Chapter 15: Supply Chain Finance

Chapter 15Management of Business Logistics, 7 th Ed.2 Learning Objectives - After reading this chapter, you should be able to do the following: Convert cost savings into equivalent sales increase. Understand a company’s income statement and balance sheet. Demonstrate the impact of supply chain strategies on the income statement, balance sheet, profitability, and return on assets.

Chapter 15Management of Business Logistics, 7 th Ed.3 Learning Objectives Understand and use the strategic profit model. Analyze the financial impact of supply chain service failures. Utilize the spreadsheet computer software to analyze financial implications of supply chain decisions.

Chapter 15Management of Business Logistics, 7 th Ed.4 Logistics Profile: CBL Book Distributors.com CBL’s mission was to be a low cost Internet provider of college textbooks. Profits were good, but started to decline, and this was causing concern among the executives. Supply chain functions attracted the most attention because increases here were higher than in other areas of the firm. A financial analysis was done and now the supply chain VP must decide what to do.

Chapter 15Management of Business Logistics, 7 th Ed.5 Introduction Throughout the text, emphasis has been placed on cost and lowering cost, with the implication that in so doing, profitability would increase. The importance of finance in the supply chain context is demonstrated by the large number of logistics managers that return to school to study finance. Finance is fourth in popularity behind information systems, E-commerce, and global processes.

Chapter 15Management of Business Logistics, 7 th Ed.6 The Supply Chain-Finance Connection Landed costs of products impacts a buyer’s decision to purchase a seller’s product thus affecting both sales and profitability. Supply chain alternatives enable optimization of the corporate goal of profit maximization. Inventory minimization is a direct result of the competing needs for capital and the difficulty many firms have in raising capital. Various cost levels of customer service must be analyzed to find the most profitable level.

Chapter 15Management of Business Logistics, 7 th Ed.7 The Sales-Cost Saving Connection Sales, cost, and profit drive the goals of top management and supply chain managers should convert cost savings into sales and profit increases. Profit equation can be important in making these conversions.

Chapter 15Management of Business Logistics, 7 th Ed.8 The Sales-Cost Saving Connection If Profit = Sales – Costs, where Cost = (X%) * (Sales), then Profit = Sales – (X%) * (Sales) * (1 – X%), where (1 – X%) = Profit Margin

Chapter 15Management of Business Logistics, 7 th Ed.9 The Sales-Cost Saving Connection For example, if cost is 90% of sales, and the profit margin is 10% of sales, a $100 cost saving is equivalent to sales of $1,000. Sales = Cost Saving (profit) ÷ Profit Margin Sales = $100 ÷ 0.10 Sales = $1,000

Chapter 15Management of Business Logistics, 7 th Ed.10 The Sales-Cost Saving Connection Profit margin Table 15-1 provides examples of equivalent sales for different supply chain cost savings found in the CBL Logistics Profile. The lower the profit margin, the higher the sales equivalent for a given supply chain cost because it takes a higher volume to produce a given profit. See Table 15-2.

Chapter 15Management of Business Logistics, 7 th Ed.11 Table 15-1 Sales Equivalent of Supply Chain Cost Saving CBL 2001Sales Equivalent for Cost Savings of (000)%$200,000$500,000$1,000,000 Sales$150, %$2,857,143 * $7,142,857†$14,285,714‡ Total Cost139, ,657,1436,642,85713,285,714 Net Profit10, ,000500,0001,000,000 *$200,000 cost saving ÷ 0.07 profit margin †$500,000 cost saving ÷ 0.07 profit margin ‡$1,000,000 cost saving ÷ 0.07 profit margin

Chapter 15Management of Business Logistics, 7 th Ed.12 Table 15-2 Equivalent Sales with Varying Profit Margins Profit Margins 20%10%5%1% Sales$50,000$100,000$200,000$1,000,000 Total Cost40,00090,000190,000990,000 Cost Saving/Profit10,000

Chapter 15Management of Business Logistics, 7 th Ed.13 The Supply Chain Financial Impact Stockholder return – major financial objective Net worth – consider absolute and relative size of the profit Return on assets – used as a benchmark Channel structure – consider outsourcing as a way to improve ROA. Channel inventories – consider minimizing inventory as a way to improve ROA. Order management – reduces costs and improves sales, both of which improve the ROA. Transit time – reductions here improve sales and reduce inventories, thereby improving ROA.

Chapter 15Management of Business Logistics, 7 th Ed.14 Figure 15-1 Supply Chain Impact on Return on Assets

Chapter 15Management of Business Logistics, 7 th Ed.15 Figure 15-2 Supply Chain Decisions and ROA

Chapter 15Management of Business Logistics, 7 th Ed.16 On the Line: Hard Sell The benefits of logistics management are evident, but it remains a hard sell to convince senior management that logistics is vital to a company’s financial performance and therefore deserves continued investment. Creating value, reducing costs, increasing both asset utilization and economic profit, and enabling growth are ways to sell logistics.

