The Seven Prime Supply Chain Performance Metrics

We will use two of the financial ratios from the profitability category and four of the financial ratios from the efficiency category for the primary gauges on our supply chain financials dashboard.

Supply Chain Profitability Ratios: 

• Gross Profit Margin Percent (GPM) 
• Return on Assets (ROA)

Supply Chain Efficiency Ratios: 

• Days Payable Outstanding (DPO) 
• Days In Inventory (DII) 
• Days Sales Outstanding (DSO) 
• Total Asset Turnover (TAT)

We will also add in Revenue Growth ($Rev) as a primary gauge for supply chain.  We will define the rationale for this metric as it relates to supply chain in future entries. 

Here is what our dashboard looks like graphically:

For each of these dashboard gauges we will connect the supply chain sensors through a common process improvement tool to help us identify the direct relationship of supply chain actions to financial performance. 

Key Financial Ratios to Measure Supply Chain Performance

“Do not worry about your difficulties in Mathematics. I can assure you mine are still greater.”  - Albert Einstein

Generally speaking, there are four primary categories of financial ratios.  There are some individuals that support the idea of three categories.  There are others that assert there are five categories.  In order to keep it simple, we’ll provide four along with a couple of examples of some of the more common ratios seen in each category.

1. Efficiency— assessment of a company's use of credit, inventory, and assets

• PP&E
• Total Asset Turnover

2. Profitability—assessment of a company’s management performance in utilizing resources

• ROA
• ROE

3. Liquidity—a company's ability to pay its current obligations

• Current Ratio
• Quick Ratio

4. Leverage—the extent to which a company has depended upon borrowing to finance its operations

• Debt-to-Equity Ratio
• Interest Coverage

Karen Bergman and Joe Knight ¹ refer to ratio categories being like windows into an organization.  Each of the categories of financial ratios provides a unique view into an organization through windows on all four sides.  Building on that idea, here is an illustration:   

In each of these categories, there a many ratios.  For an expanded list, you can refer the following Inc.com webpage: http://www.inc.com/encyclopedia/financial-ratios.html .  For the sake of what we are working to accomplish linking together supply chain specific performance to financial outcomes, we will focus on a few specific ratios from the two categories of Efficiency and Profitability.  These will be the primary gauges for our dashboard.

(1) “Financial Intelligence: A Manager's Guide to Knowing What the Numbers Really Mean” Berman, Knight, and Case