For those working in supply chain and operations, the overall financial performance of the business can sometimes feel a bit distant, but they often have the biggest role of all.

In this article, we’ll take a look at ten tangible aspects of supply chain and operations performance and how they affect a business’ key financial metrics: Net Profit, Return on Capital Employed (ROCE), and Cash Flow.

1. Output

The output of an operation or supply chain is the quantity of value that is created and delivered. Every system will have a specific output, possibly many. This output might be the output of the entire supply chain, or a particular bounded area of responsibility. 

Output is an essential metric for supply chain and operations performance, because, when value is created and delivered to a customer, the business generates revenue, and therefore the opportunity for profit.

2. Value

Value is in the eye of the customer and what they will pay for; it’s subtly different from output. It is very possible for a business to “output” something of no value and make no sales, although this is obviously a fast path to demise.

A common trap for a section of a big company is to make and deliver goods to stock without visibility of (or concern for) actual customer demand. Doing this doesn’t generate revenue and instead incurs significant costs filling up warehouses.

3. Cost

Supply chain and operations costs come in many forms, incurred at all stages of the supply chain: procurement, transportation, manufacturing, warehouse, distribution, and more. Costs can also come under many other overlapping groups: quality, scrap, taxes, tariffs, compliance, returns, labor, risk, insurance, theft, damage, energy and many more.

Some costs are direct costs. Direct costs are associated with a particular item or product, or a particular service performed. While some costs are “indirect costs”. Indirect costs are not associated with producing a “particular” product or service. In supply chain and operations, these might include overheads such as heating, warehouse rent or equipment repairs and maintenance.

4. Waste

Waste refers to unnecessary costs that do not help generate value. These are the costs that could be removed without reducing the performance of the system (it’s rarely so easy!). Examples of waste include making mistakes, or overheating the office. To improve the financial performance of a business, we should consider investing the effort into understanding and reducing the wastes that are largest and easiest to tackle.

Want to learn more about the key areas of supply chain management? Access our training course the Supply Chain Management A-Z to learn more! 

5. Customer Satisfaction

It’s easy to think that customer satisfaction doesn’t matter much to those in supply chain and operations. After all, a “supply chain” is a very tangible thing, with tangible results, so why would the “feelings” of customers matter?…

Supply chain is about delivering value to customers. If they are not happy with the experience, they probably won’t buy again, and next year you won’t have lots of customers to deliver to. Customer satisfaction is a leading indicator of future demand and revenue. It gives you an idea of who will keep coming back, and who will recommend your services to others.

6. Employee Satisfaction

Along the same lines, employee satisfaction is also important for a whole host of reasons. The success of every aspect of the supply chain and operations comes down to the people running it: their commitment, their skills and their energy.  When employees are not happy, it will always be the best ones who leave first, making the consequences much worse.

Employee satisfaction is directly linked to the financial performance of a business. Unhappy staff leave, meaning new people have to be recruited and trained, costing the business huge amounts of extra time and money.

7. Capital

When it comes to capital, all businesses think the same. Business owners and investors want to make a big profit, but it has to be acceptable relative to the money invested and tied-up, the capital employed.

Whilst much of the capital employed includes buildings, factories, machines, (areas that supply chain managers have less interest in), it also includes equipment such as the fleet of lorries and inventory.

8. Inventory

Inventory is a key type of money “tied-up” in the business, and typically the type that supply chain managers have the most influence over. So, it is worth extra attention. Having some inventory is essential for essentially all supply chains. 

Businesses need materials to process, goods to show customers, and products in stock to sell them. It’s a necessity, but we still want to minimize it. This means that we want the inventory that we have to be moving, i.e., flowing through the supply chain and generating profit (as opposed to sitting in warehouses where the money remains tied up, it incurs costs, degrades and typically depreciates).

9. Cash Flow

A good cash flow means that a business earns more cash than it spends, but also that the “time” between spending money and receiving it back is minimized. This is true of all businesses and supply chains.

The supply chain function of a business has a particularly important role in a business achieving good cash flow because the supply chain aspects of an organization are so closely involved with the points when we spend cash (buying materials) and when we fulfill the contract to deliver goods or services to the customer.

10. Variation

Variation is the bane of supply chains. Not just variation, but also the uncertainty. Variation and uncertainty is near inevitable. Not knowing what the demand rate will be tomorrow, next month, next year, nor what the supply availability will be is a challenge for those in supply chain management (SCM). Reducing variation and uncertainty through active forecasting, planning and mitigation is a key role of operations and supply chain managers.

Supply chain managers need to accommodate for variation and uncertainty – it’s almost their main job! More variation and uncertainty means the supply chain needs to build in more expensive buffers to protect the supply – buffers of time, inventory and capacity.

Rowtons Training provides businesses and individuals with supply chain and operations management training courses, alongside our free resources. Want to learn more about the core areas of supply chain management? Check out my course Supply Chain Management A-Z.