Art van Bodegraven was, among other roles, chief design officer for the DES Leadership Academy. He passed away on June 18, 2017. He will be greatly missed.
We've spoken elsewhere of the need to couch what we do—and what we hope to do—in supply chain management in the language of the executive suite, paying particular attention to the chief financial officer. But what are the financial ramifications of supply chain performance? Which levers of corporate achievement can we pull? What needles of company performance can we move on the dials?
Two leading thinkers on these topics are Dr. Stephen Timme of FinListics Solutions and Dr. Terrance Pohlen of the University of North Texas. Timme writes, teaches, and trains extensively in the arena of increasing shareholder value through supply chain management. Pohlen researches, publishes, and speaks on cost and cost accounting issues in supply chain management. Their guidance has helped our understanding of the EVA and ABC material presented below.
There are numerous techniques available to measure financial performance and the contributors to it. The least useful are the traditional ones—cost accounting, performance to budget, and so forth. It's not about balance sheets or profit-and-loss statements or outside auditors. It's about management accounting, its links to organizational financial performance, and converting quantitative financial data into information, and information into intelligence—intelligence that can be acted upon for the corporate good.
Among contemporary alternatives, activity-based costing (ABC), the balanced scorecard (BSC), and economic value added (EVA) all provide different perspectives on financial performance. Integrating them provides a powerful view of overall performance. And research continually shows that EVA leaders are shareholder value leaders.
Activity-Based Costing (ABC)
ABC can transform the quality of data and information underlying key operational and strategic decision-making by transforming how costs are calculated and presented. It is detailed and takes a fair amount of work to implement. But done well, ABC can make for what Dr. Phil calls "a life-changing day." Among other things, activity-based costing can accurately show how changes in service affect cost— and profitability. It can link indirect costs/resources with specific customers and supply flows, and bring focus to high-cost activities and processes. It provides more complete and more accurate visibility to costs and trade-offs.
The objectives of the exercise are to understand the profitability of specific customers and products, to understand cost drivers and to shine a light on where cost reduction and value creation are needed, to know why costs go up or down, and to communicate that information throughout the organization. In summary, activity-based costing is a technique to accurately associate both direct and indirect costs with those elements that consume an organization's resources—activities, customers, products, and/or individual supply chain flows. It translates and transforms traditional reactive cost reporting into proactive actionable information.
The process begins with a two-stage approach to assigning costs: resource costs assigned to activities, and activity costs assigned to products and customers. Resource costs are assigned to activities based on "drivers," and activity costs are the total of all resources necessary to accomplish the activity. Not only does the activity cost show all the resources, but it also identifies resources needed—or not needed— when activity volumes change.
Typically, the level of costing detail must be carefully considered—generally, it falls into the range of plus or minus 30 items. In all cases, costs are assigned on a per-activity basis—per shipment, per unit, etc.
Finally, cost objects are defined—customers, channels, products, and so forth—and a bill of activities, resembling a manufacturing bill of materials, is constructed to incorporate all relevant activities and their costs.
Economic Value Added (EVA)
EVA is a proprietary term popularized by the investment firm Stern Stewart. It is a powerful tool in corporate performance analysis, positing that nothing we do is important unless it helps create value. That value—the economic value added—is defined as NOPAT (net operating profit after taxes) minus the cost of capital times total asset value.
NOPAT is simply net profit minus taxes, and net profit is merely gross margin less total expenses. Gross margin is sales minus cost of goods sold. Total assets are the sum of current assets plus fixed assets. Current assets are inventory, cash, and the like; fixed assets consist of plant, equipment, and similar items. Simple, so far.
Supply chain management can profoundly affect several elements of the EVA calculation, beginning with asset productivity—getting more out of existing plant and equipment assets, building or acquiring right-sized additional assets, or reducing space and equipment. It includes managing inventories to the right levels of investment and the right levels of performance, indicated by such measures as turns, service levels, and customer satisfaction.
We can drive out costs—waste—and manage costs to the optimum when reduction is not in the cards. We can affect sales and market share through superb operational execution in fulfillment and customer service.
Our work in reducing cycle times, improving flexibility, and reducing all forms of waste affects many elements of the EVA equation. And we can show these impacts in an EVA tree that builds to a picture of EVA results.
In short, supply chain management—in manufacturing, in procurement, in physical distribution, in planning, in information systems—can move the EVA needle like nobody else can. And increasingly, the EVA needle is the most important one of all.
Balanced Scorecard (BSC)
Some good early work in defining and describing the balanced scorecard was produced by David Norton and Robert Kaplan in the early '90s. They outlined four interlinked BSC perspectives:
The internal business perspective—what must we excel at?
The customer perspective—how do customers see us?
The financial perspective—how do we look to shareholders?
The innovation and learning perspective—can we continue to improve and create value?
