Two Financial Frameworks: Part 2 - EVA

EVA—Economic Value Added

In its simplest terms, EVA is a measurement of enterprise performance.  The model was created in 1993 by the consulting company Stern Stewart Management Services.  EVA is defined as, “a measure of a company's financial performance based on the residual wealth calculated by deducting cost of capital from its operating profit (adjusted for taxes on a cash basis).” ¹ EVA is also sometimes referred to as Economic Profit (EP). 

The EVA model is helpful in light of supply chain contribution as it comprehensively captures the causal drivers for financial performance and the interrelationship between these drivers.  Many of the operational tradeoffs in operating profit and invested capital become complex very quickly.  The EVA Model is a good tool to build a common framework and language for both financial and operational leaders in an organization.  

There are certain components that are important to the model but less applicable to our purposes related to supply chain.  The tax rate and WACC portions of the model are components excluded for our supply chain specific analysis. 

Here is a visual overview of the EVA Model:

There are distinctions between the EVA and ROA model that are important to highlight as they relate to operational performance and integration.  We will look at the differences between the models and why they are important in our next entry.

(1) http://www.investopedia.com/terms/e/eva.asp