L5M4 Tutor Slides 4.1

CIPS Level 5 Advanced Diploma in
Procurement and Supply

Module: Advanced Contract and Financial Management
[L5M4]
Leading global excellence in procurement and supply

Learning outcome 4: Analyse and apply financial
performance measures that can affect the supply
chain
4.1 Assess financial measures that can be applied
to measuring the performance of the supply
chain
• The measurement of costs, timescales, processing,
quality and satisfaction
• Financial measures such as profitability, return on
investment, sales growth and cash flow
• The use of balanced scorecard methodologies
All rights reserved. These slides are provided exclusively to CIPS Approved Study Centres for the sole purpose of teaching CIPS Professional Qualifications, they are not to be
used for any other purpose and may not be altered, copied, sold or lent to other parties. Copyright ©2018 CIPS

4.1 Assess Financial Measures
• An accurate measurement of performance enables a
procurement professional to:
o Identify potential cost savings in the supply chain
o Evaluate areas of performance improvement that will help the
organisation to achieve competitive advantage
• Financial measures are used to assess the performance of the
supply chain. They can help to ensure the following:
o The organisation is utilizing its resources effectively to meet the
demands of customers in the marketplace.
o The product is available when and where it is required within the
financial constraints of the organisation.
• The procurement professional is responsible for:
o Designing, developing and implementing performance measurement
processes.
o Ensuring decisions can be made regarding the input, transformation and
output of the procurement and supply chain process

4.1 Assess Financial Measures
• There is not one single measure for the performance of a
supply chain that will capture complete performance (Beamon,
1996).
• There are 3 types of interrelated measures (Beamon, 1996)
o Flexibility
o Outputs
o Resources
• Elrod et al. (2015) documented that supply chain metrics seek
to evaluate the supply chain as a whole, instead of focusing on
individual suppliers.
• There are, however, times when breaking the supply chain into
individual aspects, such as a specific supplier’s quality
performance, can provide more useful information to diagnose
problem areas.

4.1 The Measurement of Costs, Timescales,
Processing, Quality and Satisfaction
• When considering measures of supply chain performance, an
understanding of the overall business strategy and key strategic
priorities are required.
• This helps the procurement professional to determine what
element of performance is most relevant to the achievement of
sustainable organisation performance.
• Not every organisation will have the same priorities.
• Different organisations will emphasise different performance
objectives. E.g., some organisations compete on price.
• Therefore, in order to deliver low prices to the customer they
will need to ensure that the supply chain performance metrics
focus on delivering cost, productivity and efficiency measures.
• Other organisations compete on how responsive they are to
customer needs, including high levels of customization.


4.1 Costs
• Cost performance measures seek to achieve the following:
o Help supply chain partners to reduce their costs so that the price paid by
the buyer is as low as possible.
o Ensure goods and services are delivered in such a way that the buyer’s
costs are minimized.
• The supply chains cost includes all upstream and downstream activities
and processes.
• This means the costs relating to organisational capital expenditure,
such as the cost of facilities and equipment and variable costs relating
to operations expenditure.
• The market position of the product or service will determine whether
the cost and price of the product are suitable.
• typical costs in operating a supply chain include the following:
o Labour
o Materials
o Management
o Transportation
• Supply chain cost classifications Table 4.1


4.1 Financial Measures for Supply Chains
Table 4.1 Classifications of supply chain costs

Slide 29
4.1 Supply Chain Operations Reference
Model (SCOR)
• Supply Chain Council (SCC) has developed a process reference
model for supply chain management.
• It is called the Supply Chain Operations Reference model (SCOR).
• Supply Chain Operations Reference model (SCOR) is a
management tool that can be used to helps to manage supply
chain decision-making relating to business processes needed to
satisfy customer demands and explains processes to identify
areas for improvement.
• SCOR processes integrates a number of well-known business
concepts including process re-engineering, benchmarking and
performance measurement.
• It consists of five core iterative processes: plan, source, make,
deliver and return. These are repeated throughout the supply
chain Table 4.2.