The balanced scorecard approach links the cause-andeffect elements of the four perspectives, with innovation and learning driving improved operational performance. Elevated performance, in turn, supports improved positioning with customers, which ultimately translates to increased shareholder value based on a stronger top line, well-managed costs, and net results of a better bottom line and increased asset utilization.
There are variations on the balanced scorecard theme, in which diverse performance metrics—output, quality, human resources—are displayed. That's a good thing in general, but is not so useful as the more rigorous linkage from perspective to perspective. When you can demonstrate how training drives pick accuracy, which supports greater customer satisfaction, which, in turn, leads to higher sales, margins, and share value, the story becomes not just interesting, but compelling. And it's a story that C-level executives want and need to hear.
A word of caution: It is possible, and too easy, to create a diverse scorecard that may be called "balanced," but which is not relevant to real drivers and how they affect the dependent perspectives that make up how a supply chain succeeds or fails.
All together, now
How powerful is this notion of tying ABC, EVA, and BSC together? Nearly unbelievably so. Imagine managing from reported BSC results, and managing toward BSC objectives. And what if the financial perspective focused on economic value added—real, after-tax growth in the company's underlying economic value—and its positive impact on share value? Consider adding to that the ability to know— really know—the costs and profits associated with major activities, core products, and key customers.
Does this combination and integration define Utopia? Of course not. Is it practical and real? You bet. Is it easy? Not at all. Is it worth the effort? Contemplate which companies might be making it work. Look for them among the leaders. They're the leaders in cash-to-cash cycle performance; they're the leaders in shareholder value gains. They are outperforming their industries, and they are in the top tier of supply chains, irrespective of industry. Think Dell and Apple. Think Best Buy and Wal-Mart. Think Toyota, Procter & Gamble, and Johnson & Johnson. Think Tesco.
Are they all doing everything perfectly in terms of ABC/BSC/EVA integration and execution? Probably not, but they're clearly focused on knowing costs, building value, and general supply chain excellence.
“While there have been some signs of tightening in consumer spending, September’s numbers show consumers are willing to spend where they see value,” NRF Chief Economist Jack Kleinhenz said in a release. “September sales come amid the recent trend of payroll gains and other positive economic signs. Clearly, consumers continue to carry the economy, and conditions for the retail sector remain favorable as we move into the holiday season.”
The Census Bureau said overall retail sales in September were up 0.4% seasonally adjusted month over month and up 1.7% unadjusted year over year. That compared with increases of 0.1% month over month and 2.2% year over year in August.
Likewise, September’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.7% seasonally adjusted month over month and up 2.4% unadjusted year over year. NRF is now forecasting that 2024 holiday sales will increase between 2.5% and 3.5% over the same time last year.
Despite those upward trends, consumer resilience isn’t a free pass for retailers to underinvest in their stores by overlooking labor, customer experience tech, or digital transformation, several analysts warned.
"The 2024 holiday season offers more ‘normalcy’ for retailers with inflation cooling. Still, there is no doubt that consumers continue to seek value. Promotions in general will play a larger role in the 2024 holiday season. Retailers are dealing with shrinking shopper loyalties, a larger number of competitors across more channels – and, of course, a more dynamic landscape where prices are shifting more frequently to win over consumers who are looking for great deals,” Matt Pavich, senior director of strategy & innovation at pricing optimization solutions provider Revionics, said in an email.
Nikki Baird, VP of strategy & product at retail technology company Aptos, likewise said that retailers need to keep their focus on improving their value proposition and customer experience. “Retailers aren’t just competing with other retailers when it comes to consumers’ discretionary spending. If consumers feel like the shopping experience isn’t worth their time and effort, they are going to spend their money elsewhere. A trip to Italy, a dinner out, catching the latest Blake Lively and Ryan Reynolds films — there is no shortage of ways that consumers can spend their discretionary dollars,” she said.
Editor's note:This article was revised on October 18 to correct the attribution for a quote to Matt Pavich instead of Nikki Baird.
Chinese supply chain service provider JD Logistics today announced plans to double its overseas warehouse space by the end of 2025 as part of the company’s broader global supply chain strategy to meet the growing demand for cross-border logistics solutions.
As part of that effort, the company will also expand its network of bonded and direct-mail warehouses. That would mark a significant expansion since JD Logistics—which is the logistics arm of JD.com and is also known as “JingDong Logistics”—currently operates nearly 100 bonded, direct mail, and overseas warehouses. Those facilities total about 10 million square feet in markets such as the U.S., Germany, the Netherlands, France, the U.K., Vietnam, the UAE, Australia, and Malaysia.
Specifically, JD Logistics said it is focused on expanding its presence in Europe and the U.S., establishing collaborative supply chain networks capable of delivering fulfillment services within 24 hours in several regions. In support of that, the company plans to increase its international cargo flights from China to destinations such as Malaysia, South Korea, Vietnam, the U.S., and Europe to enhance cross-border transportation services. It will also explore the development of self-operated transportation and delivery capabilities overseas.
