The Impact of Supply Chain Strategy on Shareholder Value
I had this article marked for some time now and I finally got to read it. It describes the connection between Shareholder Value and the concept of Value Based Management (VBM) and Supply Chain Strategy.
The emergence of the Shareholder Value demands lead to the Value Based Management approach to operationalize the concept. The goal of both is to enable companies to generate real value, with a clear focus on the shareholders of the company in focus. Real value is created when a company can not only compensate investors for the total costs involved in the investment, but also provide a premium which compensates for the additional risk (in comparison to a risk free investment) incurred.
Shareholder Value can be seen and measured from an internal and external view point. Internally usually the Economic Value Added (EVA®) is used. It is calculated using the Operating Profit and the true cost of capital. Alternatively, if measured from outside a measure based on the market capitalization is used.
Driver of Shareholder Value
Revenue growth, operating cost reduction, working capital efficiency, and fixed capital efficiency are the drivers of Shareholder Value.
It is obvious that Supply Chain strategy directly or indirectly affects all these drivers.
A very important notion of VBM for the Supply Chain strategy is the focus on discounted cash flows (DCF) as the basis for the profits of multi-period models.
To increase discounted cash flows one has two options: increase / decrease revenues / cost or accelerate revenues / decelerate cost.
Supply Chain Strategies
The following strategies therefore can improve the Shareholder Value:
- Decrease end to end pipeline times (especially focus on the cash to cash cycle)
- Partner with the suppliers to reduce the lead times of all (!) incoming products
- Slash internal lead times, by integrating and optimizing processes
- Improve information flow from the demand side
- Reduce risks to decrease capital costs associated with the company
Current research focusses very much on working capital as a driver for better Shareholder Value. Supply Chain Management can be the key in achieving the necessary reductions in receiveables, debt and inventory. You can find related links in the section below.
Christopher, M., & Ryals, L. (1999). Supply Chain Strategy: Its Impact on Shareholder Value The International Journal of Logistics Management, 10 (1), 1-10 DOI: 10.1108/09574099910805897