The Du Pont method of performance measurement was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). DuPont analysis tells us that ROE is affected by three things:
– Operating efficiency, which is measured by profit margin
– Asset use efficiency, which is measured by total asset turnover
– Financial leverage, which is measured by the equity multiplier
A well performed supply chain digitization project affects the operating efficiency in terms of usage of resources (less resources spent on non-value added activities), which in turn increases the profit margin. In addition, supply chain improvement projects lower stock levels substantially and total asset turnover increases. The final effect on Return on Equity (ROE) will be determined by the company’s financial leverage.
The model: ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)
Supply chain digitization, including maximum connectivity of trading partners, control of status and deviations, and performance measuring, is highly profitable.