efforts. ??