Supply Chain Decisions

and Performance Metrics

Dr. Javad Feizabadi

Most of the slides are adopted from

Chopra, S. (2019). Supply Chain Management: Strategy, Planning,
and Operations. Pearson, Seventh Edition
 Financial Measures of Performance
• Return on assets (ROA) measures the return earned on each dollar
invested by the firm in assets

Earnings before interest

ROA =
Average Total Assets
Net Income + [Interest Expense ´ (1 - Tax Rate)]
=
Average Total Assets

• ROA can be written as the product of two ratios – profit margin and
asset turnover

Earnings before interest SalesRevenue

ROA = ´
Sales Revenue Total Assets
= Profit Margin ´ Asset Turnover
 Financial Measures of Performance
• From a shareholder perspective, return on equity (ROE) is the main
summary measure of a firm’s performance

Net Income
ROE =
Average Shareholder Equity
Difference:
Return on Financial
Leverages (ROFL). Financial Leverages
such as bank loans and accounts
Payable.
Earnings before interest
ROA =
Average Total Assets
Net Income + [Interest Expense ´ (1 - Tax Rate)]
=
Average Total Assets
Financial Blank Amazon.com Nordstrom
Inc.

Data for Period Ending

Total Revenue
31-Dec-13
74,452,000
2-Feb-13
12,148,000

Amazon Cost of Goods Sold

Gross Profit
54,181,000
20,271,000
7,432,000
4,716,000
and Selling, General, and Administrative 19,526,000 3,371,000

Nordstrom Operating Income or Loss

Total Other Income/Expenses Net
745,000
–98,000
1,345,000
–

Selected Financial Earnings Before Interest and Taxes 647,000 1,345,000

Data for Amazon.com
Interest Expense 141,000 160,000
and Nordstrom Inc.
Financial Blank Amazon.com Nordstrom
Inc.

Data for Period Ending

Income Before Tax
31-Dec-13
506,000
2-Feb-13
1,185,000

Amazon Income Tax Expense

Minority Interest
161,000
–
450,000
–
and Net Income 274,000 613,000

Nordstrom Assets
Cash and Cash Equivalents
Blank
8,658,000
Blank
1,285,000

[Continued] Short-Term Investments 3,789,000 –

Net Receivables 4,767,000 2,356,000
Inventory 7,411,000 1,360,000
Financial Blank Amazon.com Nordstrom
Inc.

Data for Period Ending

Other Current Assets
31-Dec-13
–
2-Feb-13
80,000

Amazon Total Current Assets 24,625,000 5,081,000

and
Property, Plant, and Equipment (PP& 10,949,000 2,579,000
E)

Nordstrom
Goodwill 2,655,000 175,000
Other Assets 1,930,000 254,000
Total Assets 40,159,000 8,089,000

[Continued] Liabilities and Stockholder

Equity
Blank Blank

Accounts Payable 21,821,000 1,415,000

Financial Blank Amazon.com Nordstrom

Data for
Inc.
Period Ending 31-Dec-13 2-Feb-13

Amazon Short-/Current Long-Term Debt – 7,000

and Other Current Liabilities

Long-Term Debt
1,159,000
3,191,000
804,000
3,124,000

Nordstrom Other Liabilities

Deferred Long-Term Liability
4,242,000
–
341,000
485,000
Charges

[Continued] Total Liabilities 30,413,000 6,176,000

Total Stockholder Equity 9,746,000 1,913,000
 Financial Data for Amazon and Nordstrom

A Comparison of Financial Metrics for Amazon.com and Nordstrom Inc.

!"# $%&'(" )"*"%+"
Profit Margin = Asset Turnover= ,'#-. /00"#
)"*"%+"

Metric Amazon.com Nordstrom Inc.

