Linking to Shareholder Value

The biggest opportunity for supply chain executives lies in linking their organizations’ performances to what matters most in the boardroom-shareholder value.

By Tony Friscia -- Supply Chain Management Review, 4/1/2007

Modern business has been shaped by the globalization and de-verticalization of the supply chain. Companies now rely more on suppliers for value-added contributions, and these suppliers are more geographically dispersed than ever before. At the same time, companies are expected to respond to demand at an ever faster pace in order to be competitive.

These realities represent the biggest opportunity for today’s supply chain organization. As Wal-Mart and Toyota have proven, a company’s ability to manage its global supply chain is directly related to its overall success. Companies that understand this are making the supply chain leader and the supply chain organization more strategic.

The results of AMR Research’s extensive supply chain benchmarking work underscore just how high the stakes are when it comes to supply chain performance:

• Demand forecast accuracy, perfect order fulfillment (perfect means complete, accurate, and on-time), supply chain cost, and cash-to-cash cycle time are the four most critical metrics of supply chain performance.
  
  
• Demand forecast accuracy creates high responsiveness and cuts cost right through the supply chain. Companies that are best at demand forecasting average 15 percent less inventory, 17 percent stronger perfect order fulfillment, and 35 percent shorter cash-to-cash cycle times, while having a tenth of the stock-outs of their peers.
  
  
• Demand forecast accuracy correlates with perfect order fulfillment: A 1-percentage point improvement in demand forecast accuracy can yield a 2-percentage point improvement in perfect order fulfillment capability.

Finally and most importantly, AMR Research’s analysis shows clearly that perfect order performance directly correlates to earnings per share. Thus, one can now link supply chain performance to the metric that matters most in the boardroom—shareholder value.

Though there is an opportunity to link supply chain performance to overall company performance, reaching this level of strategic relevance internally is not an easy assignment.

Despite the obvious financial and market opportunities associated with functional and cross-enterprise integration, the lion’s share of the political clout generally falls within organizations like sales, marketing, and operations. In most companies, the integrated supply chain function—if it exists at all—hasn’t been around long enough to match this clout. In fact, AMR Research’s 2006 study of 455 U.S. and European companies indicates the average lifespan of formal supply chain organizations is still less than three years.

Given this lack of political clout, companies generally pay lip service to supply chain’s importance, and supply-demand balancing rarely merits a bullet on the C-level agenda. The challenge, therefore, is to elevate supply chain dialogue and make it a boardroom imperative. To do this, supply chain executives need to link their efforts more explicitly to the strategic metrics and capabilities that matter at the top—earnings per share as we said above.

We now know that metrics such as perfect order performance and supply chain management costs say more about next year’s profits than last quarter’s earnings. Investors will look increasingly at these metrics to judge share prices. While some believe that business results have a lot to do with luck, we have proven that supply chain operational performance does not. The measurement of the underlying operational capability of a business—the efficiency of its engine—is definitive. Those supply chain leaders who seize this opportunity will reap significant rewards.