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The Financial Supply-Chain Management Connection
Transcript of The Financial Supply-Chain Management Connection
Superior logistics services can strengthen the likelihood that customers will remain loyal to a supplier
Operating Cost Reduction
Reduction possible through application of a toal pipeline view of costs on a true end-to-end basis
Fixed Capital Efficiency
Rise of 3PLs has been driven by desire to reduce Logistics and
Shareholder Value Key Performance Measures today
EVA = Profit after tax – true cost of capital employed
MVA = net present value of expected future of EVA
Clear connections between logistics performance and shareholder value Logistics and
Shareholder Value Because of SCM improvement in capital utilization, what new business opportunities are now available?
For example, use freed-up cash to invest in R&D, enter new markets with lower profit margins, use increased SPEED for competitive advantage CFO's Strategic Perspective on SCM’s Impact on SPEED Companies usually insist that managers focus on results related to profitability drivers but not on capital
Profitability measures are important but incomplete
Managers must focus on both profitability and capital utilization. The Need for Speed How efficiently a company utilizes its capital.
It measures the dollars of revenues generated for each dollar invested in capital. SPEED Key driver of providing a competitive return to investors
The area with the greatest potential for SCM solutions to improve overall financial performance Capital Utilization/SPEED Exhibit 5 shows the impact on economic profit from a 5% reduction in SCM operating costs. These cost are put at 8% of revenues
The increase in market value is in excess of $450 million, which is a 6.5% increase in overall market value. Profitability (cont.) Definition: What is left over per $1 of revenue after paying all operating expenses
Typically SCM solutions are thought of in terms of their profitability through reduction in related supply chain operating costs.
Logistics-related operating costs (transportation, warehouseing, inventory carrying, and administrative) are estimated to be approximately 8% of the average company’s revenue. Profitability (Capital Utilization) How can the return on the existing business be improved?
What new business should we enter and what are their returns?
Where will the company get the funds to run the business and fund growth?
How will the company meet investors’ expectations? CFOs are constantly searching for answers to questions such as: Growth – how fast revenues grow year to year
Profitability – profit per dollar of revenue (operating profit margin)
Capital Utilization – how many dollars of revenue are generated for each dollar invested in capital Key Factors that Drive
Stock Price ROI measures the profit performance of firm compared
with the cash invested in it
If Profit = $5400 and Capital Employed= $20000,
ROI = $5400/$20000 X 100 = 27%
How do you know if a firm’s ROI is good or not?
ROI can be improved by raising inventory turnover by increasing stock turns (higher asset turns) and/or by raising profit margin by lowering COGS (better margins) SCM and The Bottom Line -- ROI Most “C-level” managers hold a traditional view that supply chain management only affects one aspect of the overall financial performance, the operating cost.
Many SCM professionals fail to articulate the real value of their solutions at the C-level because they do not speak “the language of finance.” Factors Inhibiting SCM’s
Higher value-adding revenue growth
Greater capital utilization Many companies historically have not aligned supply chain management with financial performance goals The Challenge In order for SCM to move from the “backroom” to the boardroom, SCM professionals must be able to demonstrate how SCM initiatives affect financial performance. Overview Working Capital Efficiency
Can be reduced by time compression in the pipleline and reduced order-to-cash cycle time
Focus on eliminating non-value-adding time
SCM decisions can significantly alter taxed levied so special attention is needed for every decision considered
Different regions/countries have different tax laws Logistics and
Shareholder Value All drivers of shareholder value are connected and affected (directly and indirectly) by logistics management and supply chain strategy
Drivers of shareholder value
Operating Cost Reduction
Fixed Capital Efficiency
Working Capital Efficiency
Tax Minimization Logistics and
Shareholder Value What is the bottom line impact at departmental level from improvements in capital utilization from: days in inventory, network consolidation, days’ sales outstanding, etc.? CFO's Tactical Perspective on
SCM’s impact on SPEED Studies show the impact of supply chain solutions on operating costs.
The CFO perspective is the impact on the bottom line, which is economic profit.
The initial cost-reduction perspective should be broadened to encompass the overall financial performance Profitability (cont.) SCM growth enablers include:
Reduced stock-out performance
Perfect order fulfillment performance
Other customer service improvements Growth Best metric for measuring impact of SCM solutions on overall financial performance
Measures the change in shareholder value for a given level of revenues
Economic Profit = Net Operating Profit After Taxes – Capital Charge Economic Profit Capital Utilization is also referred to as “SPEED ” -with the competing companies recording the highest average speed winning the race Capital Utilization - SPEED To attract the funds it needs to maintain its existing business and provide for future growth Why Should a Company Provide
Competitive Return? Lindsey Jackson
Sarah Salzmann The Financial-Supply Chain
Management Connection Growth
Capital utilization Remember, CFOs are only interested in
SCM solutions that influence: Financial Drivers Two key components
of SPEED 1. Conduct a high-level financial performance gap analysis
Benchmarks should examine:
Operating Profit Margin
Cash Operating Cycle
2.Map SCM operating-performance indicators to financial performance gaps
3.Develop initiatives to close the gaps. A 3-Step Plan for Success Fixed Assets Logistics Impact on ROI Profit Return on
Revenue Costs Inventory Accounts
Receivable Cash Asset
and Utilization Logistics
Service Supply Chain Management can achieve financial goals through: Study Guide 1.What are the two factors inhibiting SCM from the boardroom?
a.C-level managers do not fully recognize the potential impact SCM has on all areas of financial performance
b.SCM professionals do not speak the “language of finance”
Study Guide 2.What are three factors that drive stock
price (3 financial drivers)?
Study Guide 3. Give an example of a growth enabler
Reduced stock-out performance
perfect order fulfillment performance
other customer service improvements Study Guide Study Guide Questions? Study Guide Study Guide 4.What percentage of revenue is the average companies’ logistics related operating cost?
8% 5.The CFO perspective is the impact on the bottom line, which is economic profit. 6.What is SPEED/Capital Utilization?
It is how efficiently a company utilizes its capital. It measures the dollars of revenues generated for each dollar invested in capital.
7.What are the steps in the “3 Step Plan for Success”?
a.Conduct a financial performance gap analysis
b.Map SCM operating-performance indicators to the gaps
c.Develop initiatives to close the gaps