4.1 Supply Chain Operations Reference
model (SCOR)
• SCOR enables an organisation to detail costs within the supply
chain for each stage of the core supply chain processes.
• It can help the organisation to understand the links between
different supply chain processes, identify any issues and create
a value chain map aligned to the overall business strategy.
• The supply chain operations reference model (SCOR) measures
the following:
o Costs of the overall value at risk
o Total cost to serve
o Return on supply chain fixed assets
o Cost of goods sold

4.1 Value at Risk (VaR)
• Value at risk VaR is a measure of the risk of loss in the supply
chain, given a particular probability.
• An overall value at risk (VaR) calculation evaluates the
combined probability of risk events multiplied by the
monetary effect of any events that can affect core supply chain
functions.
VaR = the probability of the event x the financial impact of the risk
• The risk can be measured for a particular element of the supply
chain process, or for the supply chain as a whole.
• This helps the organisation to make decisions regarding its risk
positions.
Total supply chain VaR = VaR plan + VaR source + VaR make + VaR
deliver + VaR return

4.1 Total Cost to Serve
• Total cost to serve calculates the profitability of a
particular customer, based on the cost of supply chain
activities and costs incurred to deliver the product to the
customer.
• It enables the procurement professional to analyse how
costs are incurred throughout the supply chain.
• Cost to serve = Estimated average cost for each process x
Transaction volume
• Understanding the cost to serve can help the organisation
separate profitable customers from unprofitable
customers and identify areas where there is an
opportunity to recover profit.

4.1 Cost of Goods Sold (COGS)
• COGS calculates the direct costs incurred by the organisation in
delivering the service or producing the products that are sold
during a particular time period.
• COGS include the direct labour costs, direct material cost and
indirect cost related to production.
• COGS in retail is the cost of good purchased for resale.
• COGS in manufacturing are factory costs of manufacturing.
• It enables the procurement and supply function to analyse how
well procurement is controlled and can be used to calculate
the gross profit margin and percentage of revenues required by
the supply chain to cover operating expenses.
COGS = Beginning inventory + Direct procurement costs -
End inventory

4.1 Return on Supply Chain Fixed
Assets
• Is a measure that identifies the return on capital
invested in a supply chain’s fixed assets.
• Though fixed assets are not sold the changes in their
levels affect the profitability of the organisation,
because they depreciate.
• Fixed assets in themselves do not generate profit, but
they are used in the creation of inventory that can be
sold for profit.
• Lost or stolen assets can hinder workflow and lead to a
sunk cost; i.e. a cost that has been incurred by the
organisation and cannot be recovered.

• The level of profit margin sought will depend on the organisation and
also the norms for the industry sector.
• By using cost performance measures to identify areas that have a
potential for improved cost efficiency, the supply chain can contribute
added value to overall business performance.
• Other typical cost-based metrics that can be used as cost
performance measures include the following:
o Value of total inventory (% value of inventory)
o Cost effectiveness ratio
o Total productivity of the supply chain
o Per-unit inventory costs
o Direct material costs (% if sales)
o Transportation costs
o Warehouse costs and distribution centre costs (% of sales)
o Inventory obsolescence (% of inventory value)
o Return on working capital

4.1 Timescales
• Procurement professional needs to manage lead times in the
extended supply chain which is global rather than local.
• Timescales must be managed so they are competitive, all while
managing transportation (which can be unreliable) and inventory
levels (which must be kept low in order to stop waste and cash
being tied up in stock).
• Timescale performance measures look at whether the right
product is delivered to the right place, in the right quantity, at the
right time.
• Time scale measures include:
o Perfect measures
o On time in full (OTIF)
o Lead time/order cycle time
o Cash to cash cycle time (C2C)
o Inventory days of supply

4.1 Perfect Order
• Perfect order measures the number of orders
shipped/delivered to customers without any issues.
• This enables a business to monitor operations and identify
concerns related to products, services, cost and other issues
that may have an impact on the effectiveness of the supply
chain.
• The perfect order KPI is made up of the following elements:
o On-time delivery – number if orders delivered on time
o In-full delivery - % of orders delivered in the right quantity
o The number of orders that are delivered with an accurate
record of the order included with the delivery , e.g. the
correct invoice
o Damage-free delivery – number of orders delivered without
any damage
4.1 On time in full (OTIF)
•OTIF measures the percentage of orders that are shipped on
time and in full, ensuring that customer satisfaction levels are not
affected by short or late deliveries.
•OTIF % = Number of deliveries OTIF ÷ Total number of deliveries x
100
Lead time/order cycle time
•Lead time: measures the time that elapses between receiving an
order to delivery.
•It measures the effectiveness of the supply chain processes from
the customer’s viewpoint.
•Order cycle time: starts from when work begins on the order up
to when the order is ready for delivery.
•Lead time = number of days between customer order and
delivery
Cash-to-cash cycle time (C2C): the number of days between
paying for materials an getting paid for the product.
•Measures the time from when an organisation pays to
purchase raw materials from suppliers to the time the
organisation is paid by its customers.
•This helps the business to understand its cash requirements
and how to source the needed cash.
•C2C = days inventory on hand + days sales outstanding – days
payables outstanding
•Days inventory on hand: sometimes referred to as
stockholding period
•Days sales outstanding: sometimes referred to as debt
collection period
•Days payables outstanding: creditor payment period


