1. Channel Management and Logistics
Measures of Financial Performance of a Supply Chain
Channel Management and Logistics

2. Financial Measures of Performance
Return on Equity (ROE)
Return on Assets (ROA)
Return on Financial Leverage (ROFL)
Accounts Payable Turnover (APT)
Payment Weeks
Accounts Receivable Turnover (ART)
Collection Weeks
Inventory Turnover (INVT)
Inventory Weeks
Property, Plant & Equipment Turnover (PPET)
Cash-to-Cash Cycle (C2C)

3. Return on Equity (ROE)
Return on equity (ROE) is the main summary measure of a firm’s performance. It measures the return on the shareholders’ equity.
Annual Net Income
Average Stockholders’ Equity
ROE =
Net Income is after tax income; can be found from income statement
Average Stockholders’ equity is the sum of the stockholders’ equity at the beginning and the end of the year, divided by 2
It is a very important measure; but don’t rely solely on this
Always check with other companies within the industry, and also performance over time.
Watch out if debt financing is used (ROE increases, but income stays same)

4. Return on Assets (ROA)
Return on assets (ROA) measures the return earned on each dollar invested by the firm in assets
Annual Net Income
Average Total Assets
ROA =
Net Income is after tax income; can be found from income statement
Average Total Assets is the sum of the sum of the total assets at the beginning and the end of the year, divided by 2. can be found in balance sheets of two consecutive years
It is a very important measure; but don’t rely solely on this
Always check with other companies within the industry, and also performance over time.

5. Return on Financial Leverage (ROFL)
Return on financial leverage (ROFL) measures the return of ROE that can be attributed to financial leverage (management of accounts payable, debt, etc)
ROFL = ROE - ROA
Measures the degree to which an investor or a business is utilizing borrowed money.
Not always bad – see examples.

6. Accounts Payable Turnover (APT)
One important ratio that defines financial leverage is accounts payable turnover (APT)
Cost of goods sold
Accounts payable
APT =
Another important measure is:
Payment (weeks) = 52 / APT
Small APT means that the company is able to use the money it owes to its suppliers in order to finance a considerable amount of its operations
Amazon used this money to finance 20+ weeks of its operations during the year

7. Other Turnover Ratios
Similarly, we define Accounts Receivable Turnover (ART), Inventory Turnover (INVT), and Property, Plant and Equipment Turnover (PPET)
Sales Revenue
Accounts receivable
Cost of goods sold
Inventories
Sales revenue
PP&E
ART =
Collection (weeks) = 52 / ART
INVT =
Inventory (weeks) = 52 / INVT
PPET =

8. How to improve ROA
ROA can be written as the product of two ratios: profit margin and asset turnover
Earnings before interest
Sales Revenue
Total Assets
(Profit Margin)
ROA =
(Asset Turnover) x
To improve ROA either improve the profit margin or the asset turnover

9. Cash-to-cash cycle (C2C)
Cash-to-cash (C2C) cycle roughly measures the average amount time from when cash enters the process at cost to when it returns as collected revenue
C2C = - weeks payable (52/APT)
+ weeks in inventory (52/INVT)
+ weeks receivable (52/ART)

10. To improve ROA Improve ROA Increase Profit Margin
Increase Asset Turnover
Get Better Prices
Reduce
Expenses
Increase
ART
Increase
INVT
Increase
PPET
Provide higher value
Be more responsive
Good management
Pay attention to high costs
Collect AR quickly!
Turn inventory quickly around
Monitor infrastructure costs

11. Financial data from Amazon and Barnes & Noble
B & N
2011
2010
Y/Y
2012
Sales Revenue
48,077
34,204
41%
7,129
6,999 2%
Cost of goods sold
37,288
26,561
40%
5,218
5,206 0%
Gross profit
10,789
7,643
1,911
1,793 7%
Selling, General and Administrative expense
9,927
6,237
59%
1,739
1,629
Depreciation and amortization
233
229
Operating Income
862
1,406
-39%
-61
-65
-6%
Interest expense 65 39
67% 35 57
Other income (net)
137
130 5%
Income before income taxes
934
1,497
-38%
-96
-122
-21%
Income taxes
303
345
-12%
-28
-48
-42%
Net income
631
1,152
-45%
-68
-74
-8%
Assets
Cash and cash equivalents
5,269
3,777 54 59
Short-term investments
4,307
4,985
-14%
Accounts receivable
2,922
1,783
64%
160
150
Inventories
4,992
3,202
56%
1562
1375
14%
Prepaid expenses
221
162
36%
Total current assets
17,490
13,747
27%
1,997
1,746
Property, plant and equipment
4,417
2,414
83%
623
704
Goodwill
1,955
1,349
45%
520
524
-1%
Other assets
1,416
1,287
10%
625
621 1%
Total Assets
25,278
18,797
34%
3,765
3,595
Liabilities
Accounts payable
14,896
10,372
44%
959
949
Short-term debt
867
786
Total current liability
1,826
1,735
Long-term debt
324
313 4%
Other liabilities
2,625
1,561
68%
729
19%
Total liabilities less equity
17,521
11,933
47%
3,017
2,777 9%
Stakeholders equity
7,757
6,864
13%
748
818
-9%

12. Supply Chain Performance
2011
2010
2012
ROE 8%
17%
-9% 9%
ROA 4%
-2% 2%
ROFL
-7% 7%
APT
2.50
2.56
5.44
5.49
Payment Weeks
20.77
20.31
9.56
9.48
ART
16.45
19.18
44.56
46.66
Collection Weeks
3.16
2.71
1.17
1.11
INVT
7.47
8.3
3.34
3.79
Inventory Weeks
6.96
6.27
15.57
13.73
PPET
10.88
14.17
11.44
9.94
C2C
-10.65
-11.33
7.18
5.37

13. Supply Chain Performance
2011
2010
2012
ROE
34%
29%
-11% 8%
ROA
25%
-3% 5%
ROFL 4%
-8% 3%
APT
4.40
3.29
4.94
4.86
Payment Weeks
11.81
15.80
10.52
10.71
ART
20.16
11.84
5.38
5.61
Collection Weeks
2.58
4.39
9.66
9.27
INVT
83.03
37.62
11.73
11.74
Inventory Weeks
0.63
1.38
4.43
PPET
13.92
13.68
20.99
21.72
C2C
-8.60
-10.03
3.57
2.99

14. Question:
What conclusions can you draw about these companies’ supply chains performance?
Check their ratios:
ROE
ROA
ROFL
Payment Weeks
Collection Weeks
INVT
Inventory Weeks
C2C