Adding Enterprise Value

Mitigating Investment Decision Risks by Assessing the Economic Value of Supply Chain Initiatives (diss.)

Researcher:

Dr. Oliver Schneider

Financed by:

The Professorship’s own resources

Motivation:

Logistics and operations management provide for the competitive advantage and the
economic success of a company by assuring a reliable satisfaction of customer needs. These management areas focus on improving the operational excellence, which is also one lever to increase enterprise value, through increasing revenues, reducing costs, and reducing capital lockup. In comparison, the main goal of financial managers is to ensure and increase long-term enterprise value for the stockholders
through an effective use of capital. For this purpose, they need to assess investments
with regard to new buildings, machinery, and other improvement programs for increasing operational excellence.
Consequently, many companies have gone through several waves of improvement
programs, at first focusing rather on companyinternal aspects. However, in recent decades, companies have created multiple-tier supply chains, spanning significant distances and covering various time zones. This has resulted in increased lead times and decreased transparency, and extended the management scope to activities outside the factory.
In this context, the concept of supply chain management (SCM) has gained importance. SCM tries to integrate information and material flows from the suppliers’ suppliers to the customers’ customers. Driven by advances in IT, SCM facilitates the emergence of new business models like lead logistics services, supported by more comprehensive planning tools. Moreover, SCM is attracting more and more top management attention, leading to the demand for a clear orientation towards enterprise value, rather than a focus on costs. Thus, SCM is becoming a truly integrated management concept by also including the management of financial processes and cash flows.
However, logistics managers struggle to integrate a true value orientation into their daily management decisions, leading to a discrepancy between the demand coming from top management and the reality of their assigned  management tasks. One major reason for this discrepancy is that existing SCM concepts are unable to clearly show how SCM contributes to value generation. Thus, supply chain managers fail to articulate the real value of their solutions to the boardroom, in which most members primarily have a finance mindset. As a result, investment decisions on supply chain improvement programs are currently based on many assumptions about their  financial impact, leading to a high uncertainty about the true return on the investment.

Objective and Results:

The dissertation describes an approach to fill this gap. The developed method consists of seven steps. The key element and main innovation of the approach is the use of the SCORmodel and the identified relationships between related supply chain events and the different elements of working capital. Any supply chain can be displayed accordingly, providing an integrated view of operational supply chain performance and the resulting utilization of working capital. Using the same approach to display a changed supply chain performance (ex ante and/or ex post), and resulting changes in capital utilization, makes it possible to calculate the contribution of the initiative causing this change in supply chain performance to enterprise value, based on the EVA.
The integrated view links the logistics and financial managers’ perspectives on the  supply chain and provides the required common language for assessing the  contribution of supply chain improvement initiatives to enterprise value. The use of  EVA facilitates a comprehensive and long-term understanding of enterprise value and allows the use of 1) a truly value-based investment decision and target-setting, and 2) gain-sharing elements in contracts with supply chain partners or internal incentive schemes.

Publication:

The dissertation will be published in a slightly changed version as a book in the vdf Hochschulverlag AG at the ETH Zurich in March 2010. It will be possible to order the book directly at the BWI Center for Industrial Management.