The market for environmentally friendly logistics services is expected to grow by nearly 8% between now and 2033, reaching a value of $2.8 billion, according to research from Custom Market Insights (CMI), released earlier this year.
The “green logistics services market” encompasses environmentally sustainable logistics practices aimed at reducing carbon emissions, minimizing waste, and improving energy efficiency throughout the supply chain, according to CMI. The market involves the use of eco-friendly transportation methods—such as electric and hybrid vehicles—as well as renewable energy-powered warehouses, and advanced technologies such as the Internet of Things (IoT) and artificial intelligence (AI) for optimizing logistics operations.
“Key components include transportation, warehousing, freight management, and supply chain solutions designed to meet regulatory standards and consumer demand for sustainability,” according to the report. “The market is driven by corporate social responsibility, technological advancements, and the increasing emphasis on achieving carbon neutrality in logistics operations.”
Major industry players include DHL Supply Chain, UPS, FedEx Corp., CEVA Logistics, XPO Logistics, Inc., and others focused on developing more sustainable logistics operations, according to the report.
The research measures the current market value of green logistics services at $1.4 billion, which is projected to rise at a compound annual growth rate (CAGR) of 7.8% through 2033.
The report highlights six underlying factors driving growth:
Regulatory Compliance: Governments worldwide are enforcing stricter environmental regulations, compelling companies to adopt green logistics practices to reduce carbon emissions and meet legal requirements.
Technological Advancements: Innovations in technology, such as IoT, AI, and blockchain, enhance the efficiency and sustainability of logistics operations. These technologies enable better tracking, optimization, and reduced energy consumption.
Consumer Demand for Sustainability: Increasing consumer awareness and preference for eco-friendly products drive companies to implement green logistics to align with market expectations and enhance their brand image.
Corporate Social Responsibility (CSR): Companies are prioritizing sustainability in their CSR strategies, leading to investments in green logistics solutions to reduce environmental impact and fulfill stakeholder expectations.
Expansion into Emerging Markets: There is significant potential for growth in emerging markets where the adoption of green logistics practices is still developing. Companies can capitalize on this by introducing sustainable solutions and technologies.
Development of Renewable Energy Solutions: Investing in renewable energy sources, such as solar-powered warehouses and electric vehicle fleets, presents an opportunity for companies to reduce operational costs and enhance sustainability, driving further market growth.
The clean energy transition continuing to sweep the globe will give companies in every sector the choice to either be disrupted or to capitalize on new opportunities, a sustainability expert from Deloitte said in a session today at a conference in Orlando held by the enterprise resource planning (ERP) firm IFS.
While corporate chief sustainability officers (CSOs) are likely already tracking those impacts, the truth is that they will actually affect every aspect of operations regardless of people’s role in a business, said John O’Brien, managing director of Deloitte’s sustainability and climate practice.
For example, regulatory requirements on carbon emissions are expanding in every region, which means that even if a specific company doesn’t have to change its own practices, it will almost definitely need to flex to accommodate its partners and suppliers as they track scope 3 emissions or supply chain practices.
Likewise, companies are starting to challenge the classic concept of “force majeure” events than can cancel service providers’ contractual duties due to unforeseeable weather events. As the new argument goes, extreme weather patterns increasingly occur in accordance with climate scientists’ forecasts, so those hurricanes and wildfires are in fact foreseeable after all.
But one strategy for coping with the cost of those changes is to mine the power of the data that most companies will soon need to collect as part of their evolution. Instead of simply tracking its trucks to trim their routes and emissions, a transportation company could use the same data to manage their maintenance and fuel consumption.
“The climate management transition is going to be a massive disruption, but with that comes massive opportunity,” O’Brien said from the keynote stage at the “IFS Unleashed” show. “Don’t waste compliance efforts just on compliance, use it to create new value. You’re collecting all that new data, so use it!”
A real-time business is one that uses trusted, real-time data to enable people and systems to make real-time decisions, Peter Weill, the chairman of MIT’s Center for Information Systems Research (CISR), said at the “IFS Unleashed” show in Orlando.
By adopting that strategy, they gain three major capabilities, he said in a session titled “Becoming a Real-Time Business: Unlocking the Transformative Power of Digital, Data, and AI.” They are:
business model agility without needing a change management program to implement it
seamless digital customer journeys via self-service, automated, or assisted multi-product, multichannel experiences
thoughtful employee experiences enabled by technology empowered teams
And according to Weill, MIT’s studies show that adopting that real-time data stance is not restricted just to digital or tech-native businesses. Rather, it can produce successful results for companies in any sector that are able to apply the approach better than their immediate competitors.