THE EFFORT BEGINS WITH DRIVING METRICS:

As we have worked with numerous firms in various industries and helped guide
them toward enhanced performance through a concerted supply chain effort, a
variety of methods have been used to track the actual improvements, as well
as a number of specific measurements. Depending on the orientation of the
company, we have been asked to document enhancement to economic value
added, earnings per share, return on net assets employed, return on investment,
improved cash flow, and better earnings before taxes. In virtually all cases, we
were able to show the direct link between supply chain improvement and the
desired metric.
Unfortunately, along the way we encountered a number of firms that had
difficulty making the direct connection between important financial measures
and what was resulting from their supply chain actions � in a way that could
be reported on their earnings statements. In spite of good efforts to improve
sourcing costs, cut transportation and logistics costs, reduce dependency on
inventory, implement better forecasting and planning and scheduling, introduce
greatly improved order management systems, and enhance sales lifts through
better manufacturing and delivery techniques, many companies simply lack the

ability to show the direct association with improved financial performance. It
is our intention to eliminate that cloud from the supply chain environment and
show how such a linkage can be established and tracked.
As another example of how the potential positive benefits can be derived
if a driving metric is at the center of the effort, we would cite the actions taken
by Colgate-Palmolive (C-P). This firm has concentrated on achieving the highest
market share in one very competitive market, oral care, which includes
toothpaste and associated products. From a position in 1994 where the firm had
a share of 21.9%, C-P has progressed to a point where it now has 32% of that
market. As this performance was increasing, C-P was deep into a supply chain
effort, with one concentration on cash-flow return on investment. That metric
stood at 14.4% in 2003, versus an industry average 4.8%.
While part of the transformation was no doubt due to significant product
innovations, it was dramatically impacted by the connection to C-P�s supply
chain effort. According to one study, �This let Colgate integrate demand and
supply chain information � and decisions � more effectively. After years of
stagnant sales and narrowing margins in the mid 1990s, Colgate rethought the
entire process involved in its value chain. The company then slashed supply
chain costs for all its products even as it shortened manufacturing and delivery
times.� The report further states that �Colgate�s planning is now much more
precise: Errors in forecasting have been cut from 61% to 21%, and case-fill rates
nudged up from 94% to 97%� (Koudal and Lavien, 2003, p. 82).
To make the most of the exposition to be delivered, it is best for the reader
to set out those metrics of greatest importance to his or her business. Table 3.1
is an excellent reference in this area. Created by Raymond Clayton, and reported
in Supply Chain Management Review, it presents the kind of financial measures
of most importance to a business. Next to each measure is a brief list of the
elements from the financial statement that are related to the measure. Then
Clayton lists the performance drivers that need improving in order to enhance
the desired performance (Clayton, 2002, p. 35). Each company is advised to
develop its own set of financial outcome measures and performance drivers.
With the Clayton chart as a guide, the information we present will then have
the most benefit in determining how a concerted effort will produce the type
of desired impact.
Along the way, it is equally important to understand the relationship between
financial results and the specific elements within the supply chain that
impact performance in both directions � positive and negative. This refers to
the need to make sure efforts devoted to supply chain improvements are linked
with process changes that are valuable to the firm, and not just measures that
show improvement without really having a positive effect on financial perfor

mance. For example, we could consider the very important need to segregate
suppliers and customers by value, before developing supply chain changes that
impact both areas, so a lot of effort is not wasted on areas that have little
additional merit (weak suppliers and customers serviced at a loss).
We note, for example, that one firm which has made great progress with
supply chain improvements, Procter & Gamble, is constantly faced with the
need to put emphasis in its supply chain effort on areas that have the most
overall impact to the firm. According to one report, �In 2002, just 12 of P&G�s
250-odd brands generated half of its sales and an even bigger share of net
profits� (Andrew and Sirkin, 2003, p. 77). Clearly, a lot of valuable effort could
be wasted on brands that have little overall merit. It becomes essential, as a
supply chain effort matures, to track what return is being made from the specific
areas of most value, so that carefully directed investments in time and resources
are made in the areas of greatest importance.