THE APPROACH BEGINS WITH MAKING THE FINANCIAL LINK TO PROCESSES

The value created in a supply chain network can be measured in several ways,
but the key is to find a set of measures that encourage the efficient creation of
profit. These measures look good if either profit goes up or the assets used to
generate the same amount of profit go down. We shall begin by using the
concept of return on net assets (RONA) as it relates to supply chain management.
This technique will take us well on the journey, through levels 1 and 2,
and will support a more advanced treatment when we get beyond level 3.


In other words, it compares the P&L
account with elements of the balance sheet. The value of RONA is that it allows
a balance to be struck between the often-conflicting pressures of trying to
increase profit and manage the asset base. For example, if you increase your
inventories, you may be able to sell more, but will you make commensurately
more profit? If RONA goes up, you will. If it goes down, you won�t.
A second consideration is to choose the scope for applying RONA. Few
supply chains involve the whole of a multidivisional corporation working as a
single entity to supply its customers. In fact, from the authors� experience, most
corporations can be divided into autonomous horizontal businesses,
The horizontals may share suppliers and channels,
but the key decisions about range of investment management, investment in
assets, and tactical decisions around sales order management can all be taken
within the horizontal unit, with no great conflict with other horizontals. The key
determinant of a good decision is whether RONA for the horizontal organization
will go up or down. Interestingly, these horizontals often cross the formal
boundaries in the organization and are the root cause of some of the complexities
encountered in supply chain management.
These horizontals will be the basic building blocks for our thesis. A selfcontained
level 1 organization will be able to decide on its product portfolio
and investment in assets. It will have a supplier base, which it may share with
other parts of the corporation to which it belongs and will be able to see the
sales it generates from its (possibly shared) channels to market, and will incur
a share of the cost of those channels. But for our purposes, it is a self-contained
business, governed by RONA.