• Inventory days of supply: gives an indication of the amount
of time inventory is likely to last before it is necessary to
place another order for inventory.
• Inventory days of supply = amount of inventory on hand
average daily consumption of
inventory
• Inventory days is the number of days stock remaining, based
on current usage rates.
It is calculated as; (Average stock ÷ cost of goods sold) X 30
days
• New product development time (NPD): measures how long
it takes to develop a product from an idea to a finished item.
• It is assessed in months and goes from new product concept
to shipment.

4.1 Processing
• Supply chain processes convert inputs into outputs.
• The goal of a supply chain process is to use the
resources of the organisation in a way which is
reliable, repeatable and consistent.
Transformation process model

4.1 Key processes:
• Key processes that are involved in the end-to-
end supply chain include the following:
o Product development and commercialization
o Supplier relationship management
o Demand management
o Production management
o Customer relationship management
o Order fulfilment
o Customer service
o Returns management

4.1 Processing
• The choice between process effectiveness and efficiency is not
necessarily a binary choice (yes/no, do/don’t).
• Process measures need to be examined from a more holistic
perspective to deliver balance within the supply chain.
• Effectiveness and efficiency of processes can be measure using
productivity metrics that compare output to input.
• Process measures are used to evaluate the following:
o How well actors in the supply chain are following the recommended
processes
o Whether the process itself is delivering the desire outcome.
• Configuration of supply chain processes needs to deliver supply
chain activities as cost effectively as possible.
• Cost Effectiveness Ratio = value of benefit received ÷ cost of the
benefit
• Total productivity = total output ÷ Total input
4.1Measuring Supply Chain Processes
Efficiency
Focus Performance Metric that can be measured with data
attribute
Custome Reliability Perfect order fulfilment – number of orders shipped/delivered to
r customers without issues
Custome Responsiveness Lead time/order cycle time
r
Custome Agility Upside supply chain flexibility – total number of elapsed days
r resulting from an unplanned 20% increase in demand without
incurring any service or cost penalties.
Upside supply chain adaptability – maximum % increase in
quantity delivered by supply chain in a 30-day period that is
sustainable
Downside supply chain adaptability – maximum % reduction in
order quantities sustainable at 30 days prior to delivery without
the organisation incurring inventory or cost penalties
Overall value at risk
Internal
used for any otherCost Total
purpose and may not be altered, copied, sold or lentcost to serve
to other parties. Copyright ©2018 CIPS
Internal Asset Cash-to-cash cycle time

management Return on workingLeading global excellence in procurement and supply
capital
4.1 Processing Time
• Processing time is time spent in transforming raw materials into
finished goods within the internal supply chain.
• It excludes the procurement of raw materials and the processes
that occur after the product leaves the organisation’s own
logistics centre.
• It does not include waiting or movement time; just the time in
which value is being added.
• Improving the quality and efficiency of the processing time
within the internal supply chain involves identifying and
eliminating waste.
• Ideally in a Lean supply chain, this processing rate is matched to
the customers’ demand rate.

4.1 Processing Time
• Takt time is used to measure the maximum amount of time it
takes for a product to be produced in order to satisfy
customer demand.
• Takt time measure helps to establish the utilization of
capacities (labour and equipment) required for material flow
through the supply chain process.
• Takt time is the rate of production required to fulfil customer
demand.
• Takt time = production time available – customer demand
• Production time available = total production time – break –
maintenance activities – shift changeover – clean-down time
• Customer demand = amount of units required by customer ÷
time period

4.1 Value Stream Mapping
• Value creating processes span the entire supply chain, providing
the organisation with the opportunity to add value to the
customer’s product purchase.
• Physical material flows relating to production and distribution
create processes which are identified as part of the value chain.
• Value stream mapping is used to identify current processes in
the supply chain to gain clarity about what tasks and activities
are conducted throughout the supply chain. It is also used to
calculate the amount of throughput time.
• Throughput time - the total time required to process a product
or service within an organisation.
• Value stream mapping removes activities that do not add much
value for the customer such as bottlenecks and wasteful
processes.

