For businesses with shareholders, the mandate is to create value, and all executive leadership teams are aligned on that goal. A major challenge in this mission is connecting that objective to the thousands of decisions being made every day across the business. Decisions about categories, suppliers, inventory, fulfilment and logistics that individually seem routine but collectively can determine whether the business is building value or quietly eroding it.
Most businesses have a reasonable handle on their gross margin. They can tell you which categories appear to be performing, which suppliers offer the best pricing, or how promotional activity is affecting returns. It is a well-understood metric and, for many organisations, it is where financial visibility effectively ends. The problem is that gross margin does not account for the cost of holding stock, the capital tied up in inventory, the capacity consumed across the distribution network, or the cumulative downstream effects of daily operational decisions.
To understand whether a business is really creating value, you need to get to the return on capital employed, which measures how efficiently a business generates operating profit from the total capital invested in it. It captures both sides of the equation: profitability and how well the business is using its assets and working capital.
Warren Swanepoel, Senior Consultant, Transformation at ThreeSixty Supply Chain Group, says this is where the disconnect begins.
“Finance teams talk about return on capital employed, growth and shareholder value. Operations talks about throughput, productivity, service and safety. Inventory Planning talks about stock turn and availability. Merchandising talks about sales and margin. When they’re all working in silos, no one can see how their individual decisions affect the collective whole,” Swanepoel says. “Most companies measure up to gross (or cash) margin because going beyond that requires granular visibility of the total cost to serve, and that is technically very difficult to do. In many businesses, managing return on capital employed on a day to day basis comes down to gut feel, assumptions and a little bit of hope or trust in the law of averages.”
The real question
Return on capital employed has two sides. On one side is EBIT, the path from sales through to operating profit. On the other is capital employed, which measures how efficiently a business uses its working capital and assets to generate those returns. Most companies hit a measurement wall on both sides. On the profitability side, companies stop at gross margin. On the capital side, at stock turn. Everything beyond that point, the total cost to serve, the cash conversion cycle, the true return on capital employed, remains out of reach.
“What if you could keep going?” Swanepoel says. “What if you could measure return on capital employed not just at the company level, but at a budget group level, at a category level, at a supplier level? What about even at the product level? What if you could see the impact on shareholder value at every level of the business where someone is making a commercial decision?”
ThreeSixty Supply Chain Group’s advanced commercial planning services help businesses push past that wall. Led by Swanepoel, the capability provides ongoing total cost of ownership modelling and decision support, giving companies the tools to measure return on capital employed at every level where decisions are being made.
“We can calculate not just what actual true commercial performance is but what the performance should actually be based on supply chain mechanics and principles. That gives you something real to aim at. You won’t get all the way there, life’s not perfect, but you’ll know where the opportunity is and which actions will drive the biggest result,” he says. “Where is margin too low, where is the cost to serve too high, where is working capital trapped, and what could you do differently today to deliver a measurable outcome?”
What’s at stake?
Consider a common scenario. A supply planner negotiates a discount by committing to a large minimum order quantity. On paper, better unit pricing and gross margin look like wins. In reality, the business is now sitting on months of stock which is consuming warehouse capacity that could be allocated to faster-moving product. In this case, discounts on slow moving stock can actually lead to a loss.
“Without a clear line of sight to real profitability, your investment strategy is compromised. You’re deciding where to grow, defend or exit based on incomplete information, and the margin you need relative to the actual cost to serve may be very different to what you think,” Swanepoel says.
Without visibility over the true cost to serve, businesses cannot see which product categories are genuinely delivering profitable growth. Swanepoel says he has seen large retailers have to completely rethink their perceived product champions once the full cost to serve is accounted for.
The consequences extend beyond individual buying decisions. When teams across sales, merchandising, inventory and operations each work to their own KPIs without a shared view of commercial performance, competing priorities create friction. A merchandiser chases margin. A supply planner optimises availability. An operations manager controls cost. Each decision may look sound in isolation, but collectively they can pull the business in different directions, committing to plans the business cannot afford to deliver, or missing opportunities that only become visible when the full picture is connected.
“The real challenge is establishing a shared measure that can guide these common trade-off decisions with confidence,” Swanepoel says. “When everyone can see how their decisions affect return on capital employed, you move from competing KPIs to co-ordinated action. That’s when businesses start to consistently deliver profitable growth rather than just chasing revenue.”
What would happen if you did it differently?
Closing this gap starts with building a complete picture of how the supply chain actually works: how product flows, where costs are incurred, and what drives cost at each stage. This assessment needs to be reconciled with the business’s own financials as a working model that matches real commercial performance.
From that foundation, a total cost of ownership model allows return on capital employed to be measured at the budget group, category, supplier and product level, showing businesses not just where they stand, but where the biggest opportunities for improvement sit.
The real value, though, comes from being able to test decisions before making them. Decisions such as switching suppliers, accepting a higher unit price but eliminating the minimum order quantity that forced you to hold months of stock. Or changing fulfilment models, moving from in-store stockholding to direct-to-customer delivery. Perhaps adjusting a safety stock parameter or a shelf allocation could free up working capital without materially affecting availability.
“Someone at the leadership table might say a particular product needs 99 per cent availability because it’s important to the business,” Swanepoel says. “Load that as a parameter in your planning system and your working capital goes through the roof. We can model that impact before the decision is made and help the business understand what it can actually afford.”
This kind of modelling is not a one-off exercise. Budgets shift, supplier arrangements change, product ranges evolve and operating costs move. The models need to be maintained and refreshed continuously to remain useful. For businesses that attempt to build this capability internally, the technical knowledge tends to sit with one or two people, and when those people move on, the capability can leave with them.
“This is one of the reasons it’s important to have a partner who lives and breathes the methodology,” Swanepoel says. “Someone who can maintain the models over time, provide objective insights and help businesses confront the decisions that are hardest to make, especially when the data challenges long-held assumptions.”
For supply chain leaders who suspect their business is making decisions based on incomplete financial visibility, the first step is honest assessment. Can your organisation measure return on capital employed beyond the company level? Do you know the true cost to serve for your highest-volume categories? If the answer is no, the gap between your boardroom objectives and your operational reality may be wider than you think.
Also featured in eCommerce News Australia
Our insights were adapted and featured in eCommerce News Australia. Read the published article.