ROE start
274 fraction 274 over 9,746 end fraction = 2.81% start
735fraction 735 over 1,913 end fraction = 38.42%
= 2.81% = 38.42%
9,746 1913
ROA start +141274
274fraction ´ (1+-141 )
times
0.35 left parenthesis 1 minus 735 +160 735
start fraction ´ (1+-160
0.35 ) =left10.37%
times parenthesis 1 minus
= 0.91%
0.35 right parenthesis over 40,159 end fraction = 0.35 over 8,089 = 10.37%
0.91% 40,159 8,089
ROFL 1.90% 28.05%

Profit Margin 274 +141274

start fraction ´ (+
1-141 times) left parenthesis 1 minus
0.35 start
735fraction
+160735 ´ (1+-160 )
times left parenthesis 1 minus
0.35
= 0.49%
0.35 right parenthesis over 74,452 end fraction = 0.35 over 12,148 = 6.91% = 6.91%
0.49% 74,452 12,148
Asset Turnover 74,452
start fraction 74,452 over 40,159 end fraction = 1.85 12,148
start fraction 12,148 over 8,089 end fraction = 1.50
= 1.85 = 1.50
40,159 8,089
 Financial Measures of Performance
• An important ratio that defines financial leverage is accounts payable
turnover (APT)
Cost of Goods Sold
APT =
Accounts Payable
• Key components of asset turnover are accounts receivable turnover (A
RT); inventory turnover (INVT); and property, plant, and equipment
turnover (PPET)

Sales Revenue Cost of Goods sold

ART = ; INVT = ;
Accounts Receivable Inventories
Sales Revenue
PPET =
PP & E
 Financial Measures of Performance
• Cash-to-cash (C2C) cycle roughly measures the average amount time
from when cash enters the process as cost to when it returns as
collected revenue

æ 1 ö
C2C = - Weeks Payable ç ÷
è APT ø
æ 1 ö
+ Weeks in Inventory ç ÷
è INVT ø
æ 1 ö
+ Weeks Receivable ç ÷
è ART ø
 Financial Data for Amazon and Nordstrom

[Continued]

Metric Amazon.com Nordstrom Inc.

APT 54,181
start fraction 54,181 over 21,821 end fraction = 2.48 7,432
start fraction 7,432 over 1,011 end fraction = 7.35
= 2.48 = 7.35
21,821 1,011
ART 74,452
start fraction 74,452 over 4,767 end fraction = 15.62 12,148
start fraction 12,148 over 2,129 end fraction = 5.71
= 15.62 = 5.71
4,767 2,129
INVT 54,181
start fraction 54,181 over 7,411 end fraction = 7.31 start fraction 7,432 over 1,360 end fraction = 5.46
7,432
= 7.31 = 5.46
7,411 1,360
PPET 74,452
start fraction 74,452 over 10,949 end fraction = 6.80 12,148
start fraction 12,148 over 2,579 end fraction = 4.71
= 6.80 = 4.71
10,949 2,579
C2C start1fraction negative
1 1 2.48 end fraction + start
1 over 1 negative
start fraction 1 1 over 1 7.35 end fraction + start
-fraction 1+over 15.62+end fraction + start fraction 1 -
fraction +
1 over5.71 +
15.71 end5.46
fraction + start fraction 1
2.48 15.62 7.31 7.35
over 7.31 end fraction = negative 0.20 years = negative over 5.46 end fraction = 0.22 years = 11.56 weeks
=10.53
-0.20 weeksyears = -10.53 weeks = 0.22 years = 11.56 weeks
SG&A / Revenue 19,526
start fraction 19,526 over 74,452 end fraction = start 3,371
fraction 3,371 over 12,148 end fraction =
26.23%
= 26.23% 27.75% = 27.75%
74,452 12,148
 Average Average Average Average
Operating C2C Inventory SG&A
Margin Cycle Turns Cost/
Revenue

Industry

Selected Pharmaceutical

Medical device
0.25

0.18
190.3

211.6
2.0

2.2
0.31

0.36

Financial manufacturers

Consumer packaged 0.17 28.3 5.6 0.31

Metrics goods

Food 0.16 37.4 6.2 0.23

Consumer electronics 0.12 9.3 43.8 0.14

Selected Financial
Metrics Across Apparel 0.10 127.7 3.2 0.35

Industries, 2000– Chemical 0.09 78.1 5.3 0.09

2012 Automotive 0.04 75.9 9.9 0.13
 Two measures not part of financial statements
• Markdowns: discounts required to
Financial convince customers to buy excess
inventory
Measures of • Lost sales: represent customer sales
Performance that did not materialize because of the
absence of products the customer
wanted to buy
 Supply Chain Levers

