The full version of this article is available on Harvard Business Online (subscription required).
The Idea in Brief
Supply chains tie up enormous costs and assets, and the ramifications of how companies manage them reverberate to every corner of the business—and the balance sheet. Today, product companies have up to 60% of their net assets tied up in inventory, plants, warehouses, and similar supply chain assets. A staggering 80% of all costs, including cost of goods sold, are typically embedded in a company’s supply chain.
Yet in spite of this financial heft, companies too seldom look to supply chain improvements as a way to boost return on invested capital (ROIC). Companies most often focus on growing ROIC by building up the numerator: earnings. But shrinking the less-obvious denominator by accelerating asset turns can also have a huge impact.
In our experience at Bain & Company, introducing effective customer-centric supply chain management techniques can produce improvements in ROIC averaging nearly 30%. As a bonus, companies that trim assets also significantly outgrow their competitors in revenue. Yet compared with other efficiency improvements over the last 10 years, asset productivity continues to stagnate at the average company. The bottom-line importance of asset turns will only grow as the economy continues to recover and as interest rates inevitably rise.
The good news is that, by adopting a new way of thinking and implementing some new methods, companies are producing amazing improvements in supply chain efficiency, effectiveness, and flexibility. And as they drive out assets, they drive up the value of the whole company.
Embedding supply chain math in three key decisions—all focused on the customer
Firms looking to realize a higher level of ROIC improvements are using customer-focused insights about supply chain economics to drill deeper into three key questions:
1. What do we sell? Can we rationalize stock-keeping units (SKUs) and eliminate complexity, costs, and assets?
2. To whom do we sell? Do we have the right marketplace focus, aiming our supply chain capabilities where they can make money for the company?
3. How can we best get what we sell to our customers? Are our infrastructure and service policies aligned to get the job done while driving the right costs and assets?