Chapter 15Management of Business Logistics, 7 th Ed.17 Financial Statements Sales, cost, and profit Figure 15-3 contains CBL Distributors.com spreadsheet-prepared income statement. Symbol column contains the equations used. Assets and liabilities Figure 15-4 contains CBL Distributors.com spreadsheet-prepared balance sheet. Symbol column contains the equations used.

Chapter 15Management of Business Logistics, 7 th Ed.18 Figure 15-3 CBL Distributors.com Income Statement: 2001

Chapter 15Management of Business Logistics, 7 th Ed.19 Figure 15-4 CBL Distributors.com Balance Sheet: December 31, 2001

Chapter 15Management of Business Logistics, 7 th Ed.20 Financial Impact of Supply Chain Decisions Based on the financial data provided in Figures 15-3 and 15-4, an analysis of CBL’s supply chain alternatives based on a 10% reduction in transportation and warehousing costs and a 10% reduction in inventory is illustrated. The results from the analysis are presented in the next slides.

Chapter 15Management of Business Logistics, 7 th Ed.21 Financial Impact of Supply Chain Decisions: Figure 15-5 Transportation cost reduction results in: Net income increases by $360,000. Profit margin increases to 7.24%. ROA increases to 7.49%. Transportation costs decrease to 3.6% of sales. No change in warehousing or inventory costs as a percentage of sales.

Chapter 15Management of Business Logistics, 7 th Ed.22 Financial Impact of Supply Chain Decisions Transportation cost reduction of 10% results in: Net income increases by $360,000. Profit margin increases to 7.24%. ROA increases to 7.49%. Transportation costs decrease to 3.6% of sales. No change in warehousing or inventory costs as a percentage of sales. Examine Figure 15-5.

Chapter 15Management of Business Logistics, 7 th Ed.23 Figure 15-5 Financial Impact of a 10 Percent Reduction in Transportation Cost

Chapter 15Management of Business Logistics, 7 th Ed.24 Financial Impact of Supply Chain Decisions Warehousing cost reduction of 10% results in: Figure 15-6 compares results to CBL’s 2000 performance. As might be expected, reduction in warehousing costs increases profit, profit margin, and ROA.

Chapter 15Management of Business Logistics, 7 th Ed.25 Figure 15-6 Financial Impact of a 10 Percent Reduction in Warehousing Costs

Chapter 15Management of Business Logistics, 7 th Ed.26 Financial Impact of Supply Chain Decisions Inventory reduction of 10% results in: Figure 15-7 compares results to CBL’s 2000 performance. As might be expected, reduction in inventory increases profit, profit margin, and ROA.

Chapter 15Management of Business Logistics, 7 th Ed.27 Figure 15-7 Financial Impact of a 10 Percent Reduction in Inventory

Chapter 15Management of Business Logistics, 7 th Ed.28 Financial Impact of Supply Chain Decisions Figure 15-8 provides a comparison of supply chain alternatives Figure 15-9 provides a strategic profit model for CBL in 2001 based on reduced transportation costs.

Chapter 15Management of Business Logistics, 7 th Ed.29 Figure 15-8 Comparison of Supply Chain Alternatives

Chapter 15Management of Business Logistics, 7 th Ed.30 Figure 15-9 Strategic Profit Model for CBL 2001 and Reduced Transportation Costs

Chapter 15Management of Business Logistics, 7 th Ed.31 Supply Chain Service Financial Implications CBL incurs service failures resulting from 95% on-time deliveries and 97% order fill rates. 5% of the orders are delivered late and 3% are filled incorrectly. These failures result in increased costs for CBL. A model for calculating supply chain service failures is presented in Figure

Chapter 15Management of Business Logistics, 7 th Ed.32 Figure Supply Chain Service Failure

Chapter 15Management of Business Logistics, 7 th Ed.33 Supply Chain Service Financial Implications The financial impact of improving on-time delivery is presented in Figure The financial impact of improving the order fill rate is presented in Figure The strategic profit model for on-time delivery improvement is presented in Figure The strategic profit model for order fill rate improvement is presented in Figure

Chapter 15Management of Business Logistics, 7 th Ed.34 Figure Financial Impact of Improving On-Time Delivery

Chapter 15Management of Business Logistics, 7 th Ed.35 Figure Financial Impact of Improving Order Fill Rate

Chapter 15Management of Business Logistics, 7 th Ed.36 Figure Strategic Profit Model for On-Time Delivery Improvement

Chapter 15Management of Business Logistics, 7 th Ed.37 Figure Strategic Profit Model for Order Fill Rate Improvement

Chapter 15Management of Business Logistics, 7 th Ed.38 Supply Chain Service Financial Implications Outcomes Of the two alternatives, the profit margin, return on assets, and return on stockholder’s equity are greater with the order fill rate improvement strategy than with the on-time delivery strategy. The financial goal for supply chain management is to increase return to stockholders. Examining alternative courses of action in light of impact on net income and the resulting change to return on equity accomplishes this goal.

Chapter 15: Summary and Review Questions Students should review their knowledge of the chapter by checking out the Summary and Study Questions for Chapter 15.

End of Chapter 15 Slides Supply Chain Finance