• Five basic levers to deal with uncertainty

• Capacity: combination of excess
capacity and flexible capacity
• Inventory: one of the most common
levers used in practice to deal with
uncertainty
• Time: combination of speedy supply and
the willingness of customers to wait
• Information: appropriate information
can help a supply chain reduce
uncertainty
• Price: prices of products and services
that vary over time
underlying uncertainty of demand. Its ability to replenish its stores within 48 hours leaves it
vulnerable to uncertainty of demand only over that 48-hour period. In contrast, customers at an
integrated steel mill often wait weeks for their product to be delivered. The long promised lead

Supply Chain Uncertainty

times allow the steel mill to aggregate demand over a long period of time, thus reducing its
uncertainty. A supply chain must consider the cost of speedy supply and the potential loss of
customers by making them wait when using time as a lever to deal with uncertainty.
Five Key Levers to Deal with Supply Chain Uncertainty

Supply
Chain
Uncertainty

Capacity Inventory Time Information Price

Figure 2-7 Five Key Levers to Deal with Supply Chain Uncertainty
operation recognize this interaction and structure the drivers to achieve the desired level of
responsiveness at the lowest possible cost, thus improving the supply chain surplus and the firm’s
financial performance.
Having more facilities generally makes a chain more responsive but increases the amount of
inventory required, whereas having fewer, central facilities creates higher efficiency. Holding
Framework for Supply Chain Decisions
higher levels of inventory increases the responsiveness of a supply chain, whereas keeping inven-
tory low increases the chain’s efficiency. Using faster modes of transportation increases a chain’s
responsiveness and may lower the inventory required, whereas using slower modes generally
increases efficiency but may require more inventory. Investing in information can vastly improve

Competitive Strategy

Supply Chain Strategy

Efficiency Responsiveness

Supply Chain Structure

Logistical Drivers Cross-Functional Drivers

Facilities Inventory Transportation Information Sourcing Pricing

Capacity Figure 3-1 Information Frame work Prerequisite Price

Inventory Supply
TimeChain Decision-Making
For all other
decisions
 Drivers of Supply Chain Performance

Facilities Inventory Transportation

The physical locations in the All raw materials, work in Moving inventory from point
supply chain network where process, and finished goods to point in the supply chain
product is stored, assembled, within a supply chain
or fabricated
 Drivers of Supply Chain Performance (2 of
2)

Information Sourcing Pricing

Data and analysis concerning
facilities, inventory,
transportation, costs, prices,
and customers throughout the
supply chain
Who will perform a How much a firm will charge
particular supply chain for the goods and services
activity that it makes available in the
supply chain
 Drivers’ Roles in the Supply Chain
Facilities:
• Production sites and storage
sites
• Increase responsiveness by
increasing the number of
facilities, making them more
flexible, or increasing
capacity
Inventory:
• Mismatch between supply and
demand
• Exploit economies of scale
• Reduce costs
• Improve product availability
• Affects assets, costs,
responsiveness, material flow
time
 Drivers’ Roles in the Supply Chain
Transportation
• Moves inventory between stages in the
supply chain
• Affects responsiveness and efficiency
• Faster transportation allows greater
responsiveness but lower efficiency
• Also affects inventory and facilities
• Allows a firm to adjust the location of its
facilities and inventory to find the right
balance between responsiveness and
efficiency
Information
• Improve the utilization of
supply chain assets and the
coordination of supply chain
flows to increase
responsiveness and reduce cost
• Information is a key driver that
can be used to provide higher
responsiveness while
simultaneously improving
efficiency
 Drivers’ Roles in the Supply Chain
Sourcing
• Set of business processes
required to purchase
goods and services
• Will tasks be performed
by a source internal to the
company or a third party
• Should increase the size of
the total surplus to be
shared across the supply
chain
Pricing
• Pricing determines the amount to
charge customers for goods and
services
• Affects the supply chain level of
responsiveness required and the
demand profile the supply chain
attempts to serve
• Pricing strategies can be used to
match demand and supply
• Objective should be to increase
firm profit