The key to a rising CPO’s success is the often the ability to talk shop with the CFO and explain the advantages of supply chain management in terms that the CFO can understand. It’s often the quickest way to a seat at the boardroom table. Traditionally, this has come down to the ability to provide the CFO with the ROI (Return on Investment), the ROIC (Return on Invested Capital), and the ROE (Return on Equity) of every investment. This is because ROI measures the efficiency of investment, the ROIC measures the company’s efficiency at allocating the capital under its control to profitable investments, and the ROE measures the profitability of the investment. But will CPOs soon have to add another measure to their financial lexicon?
Near the end of A.T. Kearney’s Higher Visibility, Greater Expectations that chronicled the results of their recent Indirect Procurement study, they discuss their new approach to translate the business case into a language more recognizable to finance executives which revolves around their new ROSMA (Return on Supply Management Assets) metric. Now, it sounds good … because what could be better than a financial metric (which gets a CFO excited) specifically designed to showcase the performance of supply management … but does it deliver?
Breaking it down, A.T. Kearney defines ROSMA(c) as
financial results delivered / invested supply management assets where the financial results are the product of spend coverage, velocity, category yields, and compliance plus the net extended benefits and the invested supply management assets are the sum of period costs and structural investments. This sounds logical, and when you consider that twenty different factors go into the calculation of the financial results and that twelve different factors go into the calculation of the invested supply management assets, it sounds complete, but it is sound. And more importantly, will CFOs bite?
To answer this question, I’ve invited Robert Rudzki, SI’s resident expert on supply chain finance (and [co-]author of Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the supply management best seller Straight to the Bottom Line), to chime in. This is what he had to say:
AT Kearney’s ROSMA(c) framework offers another tool to connect the supply management function with its colleagues in the financial function. As a former practitioner with a dual background in finance and supply management, I appreciate the applicability of the concept. I do have a few specific questions; for example, does “supply management assets” include the assets participating from other functions outside of supply management? If so, then ROSMA(c) appears to be a comprehensive framework that can withstand the scrutiny of the toughest bean counters.
The more fundamental question however is this: do we really need a another framework, or do we just need to do a better job connecting to the financial metrics that are already being used by the CEO and CFO to manage the business?
In our experience, CPOs can dramatically improve their internal credibility with the executive staff by relating their proposed agenda (including the need to transform supply management) to the metrics that the senior staff and the Board of Directors already monitor. Such key metrics as ROIC / ROE / RONA (Return on Net Assets), cash flow and EPS (Earnings Per Share), are highly visible and relevant metrics. Rather than introduce a new metric, we have generally found it to be more productive — and quicker at achieving credibility — to relate the proposed CPO agenda directly to the particular metrics currently in use by the company’s senior management.