Reaching for Common Ground Finance vs. Supply Chain M. Bixby - - PowerPoint PPT Presentation

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Reaching for Common Ground Finance vs. Supply Chain M. Bixby - - PowerPoint PPT Presentation

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Reaching for Common Ground Finance vs. Supply Chain M. Bixby Cooper, Ph.D. Associate Professor of Supply Chain Management The Eli Broad College of Business Michigan State University Michigan State University, 2014 None of Us Doubt the

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SLIDE 1

 Michigan State University, 2014

  • M. Bixby Cooper, Ph.D.

Associate Professor of Supply Chain Management The Eli Broad College of Business Michigan State University

Reaching for Common Ground – Finance vs. Supply Chain

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SLIDE 2

 Michigan State University, 2014

  • 2 -

None of Us Doubt the Contribution

  • We “know” the value

– Cost reduction and cost avoidance

  • Purchase Price
  • Total Cost of Ownership

– Assets – Cash flow – Supplier Relationships

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SLIDE 3

 Michigan State University, 2014

  • 3 -

Cost Reduction Cost Avoidance Asset Management Revenue Generation

The Performance Hierarchy

Return on Assets

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SLIDE 4

 Michigan State University, 2014

  • 4 -
  • In the average manufacturing firm purchased goods

and services account for 55% of every dollar of revenue the firm takes in.

  • Direct labor costs account for only about 10% of the

sales dollar

Importance of Supply Management

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SLIDE 5

 Michigan State University, 2014

  • 5 -
  • Beginning Position

Sales Revenue $100,000,000 – Purchases(55%) 55,000,000 – Labor (15%) 15,000,000 – Other (22%) 22,000,000 Pre-tax profit (8%) 8,000,000

Potential Payoff

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SLIDE 6

 Michigan State University, 2014

  • 6 -

Reduce purchase cost by 10% Increase sales by 68% Reduce labor cost by 36% Sales

$100,000,000 $168,000,000 $100,000,000

Purchases 49,500,000

92,400,000 55,000,000

Labor

15,000,000 25,200,000 9,600,000

Other

22,000,000 36,960,000 22,000,000

Pre-tax Profit

13,500,000 13,440,000 13,400,000

Potential Payoff (cont’d)

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SLIDE 7

 Michigan State University, 2014

  • 7 -
  • Supply Management requires managing multiple

tradeoffs

  • The Strategic Profit (DuPont) Model Framework Offers

a means for measurement and Assessment.

Profit Margin x Asset Turnover = Return on Assets Profit Sales Profit Sales x Assets = Assets 100 2000 100 2000 x 1000 = 1000 5% x 2 times = 10%

Managing with the Strategic Profit Model

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SLIDE 8

 Michigan State University, 2014

  • 8 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

300 1500 100

400 100 100 500 400 600 400 2000 1000 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 100 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion etc.

Strategic Profit Model: A Simple Base Case

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SLIDE 9

 Michigan State University, 2014

  • 9 -

Suppose that by working closer with suppliers to reduce their cost of serving you, suppliers are able to reduce their prices to you. The result is a 2% reduction in your cost of goods sold. This also reduces the value of your average inventory by 4%. Assume you inventory carrying cost is 20%. If all of the other elements (sales, non-inventory assets, and non-inventory related expenses) remain the same, what would be your profit margin, asset turnover and return on assets.

An Exercise

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SLIDE 10

 Michigan State University, 2014

  • 10 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

300 1500 100

400 100 100 500 400 600 400 2000 1000 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 100 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 11

 Michigan State University, 2014

  • 11 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

300 1470 100

400 100 100 500 400 600 400 2000 1000 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 100 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 12

 Michigan State University, 2014

  • 12 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

300 1470 100

384 100 100 500 400 600 400 2000 1000 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 100 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 13

 Michigan State University, 2014

  • 13 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

300 1470 100

384 100 100 500 400 600 400 2000 1000 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 100 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 14

 Michigan State University, 2014

  • 14 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

296.8 1470 100

384 100 100 500 400 600 400 2000 1000 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 100 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 15

 Michigan State University, 2014

  • 15 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

296.8 1470 100

384 100 100 530 396.8 600 400 2000 1000 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 100 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 16