4.1 Process Cycle Efficiency
• Process cycle efficiency is focused on how products and
services flow through the supply chain to ensure that the end-
to-end supply chain process results in products that are
delivered at the highest cost efficiency with no waste in the
process.
• Process efficiency cycle is a lean metric. Lean process delivers
cost efficiency benefits to the organisation.
• Lean is concerned with managing each stage of the supply
chain process to remove problem areas and increase intrinsic
efficiency.
• Lean, in this case, means reducing non-value adding activities
and concentrating on a leaner process.
• Process cycle efficiency = value-added time ÷ lead time

4.1 Processes Capability Measures
• Supply chain need to be dependable and predictable. It is
important that material and product flow are not disrupted.
• There is a need to source from partners who have capable
processes that can consistently produce quality products or
services.
• Process capability is a key indicator of supply chain
dependability.
• Six Sigma: is an operational improvement approach. It is a set of
techniques and tools intended to improve business processes.
• Practitioners of Six Sigma method follow an approach called
DMAIC (define, measure, analyse, improve, control).
• People in the organisation are skilled in the use and application
of a number of different techniques including; DMAIC, the 5
Whys, value stream mapping and kaizen.


4.1 Processes Capability Measures
• Six sigma is important in enabling the elimination of defects from
the supply chain processes and minimizing the variability in
processes to achieve delivery of products that meet customer’s
expectation.
• The capability of a supply chain’s processes can be measured with a
process capability index.
• This uses the process variability and the process specifications to
determine whether the process is capable of producing defect-free
output.
• Capability indexes are used to compare the output of an in-control
process to the process specification.
• The comparison here is on the specification width (the spread
between the process specifications) and the process width (the
spread of the process values).
• The specification width and process width are expressed as a ratio.


• Process capability index: a statistical calculation of the
supply chain process to produce a product within
specified limits. This helps to determine the capability
of the supply chain.
• It uses the process variability and process
specifications to determine whether the process is
capable of producing defect-free output.
• Process specification: the documented process
method which explains how process formulas were
used to create output data from process input.
• Process specification width = upper specification with
– lower specification limit

• A capable process is one where the theoretical probability
of producing defective components is highly unlikely as the
spread (range) of the process is substantially less than the
width of the specification.
• There are two important capability process measures in
the supply chain.
• Capability process measures in supply chain:
o Process capability (Cp): It measures whether the
process is capable of producing to specification.
o Process capability index (Cpk): measures how closely
the supply chain process is operating to its specification
limits and reflects how centred the process is relative to
the natural variability of the process.

4.1 Statistical Process Control (SPC)
• SPC a scientific, data-driven methodology for supply chain
process quality analysis and continuous improvement
efforts.
• SPC is a way of measuring and controlling quality by
monitoring the production process.
• It helps to prevent defects happening through
measurement and control.
• This helps to found quality on robust data analysis rather
than guesswork.
• SPC is said to prevent defects in that, by monitoring the
process output, adjustments can usually be made before
any defective parts are produced.

4.1 SPC (cont.)
• The benefits of SPC directly contribute to supply chain
efficiency and effectiveness, including:
o Reductions in process variability and wastage
o Improved productivity
o Cost efficiency
o The ability to develop process change in real time
• If the process is in control and there are no changes in the
process, then measurements should result in a steady but
random distribution of output around the average of the data.
• There are several indicators of non-random behaviour:
o A trend of five points increasing or decreasing
o Four points above or below the mean
o Two consecutive points near the same control limit.

4.1 Quality
• Quality can be measured from a variety of perspectives.
• Ultimately, the key measure of quality is customer satisfaction.
• Quality performance measures depend on the product that the
supply chain is producing.
• For some organisations, quality measures focus on the quality of
materials used in production processes.
• Other types of quality include durability, desirability, serviceability
and reliability.
• Other important measures of quality include the following:
o Cost of quality (COQ) – the management accounting of the cost
of poor quality to the organisation.
o Customer complaint resolution – the average time it takes the
organisation to resolve a customer’s complaint to the
satisfaction of the customer.

