For businesses with shareholders, every supply chain decision ultimately influences value creation. Whether it involves selecting suppliers, managing inventory, determining fulfilment strategies, or designing logistics networks, these everyday operational choices shape how effectively a business uses its capital.
Yet many organisations still lack the financial visibility needed to understand whether those decisions are creating long-term value or quietly eroding it.
Most executive leadership teams are aligned around the goal of creating shareholder value. The challenge is connecting that objective to the thousands of decisions made every day across the business. Decisions about categories, suppliers, inventory, fulfilment and logistics may appear routine in isolation, but collectively they determine whether an organisation is building value or losing it.
Why gross margin only tells part of the story
Most businesses have a reasonable understanding of their gross margin. They can identify which categories appear to be performing, which suppliers offer the best pricing, and how promotional activity affects returns.
Gross margin is a familiar and widely used financial measure. For many organisations, however, it is also where financial visibility effectively ends.
The limitation is that gross margin does not capture the complete commercial picture. It does not account for the cost of holding inventory, the capital tied up in stock, the capacity consumed across distribution networks, or the cumulative downstream impact of daily operational decisions.
A product category may appear profitable based on margin alone, yet deliver significantly lower returns once inventory requirements, handling complexity, fulfilment costs and working capital commitments are considered.
Traditional supply chain metrics such as margin, stock turn and service levels provide valuable operational insights, but they do not always reveal whether the business is generating an appropriate return on the capital invested.
Understanding true business performance requires a broader view.
Why return on capital employed matters
To determine whether a business is genuinely creating value, organisations need to look beyond gross margin and understand return on capital employed (ROCE).
ROCE measures how efficiently a business generates operating profit from the total capital invested in it. Unlike margin-based measures, it captures both sides of the equation: profitability and how effectively the organisation uses its assets and working capital.
This provides a more complete picture of commercial performance.
The challenge is that many organisations struggle to connect ROCE to the operational decisions being made every day.
Finance teams focus on return on capital employed, growth and shareholder value. Operations measure throughput, productivity, service and safety. Inventory planning focuses on stock turn and availability. Merchandising teams concentrate on sales and margin.
Each function has valid objectives, but when these measures operate independently, organisations lose visibility into how individual decisions affect the overall business.
Most companies measure only as far as gross margin because moving beyond that requires detailed visibility into the total cost to serve. Achieving that level of insight is technically complex, and many organisations still rely on assumptions, experience and historical averages rather than measurable commercial data.
Breaking down organisational silos
Return on capital employed has two components: EBIT, which represents the path from sales to operating profit, and capital employed, which measures how effectively the business uses its assets and working capital.
Many organisations encounter a measurement ceiling on both sides.
On the profitability side, analysis often stops at gross margin. On the capital side, it typically ends with stock turn. Everything beyond that point—including total cost to serve, cash conversion cycles and true return on capital employed—remains difficult to measure.
The opportunity lies in extending visibility beyond these traditional boundaries.
What if return on capital employed could be measured not only at the company level, but also at a budget-group, category, supplier or product level? What if leaders could understand the impact of every major commercial decision on shareholder value before committing resources?
This level of visibility enables businesses to move from reporting historical performance to actively managing future outcomes.
It also creates a stronger connection between supply chain finance and operational decision-making, allowing leaders to evaluate not only cost and service outcomes, but also capital efficiency and long-term business value.
Measuring the true cost to serve
Building this capability starts with understanding how the supply chain actually operates: how products flow, where costs are incurred, and what factors drive those costs at every stage.
This operational view must then be reconciled with the organisation’s financial data to create a working model that reflects real commercial performance.
A total cost of ownership approach enables businesses to understand not only what performance has been achieved, but what performance should be achievable based on supply chain principles and operating realities.
This creates a more meaningful benchmark.
No business will operate perfectly, but greater visibility helps leaders identify where opportunities exist and which actions will deliver the greatest impact.
It allows organisations to answer critical questions:
Where is margin too low?
Where is the cost to serve too high?
Where is working capital unnecessarily trapped?
What decisions could be changed today to deliver measurable improvements?
What’s at stake?
Consider a common scenario.
A supply planner negotiates a discount by committing to a large minimum order quantity. On paper, lower unit costs and improved gross margin appear to be positive outcomes.
However, the business may now be holding months of additional inventory, consuming warehouse capacity that could have supported faster-moving products.
A discount on slow-moving stock can ultimately become a cost rather than a benefit when the full commercial impact is considered.
Without visibility into the true cost to serve, investment decisions become compromised. Businesses may decide where to grow, defend or exit categories based on incomplete information, while the margin required to generate sustainable returns may be significantly different from what traditional reporting suggests.
Once the full cost to serve is understood, long-held assumptions can change. Product categories that appear to be strong performers may look very different when inventory requirements, warehouse costs, fulfilment complexity and working capital commitments are included.
The impact extends beyond individual product decisions.
When sales, merchandising, inventory planning and operations each optimise their own KPIs, competing priorities can emerge. A merchandiser may pursue margin. A supply planner may prioritise availability. Operations may focus on cost control.
Each decision may appear reasonable independently, but together they can create a business model that is difficult and expensive to deliver.
A shared measure of commercial performance changes this dynamic.
When teams understand how their decisions influence return on capital employed, organisations can move from competing priorities to coordinated action and create a stronger foundation for profitable growth.
Modelling decisions before they are made
The greatest value of improved commercial visibility comes from the ability to test decisions before implementing them.
Businesses can model the impact of changing suppliers, accepting a higher unit price in exchange for eliminating excessive inventory commitments, or redesigning fulfilment models by shifting from traditional store-based inventory to direct-to-customer delivery.
They can also evaluate whether adjusting safety stock parameters or shelf allocations could release working capital without materially affecting customer availability.
This allows leadership teams to understand trade-offs before valuable capital is committed.
Service level decisions provide a clear example.
A leadership team may determine that a particular product requires 99 per cent availability because it is strategically important. While this objective may be commercially justified, achieving that service level may require significantly higher inventory investment.
By modelling the financial impact before making the decision, businesses can understand what level of service they can realistically afford while maintaining acceptable returns.
This creates a more balanced approach between customer service, operational requirements and capital efficiency.
Turning financial visibility into competitive advantage
Maintaining this capability is not a one-time exercise.
Budgets change, supplier arrangements evolve, product ranges shift and operating costs fluctuate. Commercial models must be continuously reviewed and updated to remain relevant.
The greatest value comes from creating an ongoing decision-support capability that evolves alongside the business.
Many organisations attempting to develop this capability internally face another challenge: the expertise often sits with one or two individuals. When those employees leave, valuable knowledge and capability can leave with them.
A sustainable methodology requires consistent processes, robust models and objective insights that help businesses challenge assumptions and make better decisions over time.
Supply chain decisions have never been purely operational. Every decision about inventory, suppliers, fulfilment and service levels ultimately affects how effectively a business uses its capital and creates shareholder value.
Organisations that can connect operational decisions to return on capital employed gain more than improved reporting. They gain the ability to align teams around a common commercial objective, allocate resources with greater confidence, and make decisions that consistently strengthen long-term business performance.
In an increasingly competitive environment, the ability to understand the true financial impact of supply chain decisions may become one of the most important strategic advantages a business can build.
Read also: Australian eCommerce is growing—but supply chain execution will determine who wins
Warren Swanepoel
Warren Swanepoel is Senior Consultant – Transformation at ThreeSixty Supply Chain Group, specialising in supply chain strategy, commercial planning and transformation. He helps organisations connect operational decisions with financial outcomes, improving visibility into cost, capital efficiency and long-term value creation.
