Over the last few years optimization of supply chain management has become one of the critical strategic objectives set by executives around the world. Driven by tight credit conditions, poor liquidity, and disruption of operation of strategic supply and distribution partners, companies were faced by a challenge to find innovative solutions to increase supply chain efficiency, reduce cost and risk along their value chains.
While the buzzword in supply chain in the last two decades was consolidation, today’s buzzword is smart integration, where companies are recommended to maintain some degree of diversification, visibility and control over its supply chain network.
In this article, we will feature 5 key financial key performance indicators for effective monitoring of supply chain performance.
Cash Conversion Cycle
Cash conversion cycle (CCC) attempts to measure the amount of time money is tied up in the business process starting from production to selling. CCC is calculated as:
CCC = Days of Sales Outstanding + Days of Inventory Outstanding – Days of Payables Outstanding
Working Capital Turnover
Working capital, measured as total current assets net of total current liabilities, is a measure of money used to finance operation and purchase inventory. Working capital turnover (WCT) measures the efficiency of sales generated for every unit currency spent, and is calculated as follows:
WCT = Sales ÷ (Total current assets – Total current liabilities)
The inventory turnover KPI is an important indicator of supply chain efficiency, but it can also differ from an industry to another, depending on industry structure and business norms. It measures how many times a year the entire inventory can be sold. Inventory turnover is calculated using the following formula:
IT = Cost of goods sold ÷ Average inventory
Carrying Cost of Inventory
Carrying cost of inventory (CCI) measures the cost associated with holding and storing inventory over a given period of time, and it is often described as a percentage of inventory value. It can also be used to determine profit that can be made on current inventory. CCI is calculated as follows:
CCI = Inventory carrying rate * Average inventory value
Each industry may offer opportunities or pose restrictions on the ability of company to enhance the financial performance of its supply chain process. Analysing change in KPIs can either be done by looking at the historical trends or by a benchmark against competition. When business cycle swings are large, only benchmark against competitors is useable.