Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

1.3.2b Return on Net Assets (RONA), Net Working Capital and Supply Chain Initivative (SCI) — Resolving Conflicting QCDF Objectives

Intended learning outcomes: Explain the potential for conflicting QCDF objectives. Present terms such as return on net assets (RONA), net income, profit after tax, net working capital, and primary entrepreneurial objective. Disclose the objective of a supply chain initiative (SCI).

Continuation from previous subsection (1.3.2).

Some possible strategies, shown as example profiles in Figure, illustrate that the four target areas result in a potential for conflicts among objectives. There are even conflicts within the area of costs itself: As we will show later, reduction of inventory with a simultaneous increase of capacity utilization can result in goal conflict.

Fig.        Potential for conflicting entrepreneurial objectives.

  1. High quality of product or process tends to result in high costs and long lead times. There is also a tendency toward repeatable processes, and thus to a low degree of flexibility.
  2. The shorter the delivery lead times, the higher the costs: To achieve short delivery lead times, stock or over­capacity is a must. Short lead times can result in cost of poor quality and reductions in flexibility (for example, reduced product variety).
  3. A high degree of flexibility in achieving customer value, through product variety, for example, leads either to long delivery lead times (as little inventory can be stocked) or to high costs due to unusable inventory of product variants.
  4. Low costs, due to high capacity utilization and simultaneous avoidance of stock, result in long delivery lead times, cost of poor quality, and reductions in flexibility in the range of goods.

Determining opportunity cost implicitly determines the relationship between entrepreneu­rial objectives in the four areas in Figure and the primary entrepreneurial objective.

The primary entrepreneurial objective, the achievement of which logistics, operations, and supply chain management are intended to support, is maximization of return on net assets (RONA).

Return on net assets (RONA) is defined as (net income) / (fixed assets + net working capital). Note: only fixed operating assets should be included in the calculation.

Operating assets are the resources owned by a company for productive purposes. [note 113].

Net income is the profit that a firm has after subtracting costs and expen­ses from the total revenue.

Profit after tax is also called bottom line. [note 114].

Net working capital is defined as current assets minus current liabilities, that is, the capital that is locked up in the “short-term” operating business. It is the fraction of the operating assets that can be converted into cash within the normal business cycle, yet is secured by long-term liabilities or equity. [note 115].

A particular goal in any of the four areas does not always support the primary entrepreneurial objective. This is true not only for daily decisions but also for supply chain initiatives.

A supply chain initiative (SCI) is a project or an investment aiming to improve supply chain performance.

For example, if investments to reduce lead time do not result in increased demand or a larger market share, then return decreases rather than increases (see Section 1.7.2). Section 1.7.3 presents a method for assessment of the economic value (added) of SCIs.

Course section 1.3: Subsections and their intended learning outcomes