Driving ROCE...How to Identify and Impact KPI's
By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

If we accept that retailers’ published accounts can be a useful source of ‘negotiatable’ information, and that the share price is a major motivator at all levels within the customer’s organisation, then it is perhaps helpful to explore ways in which practical use can be made of the insights….

By relating each aspect of the supplier’s offering to specific parts of the customer’s Balance Sheet and Profit & Loss Account, the KAM can demonstrate the positive impact upon overall financial performance and thus share price, thereby appealing directly to any role or function, at any level, within the customer’s organisation. Systematic analysis of ROCE and its elements facilitates this process.

Bearing in mind that Return on Capital Employed is simply Net Profit before Tax, divided by Fixed Assets + Current Assets – Current Liabilities, then taking each ratio separately allows the KAM to illustrate positive impacts upon the key performance indicators.

Impact upon net profit can be demonstrated via the P&L. The supplier can use category management to improve retailer sales in that a comprehensive offering (brand and private label in a mix reflecting the synergies of the retailer’s knowledge of shopping behaviour combined with the supplier’s knowledge of consumption behaviour), well presented/displayed at point of sale can optimise shopping basket size, the price the consumer/shopper is prepared to pay and thereby net profit margin. Tailoring the offer specifically to retailer need (ECR), and stripping out unwanted add-ons will optimise the customer’s gross margin, at lower cost to the supplier.

Within the Balance Sheet, Fixed Asset utilisation can be improved by skillful management of retail space, with Sales and Profit per sq.m. as key indicators. Current Assets (stock levels) management can be improved by more effective supply chain management (smaller, more frequent deliveries) which will reduce the retailer’s stockholding costs, without the risk of out-of-stocks… Reduced stock quantities will also have a positive impact upon the retailer’s storage costs.

The supplier also helps the retailer by offering credit to a cash-based business, in that the customer is given a permanent interest-free loan and is thereby able to run the business with negative working capital, with much of the business risk being carried by the supplier. It soon becomes obvious that this constant meeting of customer need, especially through improved service level, can have a negative impact upon the supplier’s ROCE.

For this reason it is essential for the KAM to become skilled in calculating the cost of each element of the service package, to become adept at relating this cost to its value to the customer’s business to then negotiate a mutually profitable settlement between equals. Failure to so do will result in a gradual dilution of the supplier’s ROCE, a lowering of the share price and ultimately an inability to meet expectation created by the ROCE approach to customer management…

Ideally, as retailers become more adept at relating the supplier offering to their retail organisation’s ROCE performance, the measure will be cascaded down through the entire organisation. This means setting an ROCE goal for the global company, and then allocating ROCE performances to country, region, format, store, department, category, brand, SKU, and back to the share price as a series of portfolio performances. A supplier will enter the process at whatever stage ROCE is below the required level and then adjust the support mix to improve the outcome.

However, well before that stage is reached, pro-active KAMs will have benefited by taking a business management approach to identifying a series of key leverage points and building a strong negotiation platform, all courtesy of the customer’s own Balance Sheet and P&L…