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SUPPLY CHAINS TO ADMIRE | 2025
What Should Be Measured?
While the companies vary by year over the eleven years of the analysis, the win rate remains constant at 4-7%. The percentage for this time period is 5.3%. The path to excellence for supply chain leaders takes four to five years, and the most critical factor is leadership. Our research finds no correlation to performance based on technology or consultant selection. We also see an adverse impact on results
control, metrics performance, and superior value in public markets during 2015-2024. The analysis tracks year-over-year progress on the metrics: year-over-year growth, operating margin, inventory turns, and Return on Capital Employed (ROCE). This work aims to move the definition of supply chain excellence from a cost- based focus to align the organization with a balanced scorecard to improve market capitalization. For supply chain leaders to be effective, they need to speak the language of the balance sheet.
WHY OPERATING MARGIN VERSUS TOTAL COST?
A focus on cost throws the supply chain out of balance, increasing inventories. In contrast, an organizational focus on margin helps organizations to better align on channel programs and new product launches. Cost of Goods Sold is less correlated with market capitalization than operating margin.
for IT standardization and outsourcing. Supply chain excellence is easier said than explained. The Supply Chains to Admire methodology identifies companies within an industry peer group that drove higher levels of improvement,
Balanced Scorecard to Drive Value
The journey from a focus on functional cost to maximizing shareholder value is a major but needed transition. To understand what metrics, in combination, maximize shareholder value, we worked with the statistics department at Georgia Tech to develop linear regression models for each industry to predict market capitalization. We carefully analyzed collinearity and tested the models through backcasting to select the most important metrics. (The data set was from 1982 to 2019, and the backcasting attempted to predict 2019 using 2011-2018.) The results show that supply chain matters. Table 3A shows that over 40% of market capitalization value is explainable through a focus on the core metrics of year-over-year revenue growth, operating margin, inventory turns, and Return on Capital Employed (ROCE). We aim to have companies adopt these metrics in a balanced scorecard and work to align supply chain
planning to produce value for the firm. This journey requires the rethinking of the functional optimization present in traditional supply chain planning technologies. Focusing on cost-of-goods versus operating margin reduces the market capitalization potential by 10-50%. As a result, focusing on functional costs sub-optimizes shareholder value. We share this analysis in Figure 3B. A common mistake is assuming that supply chain excellence is at the center of a simple triangle that trades costs, customer service, and safety stock. While this is a valuable model for calculating safety stock levels, defining supply chain excellence to maximize market capitalization requires analyzing the trade- offs of growth, operating margin (not cost), inventory turns (total inventory turns), and the effectiveness of asset strategies (ROCE).
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