Channel Management and Logistics Measures of Financial Performance of a Supply Chain Channel Management and Logistics

Financial Measures of Performance Return on Equity (ROE) Return on Assets (ROA) Return on Financial Leverage (ROFL) Accounts Payable Turnover (APT) Payment Weeks Accounts Receivable Turnover (ART) Collection Weeks Inventory Turnover (INVT) Inventory Weeks Property, Plant & Equipment Turnover (PPET) Cash-to-Cash Cycle (C2C)

Return on Equity (ROE) Return on equity (ROE) is the main summary measure of a firm’s performance. It measures the return on the shareholders’ equity. Annual Net Income Average Stockholders’ Equity ROE = Net Income is after tax income; can be found from income statement Average Stockholders’ equity is the sum of the stockholders’ equity at the beginning and the end of the year, divided by 2 It is a very important measure; but don’t rely solely on this Always check with other companies within the industry, and also performance over time. Watch out if debt financing is used (ROE increases, but income stays same)

Return on Assets (ROA) Return on assets (ROA) measures the return earned on each dollar invested by the firm in assets Annual Net Income Average Total Assets ROA = Net Income is after tax income; can be found from income statement Average Total Assets is the sum of the sum of the total assets at the beginning and the end of the year, divided by 2. can be found in balance sheets of two consecutive years It is a very important measure; but don’t rely solely on this Always check with other companies within the industry, and also performance over time.

Return on Financial Leverage (ROFL) Return on financial leverage (ROFL) measures the return of ROE that can be attributed to financial leverage (management of accounts payable, debt, etc) ROFL = ROE - ROA Measures the degree to which an investor or a business is utilizing borrowed money. Not always bad – see examples.

Accounts Payable Turnover (APT) One important ratio that defines financial leverage is accounts payable turnover (APT) Cost of goods sold Accounts payable APT = Another important measure is: Payment (weeks) = 52 / APT Small APT means that the company is able to use the money it owes to its suppliers in order to finance a considerable amount of its operations Amazon used this money to finance 20+ weeks of its operations during the year

Other Turnover Ratios Similarly, we define Accounts Receivable Turnover (ART), Inventory Turnover (INVT), and Property, Plant and Equipment Turnover (PPET) Sales Revenue Accounts receivable Cost of goods sold Inventories Sales revenue PP&E ART = Collection (weeks) = 52 / ART INVT = Inventory (weeks) = 52 / INVT PPET =

How to improve ROA ROA can be written as the product of two ratios: profit margin and asset turnover Earnings before interest Sales Revenue Total Assets (Profit Margin) ROA = (Asset Turnover) x To improve ROA either improve the profit margin or the asset turnover

Cash-to-cash cycle (C2C) Cash-to-cash (C2C) cycle roughly measures the average amount time from when cash enters the process at cost to when it returns as collected revenue C2C = - weeks payable (52/APT) + weeks in inventory (52/INVT) + weeks receivable (52/ART)

To improve ROA Improve ROA Increase Profit Margin Increase Asset Turnover Get Better Prices Reduce Expenses Increase ART Increase INVT Increase PPET Provide higher value Be more responsive Good management Pay attention to high costs Collect AR quickly! Turn inventory quickly around Monitor infrastructure costs

Financial data from Amazon and Barnes & Noble B & N 2011 2010 Y/Y 2012 Sales Revenue 48,077 34,204 41% 7,129 6,999 2% Cost of goods sold 37,288 26,561 40% 5,218 5,206 0% Gross profit 10,789 7,643 1,911 1,793 7% Selling, General and Administrative expense 9,927 6,237 59% 1,739 1,629 Depreciation and amortization 233 229 Operating Income 862 1,406 -39% -61 -65 -6% Interest expense 65 39 67% 35 57 Other income (net) 137 130 5% Income before income taxes 934 1,497 -38% -96 -122 -21% Income taxes 303 345 -12% -28 -48 -42% Net income 631 1,152 -45% -68 -74 -8% Assets Cash and cash equivalents 5,269 3,777 54 59 Short-term investments 4,307 4,985 -14% Accounts receivable 2,922 1,783 64% 160 150 Inventories 4,992 3,202 56% 1562 1375 14% Prepaid expenses 221 162 36% Total current assets 17,490 13,747 27% 1,997 1,746 Property, plant and equipment 4,417 2,414 83% 623 704 Goodwill 1,955 1,349 45% 520 524 -1% Other assets 1,416 1,287 10% 625 621 1% Total Assets 25,278 18,797 34% 3,765 3,595 Liabilities Accounts payable 14,896 10,372 44% 959 949 Short-term debt   867 786 Total current liability 1,826 1,735 Long-term debt 324 313 4% Other liabilities 2,625 1,561 68% 729 19% Total liabilities less equity 17,521 11,933 47% 3,017 2,777 9% Stakeholders equity 7,757 6,864 13% 748 818 -9%

Supply Chain Performance 2011 2010 2012 ROE 8% 17% -9% 9% ROA 4% -2% 2% ROFL -7% 7% APT 2.50 2.56 5.44 5.49 Payment Weeks 20.77 20.31 9.56 9.48 ART 16.45 19.18 44.56 46.66 Collection Weeks 3.16 2.71 1.17 1.11 INVT 7.47 8.3 3.34 3.79 Inventory Weeks 6.96 6.27 15.57 13.73 PPET 10.88 14.17 11.44 9.94 C2C -10.65 -11.33 7.18 5.37

Supply Chain Performance 2011 2010 2012 ROE 34% 29% -11% 8% ROA 25% -3% 5% ROFL 4% -8% 3% APT 4.40 3.29 4.94 4.86 Payment Weeks 11.81 15.80 10.52 10.71 ART 20.16 11.84 5.38 5.61 Collection Weeks 2.58 4.39 9.66 9.27 INVT 83.03 37.62 11.73 11.74 Inventory Weeks 0.63 1.38 4.43 PPET 13.92 13.68 20.99 21.72 C2C -8.60 -10.03 3.57 2.99

Question: What conclusions can you draw about these companies’ supply chains performance? Check their ratios: ROE ROA ROFL Payment Weeks Collection Weeks INVT Inventory Weeks C2C