4.1 Quality (cont.)
o Parts per million (PPM) – is used to measure quality
performance from the perspective of the number of defects
in million products.
o This is a measurement of the number of defects rates, and
the process of quality control within the production process:
o Delivery dependability – the ability of the organisation to
deliver on its promises.
• Quality can be measured across three areas of the supply chain:
o Manufacturing-related
o Supplier-related
o Customer related

4.1 Quality Measures for the Whole Supply
Chain
Measure Area of the supply Explanation
chain
Perceived value of the Customer related Determines a consumer’s satisfaction
product or service level
Buyer-supplier Supplier related Determines the relationship between
relationship the supplier and the organisation
Shipping errors Customer related Determines the location and severity

of shipping errors
Accuracy Manufacturing Determines the accuracy of the
related production quality
Number of faulty Customer related Identifies the number of wrong
notes invoiced invoices sent to customers and the
requirement for credit notes to be

issued
4.1 Quality (cont.)
• Quality can be measured across three areas of the supply chain:
o Manufacturing-related – The number of defective parts per
million is a manufacturing-related measure of quality. One
PPM means one defect (or event) in a million. Therefore, a
reject rate of 1% is equivalent to 10,000 PPM.
o Supplier-related – this relates to how a supply partner
performs against the supply chain contract, and whether
the supplied goods and services are provided to the specified
level to be utilized within other supply chain processes.
o Customer related – this is measured as the number of end
customer returns that need to be managed through a
process of reverse logistics which may add cost through
replacement or refunds.

4.1 Service Quality
• Services are the activities that influence the
physical, emotional or intellectual condition of a
customer.
• Measuring quality of a service is difficult
compared to a good due to the characteristics of a
service.

4.1 Comparing goods and services
Goods Services
Physical form Tangible Intangible
Variability uniform Variable
(heterogeneity)
Storability Can be purchased and Cannot be stored.
stored Purchase and
consumption is done at
the same time
Location Can be used anywhere Used at the place of
provision
Separability A product and producer A service cannot be
can be separated separated from the
provider
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Ownership Purchase results in

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transfer of ownership in transfer of ownership
4.1 SERVQUAL
• In 1985, Zeithaml, Parasuraman and Berry developed SERVQUAL,
which is also known as the gap model, to enable organisations to
measure service quality.
• SERVQUAL is a technique which can be used to perform a gap
analysis to identify the gap between the organisation’s supply chain
service quality and the service quality requirements of the
customer.
• They identified five gaps that can cause unsuccessful service
delivery:
• Gap 1 – the gap between the expectation of customers and the
perception of management, i.e. management failure to understand
what customers expect.
• Gap 2 – the gap between the perception of management and the
specification of service quality, i.e. application of the wrong service
quality standards.

4.1 SERVQUAL (cont.)
• Gap 3 – the gap between the quality specification and
the service delivered, i.e. service performance gap.
• Gap 4 – the gap between the service delivered and
external communications, i.e. the actual delivery
failing to match the promises made.
• Gap 5 – the gap between the service expected and the
service perceived, i.e. the difference between
customers’ perception and expectation.
• Ultimately, the difference between the expectations of
a service and the perceptions of the service received
determine the perceived service quality.

4.1 SERVQUAL Model

4.1 Five SERVQUAL Quality Measures
• Ultimately, the difference between the expectations of a
service and the perceptions of the service received
determine the perceived service quality.
• The five SERVQUAL quality measures are:
o Reliability – the ability to perform the service dependably and
accurately.
o Assurance – the level of knowledge of employees and how able
they are to inspire trust and confidence
o Tangibles – the appearance of physical facilities and products,
personnel and communication
o Empathy – the level of attention given to individual customers
o Responsiveness: the ability and willingness of the business to
help customers and to provide a prompt service.

Figure 4.20 SERVQUAL dimensions (Source: creativecommons.org/licenses/by-sa/3.0)
Slide 30
4.1 Benefits of SERVQUAL
• The benefits of SERVQUAL include the following:
o Service quality can be assessed from the customer’s
perspective.
o Customer expectations and perceptions (and the
discrepancies between these) can be tracked over
time.
o SERVQUAL scores can be compared against those of
competitors or industry best practice examples.
o The expectations and perceptions of different
customer groups can be compared – this is
particularly useful in the public sector as they are
mainly providing services.

4.1 Benefits of SERVQUAL (Cont.)
• The expectations and perceptions of internal
customers (i.e. other departments or service
providers) can be assessed.
• Data on customer priorities can be fed into the house
of quality. The house of quality is an off-line quality
tool that helps bring the voice of the customer into
the design process.
• Customer priorities can be ranked in order of their
importance.

4.1 Satisfaction
• It is said that quality is a prerequisite to customer satisfaction.
• Total quality management – is about achieving customer
satisfaction through continuous improvement and focusing on
customer needs.
• This offers a long-term commitment to quality and seeks to
identify problems at every stage of the operations process in
order to eliminate them.
• Customer satisfaction – a post-purchase evaluation of the
organisation’s overall performance, prior to the point of purchase,
at the point of purchase, and after the point of purchase.
• Service encounter (sometimes called the moment of truth) – is
the interaction between the consumer and the service provider.

