Chapter 11: Measuring Results: NikoTech, Inc. - Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

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Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance - نسخه متنی

Daniel L. Gardner

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Chapter 11: Measuring Results: NikoTech, Inc.

Given the complex nature of international supply chains, the metrics chosen to measure financial performance must converge on revenue, profitability, productivity, asset utilization and cash flow. Of equal importance, tools that are capable of exposing the cause-and-effect relationships between financial outcomes and areas such as sales, landed costs, lead times and inventory management must also be employed. Because financial performance has the last word on supply chain execution, the methodology for identifying causal relationships should be a diverse exercise that focuses on the elements of time, variance, utilization and profitability. Applying different techniques to period-specific figures puts supply chain execution in the crosshairs of management, allowing managers to make decisions based on a variety of information and angles.

Supply Chain Execution, the Balance Sheet and Profitability

For better or for worse, many stockholders, institutional investors and creditors base their evaluation of a company on its short-term, period-specific financial results. In fact, judging by how most senior executives are compensated (quarterly or yearly bonuses linked to net income), the same could be said about how those same organizations gauge their own performance.

Because companies are measured in the short term, the natural inclination of most management teams is to focus on results found on the income statement. There is no question that the income statement provides valuable information on sales, cost of goods sold, general, sales and administrative expense and net income. Also, many cause-and-effect relationships can be spotted between individual line items and areas like velocity, productivity and variance. However, it is the same short-term nature of the income statement that may cause managers to lose sight of longer term considerations. Strict profit-and-loss management is more reactionary than strategic, with decisions that impact the future of the organization based on last month's results. The supply-chain-oriented manager realizes that outcomes on the income statement are a function of what is found on the balance sheet. After all, it is investments in plant, equipment and inventories that make sales possible, right?

Depending on one's philosophy of business, a fair rebuttal to the preceding statement would be that market demand and sales are what generate the need to create manufacturing capabilities. While this is a reasonable statement to make, what should be observed is that recognition of the validity of both statements implies a cause-and-effect relationship that cuts both ways. A company cannot generate sales without assets, but there is no need for assets without sales. This is an interesting paradox, yet one can be certain that it is the combination of asset management, profit-and-loss considerations and cash flow that moves businesspeople from reacting to monthly results to managing an enterprise.

It is for the above reasons that the following case study will begin with an analysis of asset velocity and utilization, followed by an in-depth look at the balance sheet itself. Many cause-and-effect relationships will be uncovered, setting the stage for study of the income statement and the additional causal relationships found there. Once the reciprocal links between net income and balance sheet investments are established, a comprehensive breakdown of the cash flow statement will be presented. The financial epicenter of any organization, the cash flow statement unites the short-term concerns of profit and loss with the longer term, strategic issues faced by any company.

Throughout the entire case study, techniques and tools will be introduced that isolate problems, reduce variation, increase productivity and goose supply chain velocity. Completing the circle, all supply chain initiatives are intended to filter up to results on the balance sheet, income statement and, most importantly, the cash flow statement.

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