Supply Chain Metrics that Matter

Appendix

The Methodology

In this section, we describe the methodologies used in the book to define the Metrics That Matter. Here we first define the financial ratios used to determine corporate performance, and then detail the math used to calculate the supply chain index used in Chapters 4–9.

Understanding the Financial Chain Ratios

Throughout the book, we reference a number of commonly used financial ratios. These ratios are based on the most common metrics that we find used by teams to measure corporate performance.

Each company has a unique potential. The size of the company matters as does the industry. Both have a major impact on the company's potential on the Effective Frontier. As a result, in the development of the tables in Chapters 4–8, we focused on companies with annual revenues greater than $1 billion in 2012.

The definitions of the most commonly used ratios in the analysis of corporate performance are listed here:

1. Cash-to-cash cycle = Days of inventory + Days of receivables – Days of payables
2. Current ratio = Total current assets/Total current liabilities
3. Days of inventory = (Days of inventory × 365)/Cost of goods sold
4. Days of receivables (Days of sales outstanding) = (Accounts receivable × 365)/Total sales
5. Days of payables = (Accounts payable * 365)/Cost of goods sold
6. Gross margin = Gross profit/Total sales
7. Inventory turns = Cost of goods sold/inventory
8. Operating margin = Operating income/Total sales
9. Return on assets = Net operating profit/Total assets
10. Return ...