4.1 Service Encounter
• Zeithamland Bitner (2003) identified the following four
general themes that influence how satisfied a
customer is with the service state:
• Recovery – the employee’s response to any failure in
the service delivery system
• Coping – the employee’s response to the needs and
requests of the customer
• Adaptability – the employee’s response to any
problem
• Spontaneity – the employee’s spontaneity in
delivering a memorably good (or poor) service

4.1 Customer Satisfaction
There may be a wide difference between the perceived
quality of the service and the customer’s level of
satisfaction.
There are a number of reasons for this:
•Satisfaction is typically influenced by price; service quality is
not generally price related.
•Customer satisfaction is cumulative, based on current, past
and anticipated future experience. In contrast, quality relates
to a customer’s current, immediate perception of goods or a
service.
•Quality is one of the components of customer satisfaction;
customer satisfaction does not determine the quality of a
product or service.

4.1 Customer Satisfaction
• Satisfaction is therefore a broad term, influenced by a
number of factors which include perceived quality, price,
situational factors, and personal factors.
Customer satisfaction can occur across the following
numerous levels.
• With an individual with whom the customer has had
contact
• With the core service provided
• With the organisation as a whole
Customer satisfaction is considered essential for customer
loyalty and retention, and as a source for improving
profitability and generating sales.

4.1 European Performance Satisfaction
Index (EPSI) model
• EPSI is a statistical model that can be used to measure
employee and customer satisfaction.
• The EPSI model provides a tool with which the organisation can
measure customer loyalty including the following factors:
o The likelihood of customer retention
o The likelihood of customers recommending the organisation or
brand
o Whether the amount customers are likely to spend will increase.
• The EPSI model links customer satisfaction to its drivers, and in
turn, to customer loyalty.
• Loyal customers are essential to sustainable business
performance because they tend to contribute long-term
custom, spend more on products, and be less sensitive to price

fluctuations. Leading global excellence in procurement and supply

4.1 Drivers of Customer Satisfaction
The drivers of customer satisfaction are the following:
1. Perceived company image
2. Customer expectations
3. Perceived quality - divided into the following two elements:
i. ‘Hardware’ – the quality of the product/service attributes
ii. ‘Software’ – the associated customer interactive elements
in service, i.e. the personal behaviour and atmosphere of
the service environment.
4. Perceived value (‘value for money’)
There may be a wide difference between the perceived quality
of the service and the customer’s level of satisfaction.

EPSI model
Figure 4.24 A basic EPSI model (Source: Adapted from Johnson et al., 2001)
Slide 31
4.1 Profitability
• Profitability is the degree to which a business is able to
make a profit, i.e. revenue exceeding costs.
• An organisation will need to make a profit in the long
term, although it may be able to survive in the short term
without making a profit, subject to cash flow
considerations.
• Profit is an absolute term, relating to financial gain. It is
measured as a quantity.
• A company reports its profit in an income statement.
• There are different categories of profit, and different
calculations depending on the type of profit being
considered.
• (examples of income statements on page 256)

4.1 Income Statement
• Income statements for trading companies and
manufacturers have a cost of sales figure.
• For a retailer, this is simply the value of all the goods
purchased for resale that have not yet been sold.
• For a manufacture, it includes the cost of running the
factory, e.g., direct labour, direct materials, and indirect
production costs.
• The COS figure is deducted from the organisation’s revenue
to give the gross profit.
• Gross Profit = Revenue – Cost of Sales
• There are other expenses, such as overheads, which are
deducted from the gross profit to give the operating profit.

4.1 Types of Profit
• Gross profit = Revenue - COS
• Operating profit
• Net profit before tax
• Net profit after tax

4.1 Profitability Ratios
• These ratios measure the performance of an
organization in terms of their ability to exceed costs
and make a profit.
• There are several profitability ratios including;
o Gross profit percentage
o Net profit margin
o Return on capital employed/return on investment
o Return on equity - measures the success of a company in
using funds provided by shareholders
o Return on total assets - measures how well the assets of
the business are used to generate profit

4.1 Profitability Ratios (cont.)
• Gross profit percentage: compares the gross profit made with
the sales/turnover/revenue. If the prices of the components
that are bought in increase, this will reduce the gross profit
percentage.
• Gross profit percentage = Gross profit X 100
Revenue
• Net profit margin: compares the after-tax profit against the
sales. It provides the organisation with an understanding of
what profit remains after all the cost of production,
administration, and financing have been deducted.
• Net profit margin = profit before tax X 100
Net Sales

