In an earlier entry we discussed the importance of A
Supply Chain Finance Lingua Franca—a common language leading toward an integration
of operational metrics and financial corporate performance. This is possible through the linking of
tools like SCOR, DuPont Model, and EVA in defining the ability for supply chain
to be the strategic enabler of financial performance.
Before we dive into the details of each of The
Seven Prime Supply Chain Performance Metrics, it is important to have a
working understanding of the broader context of financial performance
models. The intent is not to be cost
accounting experts. However, a
fundamental understanding of basic business math is needed. The good news is it is primarily simple
addition and subtraction. It gets a bit
complicated with some division but no calculus required!
Two models will be reviewed.
- Return on Assets (ROA)
- Economic Value Added (EVA)
ROA—Return on
Assets
Return on Assets (ROA) looks at an organization’s
profitability relative to its total asset base.
Also known as the DuPont Analysis Model, the ROA ratio was developed by F.
Donaldson Brown, a financial executive at DuPont and General Motors. The ROA model was originally designed to
coordinate financial controls across the organization. 1 ROA measures
the combined effects of profit margins and asset turnover. 2
The ROA calculation looks like this:
Here is a visual depiction of the model and the related
operational levers:
There is some debate over the finer points of this model as
it relates to inclusions and relationships.
Some of these points are related to items like Return-on-Equity (ROE)
and Return-on-Investment (ROI). As an example, is ROA the same as ROI? That depends on various schools of
thought. It is good to be aware that
there is not a uniform glossary of terms across financial models. For our specific to supply chain purposes, we
will leave those nuanced definitions out for now and focus on the model as it
relates to building a common language for finance and operations
professionals.
Next, we will look at the Economic Value Added (EVA) model.
(2) Groppelli, Angelico A.; Ehsan Nikbakht (2000). Finance,
4th ed. Barron's
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