Unlocking Supply Chain Success: Factors, KPIs, and Challenges

Introduction

In this article, We embark on a journey through the intricacies of the supply chain, where we investigate the guiding forces, performance metrics, and hurdles that businesses face. Also, we delve into the dynamic world of demand planning, logistics, production, and procurement, each with its unique set of challenges and key performance indicators. In addition, we will briefly investigate the concept of profitability as a major KPI for any business enterprise. Nevertheless, we plan to explore (Growth, Financial Health, and Efficiency) in more detail in forthcoming articles.

Supply Chain Keys

The supply chain is typically guided by several critical factors, including shipping, inventory management, warehouse order fulfillment, the speed at which new products enter the market, and the overall customer experience. The effectiveness of a supply chain can be evaluated using Key Performance Indicators (KPIs), and the challenges it faces, which both can vary depending on the specific phase or stage within the supply chain. By monitoring the relevant KPIs and proactively addressing challenges, businesses can enhance their supply chain operations and ultimately deliver better products and experiences to customers. Here's a further explanation of this concept for diverse phase:

• Demand Planning Phase: In this phase, KPIs are centered around revenue, customer satisfaction, and cost reduction. These metrics help measure how well a company is at forecasting. Challenges include product selection (determining which products to offer) and pricing (setting competitive and profitable prices).
• Logistics Phase: KPIs revolve around cost and time efficiency, inventory cost management, and ensuring on-time delivery. These indicators are crucial for assessing how efficiently goods are moved and stored. Common challenges include fulfillment diagnostics (identifying and resolving issues in the logistics process), logistics planning (efficiently planning routes and resources), and transportation (managing the movement of goods).
• Production Phase: During this phase, KPIs are related to cost control, efficient use of time, product variety, and maintaining high-quality standards. These metrics help assess how well a company is producing its goods. Challenges often involve planning (scheduling production to meet demand) and inventory management (managing raw materials and finished goods efficiently).
• Procurement Phase: KPIs encompass cost control, ensuring product quality, meeting delivery deadlines, flexibility (adapting to changing market conditions), and maintaining security levels in the supply chain. Challenges may include supplier performance (evaluating and improving the performance of suppliers) and order management (managing and processing purchase orders efficiently).

Financial Insights

Furthermore, we will explore Business Intelligence Analytics and various Key Performance Indicators (KPIs) that prove effective for comparing the performance of diverse industries or businesses. When examining financial statements, analysts frequently use current growth and profitability as a starting point to forecast future performance. Typically, textbooks introduce ratio analysis, a method by which return on assets is systematically broken down into more specific ratios to provide deeper insights into a company's profitability. Research indicates that the value of a company depends on its anticipated future growth and profitability. One of the most fundamental breakdowns, which is prominently featured in many books like Bernstein and Wild (1998), involves dissecting return on assets into asset turnover and profit margin components.

Fairfield and Yohn (2001) noted that asset turnover, which assesses how effectively a company generates revenue from its assets, differs from profit margin, which evaluates the company's ability to manage the costs associated with generating revenue. A change in profit margin may indicate a shift in operational efficiency or, alternatively, a change in accounting conservatism.

Damodaran (2007) emphasized that growth without the generation of additional returns does not create value. This has led to an increased emphasis on measuring and predicting the returns a business earns from past investments and those expected in the future, with "excess returns" taking on a more prominent role in determining a business's value. He also stressed that the belief that a business's value is closely tied to its expected cash flows is a fundamental principle in finance. In essence, a business's value can be simplified as a result of the "excess returns" it generates from both existing and new investments.

Profitability as a KPI

Profitability provides valuable insights into a company's financial performance and profitability and it could be assessed using the following metrics:

• Total Revenue: The overall income derived from the sale of products or services, calculated by multiplying the price of an item by the quantity sold.
• Net Income: The profit remaining after deducting total expenses from total revenue.
• Gross Margin: The portion of revenue that remains after subtracting the cost of goods sold, expressed as a percentage of revenue. Essentially, Profit margin (PM) is operating income/revenues (Fairfield and Yohn, 2001).
• Net Margin: The portion of revenue that remains after subtracting all costs, expressed as a percentage of revenue.
• Operating Margin: The ratio of operating income to revenue, indicating the profitability of a company's core operations.
• Operating Income or Loss: The result of subtracting operational expenses from sales, representing the reinvestment rate (Fairfield and Yohn (2001).
• Return on Asset: A measure that considers net operating income in the numerator and net operating assets (operating assets net of operating liabilities) in the denominator, (Fairfield and Yohn, 2001).
• Asset Turnover: Total revenue divided by the average net operating assets, with net operating assets calculated as equity (net assets) minus net financial assets, (Fairfield and Yohn, 2001).
• Return on Equity: The ratio of net income to shareholder's equity, reflecting the return generated for equity investors.
• Return on Invested Capital: Calculated as operating income multiplied by (1 - tax rate) and divided by shareholder's invested capital, revealing the return on capital invested in the business, ?(Damodaran, 2007).

References:

1. Fairfield, P.M. and Yohn, T.L., 2001. Using asset turnover and profit margin to forecast changes in profitability. Review of accounting Studies, 6, pp.371-385.
2. Damodaran, A., 2007. Return on capital (ROC), return on invested capital (ROIC) and return on equity (ROE): Measurement and implications. Return on Invested Capital (ROIC) and Return on Equity (ROE): Measurement and Implications (July 2007).
3. Yao Zhao, Supply Chain Analytics Specialization, Rutgers University, Coursera, https://www.coursera.org/specializations/supply-chain-analytics ?
4. Bernstein, L. and J. Wild. (1998). Financial Statement Analysis, 6th ed. Irwin-McGraw Hill.