 Michigan State University, 2014

  • 16 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

296.8 1470 100

384 100 100 530 396.8 584 400 2000 984 5%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 133.2 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 17

 Michigan State University, 2014

  • 17 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

296.8 1470 100

384 100 100 530 396.8 584 400 2000 984 6.67%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2 133.2 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 18

 Michigan State University, 2014

  • 18 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

296.8 1470 100

384 100 100 530 396.8 584 400 2000 984 6.67%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2.03 133.2 10% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 19

 Michigan State University, 2014

  • 19 -

SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES PROFIT PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000

296.8 1470 100

384 100 100 530 396.8 584 400 2000 984 6.67%

TIMES net profit net sales net sales total assets

  • +

+ +

  • +

÷ ÷ ( ) ) (

2.03 133.2 13.54% 2000

Price Quantity

x

Cost of goods Quantity

x

Transportation Handling Storage Space Promotion, etc.

Strategic Profit Model: Improved Supplier Relationship

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SLIDE 20

 Michigan State University, 2014

  • 20 -

20

Driver Category Supply Chain Value Drivers Price Quantity Material cost,/ inbound freight Packaging Manufacturing Conversion Cost Freight/dutieis/fees Procurement Administration Storage & Handling Transportation (Non-Freight / Capital)

  • Gen. Admin. / Tech Support

Quality costs Returns Management Disposal Costs Raw Material Inventory WIP Inventory Finished Goods Inventory Account Receivable Loading / Unloading Equipment Transportation Assets Storage Space Packaging Facilitites/Equipment Manufacturing Facilities/Equipment Profit Margin Asset Turnover Gross Margin Expenses Total Assets Fixed Classification Sales COGS Fixed/Variable Current

Example Supply Chain Value Drivers Related to DuPont Model

DuPont Model: Example Supply Chain Drivers

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 Michigan State University, 2014

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Cash-to-Cash Cycle Time Days Accounts Receivable Outstanding Inventory Days of Supply Days Trade Accounts Payable Outstanding

+ _

The length of time between the expenditure of money to acquire products, components, materials until cash is collected from customers. Suppose your company gets 30 days credit from suppliers, consistently maintains a 30 day supply, and your customers pay in cash. What is your cash-to-cash cycle time?

What is Supply Management’s Role in Cash to Cash Cycle Time?

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 Michigan State University, 2014

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Cash-to-Cash Cycle Time: A Few Examples

Company

  • Accts. Rec.

Days Inventory Days Accts. Payable Days Cash-to- Cash Cycle Time Apple 61.3 8.0 114.4

  • 45.2

Dell 45.9 8.7 84.8

  • 30.2

Wal-mart 3.5 44.8 38.7 9.6 Pepsi 40.6 46.3 51.8 35.1 Coca-Cola 42.0 77.9 48.4 71.4 Samsung 10.3 26.0 15.1 21.2 Sony 52.8 17.8 51.5 19.2 Lockheed Martin 42.9 16.7 21.0 38.6 Schlumberger 84.1 38.6 107.3 15.4

Data collected May 2011

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 Michigan State University, 2014

  • 23 -

Data collected May 2014

Company

  • Accts. Rec.

Days Inventory Days Accts. Payable Days Cash-to- Cash Cycle Time Apple 28.0 6.0 90.0

  • 56.0

Dell 42.4 11.3 94.4

  • 40.7

Wal-mart 5.1 45.7 38.1 12.7 Pepsi 39.2 41.7 138.8

  • 57.9

Coca-Cola 38.0 64.9 185.6

  • 82.7

Samsung 48.4 51.1 48.7 50.8 Sony 46.9 53.4 81.1 19.2 Lockheed Martin 46.9 27.2 34.7 39.4 Schlumberger 98.3 52.8 93.3 57.8

Cash-to-Cash Cycle Time: A Few Examples

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 Michigan State University, 2014

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  • ?????
  • Payment terms
  • Order lot size
  • Make vs. buy
  • Others?

How Can Purchasing Managers Influence Cash-to-Cash Cycle?

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 Michigan State University, 2014

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QUESTIONS?

Performance Measurement Systems