Supply Chain Metrics That Matter: A Critical Look at Operating Margin
Using Financial Data from Corporate Annual Reports to Better Understand Operating Margin Performance by Industry
12/10/2013 By Abby Mayer Research Associate, Supply Chain Insights LLC
If a supply chain leader cannot demonstrate improvement in operating margin, they are often fired. Consequences are severe. However, as complexity in global supply chains has increased,
it has become increasingly difficult to improve profitability metrics. Among supply chain leaders, operating margin is one of the preferred measures of profitability.
Successful supply chain management is about balance and particularly the balancing of growth, profitability, cycle and complexity. This is what we call The Effective Frontier. Supply chain management is getting tougher as commodity markets get more volatile, wage prices increase, and product life cycles shorten. It is up to the supply chain leader to design the network and processes to protect margin and balance the supply chain. This is becoming an increasingly difficult task.
The challenges are many and they vary by industry. Commodity pressure is higher than at any previous point in time as shown in Figure 2. There is a limited toolkit for how to offset margin pressure. They include better planning, transportation optimization, rethinking network design, improved Sales & Operations (S&OP) execution, and Kanban events with suppliers and customers. None are easy or quick fixes. Additionally, while many think that calculating cost and monitoring profitability should be easy,
this is not true. In our research, we find that only 24% of companies surveyed can easily access total supply chain cost information. The ability to get to the data and connect the dots on cost to operating margin performance remains difficult for most. In fact, as shown in Figure 3, for 53% of survey respondents, getting to total supply chain cost is difficult.