4.1 Return on Capital Employed (ROCE)
• Return on capital employed (ROCE) - measures the amount of
capital used in making the profit. It examines the amount of
profit made in relation to the long-term capital used by the
business to generate the profit.
• ROCE = Profit from operations X 100
Capital employed
• Calculating the capital employed can appear complex. There
are two ways this can be calculated. Both use data from the
company’s Balance Sheet.
• Capital employed = Total assets – current liabilities
OR
• Capital employed = total equity + Non-current liabilities

4.1 Return on Investment (ROI)
• ROI is a ratio that is used to measure the profitability
of an investment. It is an important performance
measure enabling the evaluation of supply chain
investment efficiency, which can support the
comparison of different investments to aid decision-
making.
• ROI = (current value of investment – cost of investment )
Cost of investment
• Sometimes ROI is referred to as ROCE

4.1 Other Investor Ratios
• Another way to explain ROI is in terms of investor ratios. Investor ratios
provide a measurement for potential shareholders to evaluate whether the
organisation can deliver an adequate return on investment in comparison to
the risk of investing in the organisation.
• Two key investor ratios are:
• Dividend Yield: measures the amount a company pays out in dividends.
• It is also a company’s total annual dividend by its market capitalization,
assuming the number of shares is constant.
• It is often expressed as a percentage.
• Dividend yield = (Dividend paid ÷ share price) x 100
• Earning per share (EPS): measures the profit earned for each
ordinary share.
• Earnings per share = profit after interest and tax
Number of issued ordinary shares

4.1 Sales Growth
• Revenue should grow in line with the rate of growth in the
market in which the business operates.
• Growth is crucial for the long-term survival of an organisation.
• It demonstrates that the organisation’s management is
exploring opportunities for growth and greater overall
profitability.
• Bottom line profits can be increased without increases in
turnover by cutting costs and reducing waste.
• A successful company should have both top-line growth (sales
revenue) and bottom-line growth (increased profit).
• In a short term it is possible to increase bottom-line growth
(profit) without increasing the top-line (Sales Revenue).
• Sales growth % = current year net sales – prior year net sales)
÷ prior year net sales X 100

4.1 Sales Growth
• The term sales growth needs further consideration.
• Sales can mean different things – sales can be in quantities
sold or expressed as a value of the goods sold.
• This term is not used in accounting as it can be misleading.
Instead, the term revenue is used.
• This is simply the value of all the goods or services sold in
the accounting period.
• Revenue can fall due to decreases in volumes or decreases
in selling prices. Or it can be a combination of both.
• In terms of impact on supply chains, this can mean
reduced volumes passing through the chain or higher
volumes.

4.1 Cash Flow
• Survival of a company depends on its ability to
generate cash, because without it, it does not have the
liquidity required to meet its short-term
commitments.
Relationship between cash and profit
• A business needs to make a profit in order to survive.
• On the other hand if it makes a profit without cash it
cannot survive because it will not have cash to pay for
its operations.
• Therefore it must have cash in order to survive.
• In short, a business needs to make profit and have
cash in its bank account.

4.1 Statement of Cash Flows
• Listed companies are required to publish complete financial
statements to provide transparency regarding the organisation’s
financial position.
• This is a statement that is drawn to depict the sources and uses of
cash.
• It is a useful indicator of how the operations of a company have been
in terms of its liquidity and solvency.
• It’s a requirement by the international accounting standard; IAS1 that
organisations provide a statement of cash flows.
• A cash flow statement provides a summary of the amount of cash
that enters and leaves an organisation.
• Cashflow provides a measure of how effectively the organisation is
managing its cash position and whether it is generating enough cash
to meet its debt obligations and fund and its operating expenses,
• Cash flow = cash inflows – cash outflows


• Profitability: relates specifically to how the firm
manages its cash in order to minimise costs and
maintain a return.
• Liquidity: the ease with which sales can be converted
into cash for use. Cash is the most liquid asset of all
and can be used to pay off any debts when they
become due for payment.
• The formula to measure liquidity for accounting
purposes is the Current ratio and Quick ratio.

