Supply Chain Management Review

Robert A. Rudzki

Transformation Leadership - Part 2
October 4, 2007

 “Welcome to ‘Transformation Leadership’ – Part 2”

It’s not a stretch to say that most senior executives are unaware of the comprehensive impact that modern supply management can have on their companies. A big reason for this lack of awareness is that no-one has communicated the opportunity in the language of the executive suite.

If there is one framework that I would want every senior executive to understand, and every CPO or CSCO to be conversant with, it is shown in the Figure. This is one of my favorite charts, and is the essence of relating supply management’s potential roles to the subject of improved corporate performance. Let’s walk through this framework carefully.

Two important measures of corporate performance are Return on Invested Capital (ROIC), and Cash Flow. For those desiring a definition, ROIC is calculated by taking the annual Earnings of a business and dividing it by the total capital invested in that business (long term debt and stockholder’s equity). ROIC is important because it is an indicator of the current health of a business. ROIC needs to exceed the corporate cost of capital for a business to be creating value for its shareholders.

Improving profits helps to improve both ROIC and Cash Flow. Reducing the capital intensity of your business helps to improve ROIC and Cash Flow. Improving profits while also reducing the capital needed to run the business has a powerful compounding effect on ROIC and Cash Flow.

So how to improve profits? Two ways: revenue enhancements and cost reductions. And, supply management can - and should - play an important role in each of those areas, as indicated with examples on the chart.

How to improve capital intensity? Two ways: working capital improvements, and capital expenditure improvements. Once again, supply management can - and should - play an important role in each of those areas.

To conduct a world-class opportunity assessment for your company, you would typically develop assessments of the improvement opportunities in each of the four categories shown on the chart. Then, to really tie it together for the executive audience, you should relate those improvement opportunities to the company’s actual income statement and balance sheet. Going that extra step allows you to demonstrate the impact on Net Income, on Earnings per Share, on ROIC and on Cash Flow – key areas of interest for most senior executives. It’s a powerful way to communicate the enormous potential of modern supply management - in the language of senior executives – and in a manner that is relevant to the specific company involved. It’s also critical for building a credible business case in support of a transformation intent.

Each situation is unique. However, it’s not unusual for this type of opportunity assessment – done correctly - to demonstrate that the ROIC of a company has the potential to double or triple from its pre-transformation levels. The question that ought to be on your mind, at this point in my narrative, is this:

            “If that’s correct, why aren’t there a lot of 20% ROIC super-performers in the business world?”

The answer is painfully simple: achieving that step-change in performance doesn’t just happen by itself. It takes leadership, and a well-designed and planned transformation roadmap.

More on that in my next segment.

(note: the Figure is © Copyright Greybeard Advisors LLC)

Posted by Robert A. Rudzki on October 4, 2007 | Comments (0)