A new book released recently in the US shows how a successful supply chain can contribute to a company’s economic profit and thus increase shareholder value.

The book, The New Supply Chain Agenda, was written by supply chain experts Reuben Slone, Paul Dittmann and the late John Mentzer.

The following is a brief excerpt:

Given the hype of the last ten years surrounding the supply chain excellence of companies such as Walmart, Toyota, and Amazon, why do so many firms still not get it? 

The success of the firms ranked in an AMR Research's Supply Chain Top 25, such as Apple, IBM, and Proctor & Gamble, should have made everyone focus on supply chain as the driver of shareholder value.

The most neglected pathway to increasing shareholder value runs through the supply chain.

This isn’t a cost-cutting argument, though supply chain excellence often dramatically reduces costs over the long term.

In fact, reaching excellence is expensive, both in terms of executive attention and actual cash outlays.

Supply chain excellence drives shareholder value because it controls the heartbeat of the firm – the fundamental flow of materials and information from suppliers through the firm to its customers.

Unfortunately, too many companies have a supply chain in which this flow is crippled by the lack of a strategy, the absence of talent, a misapplication of technology, internal and external silos, and a basic lack of discipline in managing change.

The supply chain isn’t just trucks, pallets, and warehouses. But being trapped in a traditional view is one of the primary reasons that few companies are taking advantage of the shareholder value opportunity presented by supply chain excellence.

You, like many executives we talk to, may be skeptical that investing in this new, expansive vision of a supply chain is worth it.

So we’ll begin by looking at the unequivocal link between supply chain excellence and shareholder value by focusing first on economic profit, which is the linchpin between the two.

Economic Profit drives shareholder value

Economic profit very simply is profit less the cost of capital needed to generate that profit.

That profit is a big deal because it means the company is delivering returns above the cost of the capital invested.

Generating economic profit should be the prime goal of all firms.  Most CEOs intuitively know that economic profit drives shareholder value. But many don’t clearly comprehend the linkage that begins at supply chain excellence and continues to shareholder value via economic profit.

Supply chain excellence very often can deliver the most upside to economic profit and shareholder value because its full potential has been so underutilized in the past compared to other corporate initiatives.

We believe the Global Financial Crisis will increase the focus on economic profit. In an era of tighter credit, supply chain levers can be used to free cash reserves from balance sheets rather than depending on restricted credit markets. 

The opportunity to increase shareholder value in the future will be to take care of both the income statement and balance sheet through supply chain excellence.