4.1 Current Ratio
• This measures the relationship between a company’s
immediate debts (current liabilities) against the value
of their current assets out of which debts will have to
be paid.
• An ideal current ratio is 2:1 and a current ratio of less
than 1 shows that a company is not in a good financial
health.
• Current ratio = Current assets
Current liabilities

4.1 Quick Ratio or Acid Test
• This ratio measures the ability of a company to meet
its short-term debts. Stocks are subtracted because
they cannot be converted into cash quickly.
• An ideal quick ratio is 1:1 and a quick ratio of less than
0.5 shows that a company is not in a good financial
health.
• Quick ratio or acid test = current assets – inventories
Current liabilities

4.1 How an Organisation can Improve Cash
Flow Structure
• Extend the creditors (suppliers) payment period
• Shorten the debtors (customers) collection period
• Increase inventory turnover
• Shorten inventory holding period

4.1 The Use OF Balanced Scorecard
Methodologies
• Balanced scorecard is both a management system and a
measurement system.
• It seeks to overcome the problem of assessing company
performance using only financial measures such as profitability
and other accounting measures.
• Financial measures are said to be lagging in that they measure
only what has already happened and can offer no guidance on
future performance.
• To overcome this problem, the scorecard incorporates leading
measures that are more indicative of future performance, such
as the following:
o Customer satisfaction
o Market share
o Time to market for new products

4.1 Balanced Scorecard
• The concept is not dissimilar to key risk indicators (KRIs).
• KRIs measures and metrics can relate to a specific risk and
demonstrate a change in the likelihood or consequence of the
risk occurring.
• KRIs differ from KPIs as they are not concerned with how well
something is being done, but rather the possibility of future
adverse impact.
• KRIs are concerned with the possibility of future adverse
impact.
• They provide an early warning to identify potential events that
may harm the continuity of an activity or project.
• E.g., if the liquidity ratios start to fall this could indicate future
solvency or cash flow problems for the organisation.

• The scorecard also uses hard (financial) and soft (operational)
measures to ensure a balanced view is presented.
• This can be explained in terms of a balance between external
financial measures and internal measures relating to
operational performance.
• The measures selected must be aligned to the organisation’s
objectives, and ultimately to its corporate strategy.
• The scorecard provides a framework that helps turn aims and
objectives into measures and targets. See Figure 4.39.
• It looks at performance from four perspectives;
o Financial perspective
o Learning and growth
o Customer perspective
o Internal business processes


Financial
Definitions
Customer Internal Business Processes

Vision and
Strategy
Learning & Growth / Innovation

4.1 Steps to Successful Application of the
Balanced Scorecard
• Clarify and translate vision and strategy into specific
objectives and identify strategic objective drivers.
• Communicate and link strategic objectives and
measures
• Plan, set target and align strategic initiatives
• Use strategic feedback and learning to ensure
management monitors and adjusts strategy
implementation

4.1 Example K Hospital’s Balanced Scorecard
Objective Measure
Financial Enhancing • Revenue
perspective operational • Patient provided income
excellence & cost
• Revenue per employee
• Revenue per patient
management • Cost ratio (HR cost, operating cost)
Customer Investigating • No. of services recognised & praised by customer
perspective customer needs • Customer satisfaction (outpatient, inpatient etc.)
• Customer complaints
• Average patent visits per week
• New customers
Internal Enhancing the • Percentage of employees being able to handle
process combined direct patient care problems
• Emergency room transfer rate
perspective professional • Doctors’ professional quality
service quality • Employee average professional skill
Learning • Enhancing the • Employee satisfaction

employee • Employee turnover
and growth • Doctor’s commitment
perspective satisfaction • Number of doctors
Slowing down
•
• Number
All rights reserved. These slides are provided exclusively to CIPS Approved Study Centres ofof employees
for the sole purpose teaching CIPS Professional Qualifications, they are not to be
the expansion of
• Human resource cost (training, salary
new operating • Workload
activity • Number of new services
• Environment Leading global andexcellence
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CIPS Level 5 Advanced Diploma in

Procurement and Supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

customer needs, including high levels of customization.

Leading global excellence in procurement and supply

• Supply chain cost classifications Table 4.1

Leading global excellence in procurement and supply

Table 4.1 Classifications of supply chain costs

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

o Inventory days of supply

•Days payables outstanding: creditor payment period

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Internal Asset Cash-to-cash cycle time

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Whys, value stream mapping and kaizen.

Leading global excellence in procurement and supply

• The specification width and process width are expressed as a ratio.

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Shipping errors Customer related Determines the location and severity

requirement for credit notes to be

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Ownership Purchase results in

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

custom, spend more on products, and be less sensitive to price

fluctuations. Leading global excellence in procurement and supply

Leading global excellence in procurement and supply

Leading global excellence in procurement and supply