This document discusses balancing the supply chain triangle of service, cost, and cash. It argues that supply chain plays a strategic role in optimizing return on capital employed (ROCE) by balancing these factors based on a company's strategy and objectives. Different strategies, such as focusing on low cost or product differentiation, require different balances within the supply chain triangle. The document advocates for a strategy-driven sales and operations planning process to help supply chain better support financial and strategic goals.
2. Balancing the Supply Chain Triangle of Service, Cost and
Cash
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CAPITAL EMPLOYED COST
SERVICE
-Working Capital
- Inventory
- Accounts Receivable
- Accounts Payable
-Fixed Assets
-Operations
- Logistics
- Warehousing
- Manufacturing
- Purchasing
-Research & Development
-Sales, General & Administrative
-target service level
- fill rate
- lead time
-product portfolio
-order flexibility
3. Balancing the Supply Chain Triangle of Service, Cost and
Cash
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e.g. sourcing in the far east to lower
cost, maximize efficiency by bigger
batches or leveling production
CASH COST
SERVICE
e.g. expanding the product
portfolio to increase market
share
CASH COST
SERVICE
e.g. lower inventory by lowering
safety stocks
CASH COST
SERVICE
e.g. improve responsiveness
by building ‘peak’ capacity
FIXED ASSETS COST
SERVICE
4. Why do we lack balance in the supply chain triangle?
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CEO
Sales/MarketingProductionPurchasing Supply Chain
CFO
Targets: Purchasing cost Manufacturing cost Logistics cost &
Inventory Turns
Turnover, market share
...
Earnings per Share,
Free Cash Flow, ...
5. Why do we lack balance in the supply chain triangle?
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CASH COST
SERVICE
VP Sales/Mkt
VP
Ops
Mfg’
Cost
VP
Purch
Purch’
Cost
Logistics
Cost
VP
SC
Working
Capital
VP SC
CFO
6. Balancing the triangle = optimizing ROCE
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CAPITAL
EMPLOYED
COST
SERVICE REVENUE
EBIT
RETURN ON CAPITAL
EMPLOYED (ROCE)
7. Different strategies lead to a different balance
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Michael Porter - 2 options:
- cost advantage
- differentiation advantage
Treacy & Wiersema – 2 options
for differentiation
- Best total solution advantage
- Best product advantage
8. Different strategies lead to a different balance
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Service
Cost
Higher service
Lower cost
Capital
employed
Lower capital
employed
Differentiation
Lowest Price
9. Redefining the role of Supply Chain
9
Finance
- strategic: capital structure, financing
- tactical: budgeting, financial forecasting
- operational: controlling, reporting
Operations
- strategic: defining the value chain
- operational: driving the value chain
Key Metrics
- working capital
- cash flow
Key Metrics
- cost
- efficiency
EBIT
Marketing & Sales
- strategic: define the value
proposition
- operational: driving sales and
margins from the proposition
Supply Chain
- strategic: network design
- tactical: S&OP
- Operational: customer
service, logistics
Key Metrics
- top-line
- growth
- gross margin
CEO/Strategy Office
- strategic: strategic plans
Key Metrics
- OTIF performance
- logistics cost
- inventory
Finance
- strategic: capital structure, financing
- operational: controlling, reporting
Operations
- strategic: defining the value chain
- operational: driving the value
chain (incl. customer service,
logistics)Key Metrics
- working capital
- cash flow Key Metrics
- OTIF performance
- cost
- efficiency
EBIT
Marketing & Sales
- strategic: define the value
proposition
- operational: driving sales and
margins from the proposition
Supply Chain
- strategic: balanced strategic plans
- tactical: budgeting, S&OP
Key Metrics
- top-line
- growth
- gross margin
CEO
CMSO
COOCFO
CSCO Key Metric: ROCE
10. Strategy-Driven S&OP
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Strategic Benchmarking:
• define how you will generate ROCE, in which combination of EBIT and Capital Employed
• define intermediate steps to go from current ROCE to best-in-class (e.g. 20%)
Strategic Planning:
• make a plan on a customer-product segment: grow, turnaround, divest, acquire
• how will individual segments contribute to the overall objective
Financial Planning / Budgeting:
• fix next years ambition, allocate resources
Sales & Operations Planning:
• 18 month rolling horizon, detect and solve imbalances 3-18 months out
Sales & Operations Execution:
• 12 week rolling horizon, detect and solve imbalance 3-12 weeks out
12 wks
Execution
3-5 yrs
Long-term targets and milestones
18 mth
Monitor & adjust
3-5 yrs
Bottom-up planning starting from customer-product segments
12 mth
Fix next year
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12. Why ROCE?
• ROCE ROE/EPS share price/market cap
• ROCE is an ‘operational’ measure for ‘intrinsic’ value
generation
• Operational: balancing service, cost and capital employed
• Intrinsic: a healthy ROCE is a better starting point
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leverage growth
risk
13. Why Supply Chain?
• Finance
• Lacks knowledge of operations, doesn’t feel the heartbeat of
the customer/market
• May overly focus on short term financials and impact
• Supply Chain
• Misses knowledge of finance & strategy
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