Financial metrics that predict supply chain effectiveness

14 March 2019

Many organisations are attempting to gain a competitive advantage through supply chain integration but struggle for efficiency and effectiveness. In supply chain management research, effectiveness has been equalised with supply chains’ flexibility and agility to customer demand. Effective management in a supply chain must consider metrics to be used. Metrics refer to measurement. Most people in business have heard the term financial metrics, which convey a unique message about a body of economic data. Financial metrics reveal characteristics that are not apparent when merely reviewing the data.

Traditional supply chain management is focused on both materials and information flows. Nevertheless, the financial flow which runs parallel to the flows of goods and information is also a critical aspect of supply chain integration. Many research papers empirically assess the influence of supply chain performance factors on financial performance of a firm. Yet, supply chain effectiveness measurement using integrated metrics that include both supply chain factors and financial performance factors have not been adopted.

The threats toward businesses from economic and financial downturns along with the complexity of the worldwide supply chain have caused distress and affect firms’ performance. The awareness of financial factors that contribute to making a business successful is important. It is also important for a financial manager of successful firms to know their firm’s possible actions that should be taken when their customers, or suppliers, go into bankruptcy. Similarly, firms should be aware of their own status, of when and where they should take necessary actions in response to their financial problems, as soon as possible rather than when the problems are beyond their control and reach a crisis. Therefore, to bring out all financial distress risk factors into open as early warning signals have vital importance for all enterprises.

The aim of my research is to design a tool for Chief Financial Officers (CFOs) to use to evaluate the health of the supply chain as well as to predict the failures. My key research questions are as following:

  1. Can we use publicly available financial metrics combined with supply chain knowledge to predict company failures?
  2. How do operations and supply chain metrics feed into financial metrics or vice versa? Can we design an early warning system as an issue detector of the health/effectiveness of the supply chain for CFOs?
  3. How should these metrics change depending on a company’s size and/or strategic positioning?

 

Diep N. Ly
PhD student
University of Auckland Business School