supply chain industry forum sponsored by yrc logistics

Supply Chain Industry Forum

Sponsored by YRC Logistics

Making the Financial-Supply Chain Management Connection

Dr. Stephen G. Timme

President, FinListics Solutions and Adjunct Professor, Georgia Institute of Technology

Copyright 2007 © by FinListics Solutions 3

The Challenge

• Many companies historically have not aligned supply chain management with financial performance goals.

Financial Financial PerformancePerformance

– Higher Value-Adding Revenue Growth

– Improved Profitability

– Greater Capital Utilization

• High performance companies use supply chain management to achieve financial goals through:

Capital Capital UtilizationUtilization

Revenue Revenue GrowthGrowth

ProfitabilityProfitability


Aligning SCM with Financial Goals: A Top-Down Approach

Uses gaps in financialperformance drivers to determine potential for

improving SCM businessprocesses, activities, tasks

Inventory, Revenue, SG&A, COGS, Fixed Assets, A/R, A/P

1

2

3

FinancialDrivers

SCMBusiness Processes

SCM Activities/Tasks


SCM – Who’s View?

CxO View of Supply Chain Management

CEO• Deliver value-adding growing revenue.

• Like product availability, new product speed to market and customer service.

CFO• Better manage the balance sheet primarily in terms of inventory and fixed assets and the

income statement in terms of SCM related expenses.

COO

• Balance supply with demand.• Maintain sufficient levels of inventory to keep production flowing, adequate spares, and

efficient procurement operations,• Review distribution and logistics operations to enhance customer service.

VP Sales• Context of customer serviceability.• Like sufficient quantities of the right products to sell. Operationally, recognize an on-

going need to provide accurate and timely field forecasts.

VP Procurement• Better management of suppliers.• Like visibility into current and future demand including both quantities and required lead

times or replenishment times.

VP Supply Chain

• Better plan and fulfill market demand for goods and service and do so more efficiently.• Like SCM buy-side, sell-side, planning and execution.


Financial-SCM Connection

Financial Metric Examples of How Supply Chain Management Adds Value

Revenue Growth

Fill ratesForecastingCustomer Service

Lead timesNew Product Speed to Market

COGS as a Percentage of Revenue

(Gross Profit Margin)

Inbound Transportation Mgt.Inventory Mgt.Network Design

ProcurementReverse LogisticsSelective Outsourcing

SG&A as a Percentage of Revenue

Warehouse Mgt.Transportation Mgt.Supply Chain Administration

Customer ServiceInformation Technology

Days in Inventory (DII)

(GMROII)

Transportation Mgt.Warehouse Mgt.Network Design

Inventory VisibilityForecasting AccuracyDemand Planning

Days Sales Outstanding (DSO)

Shipment IntegrityFill RateProof of Delivery

Invoicing AccuracyInternal Communications

Days Purchases Outstanding (DPO) Procurement Terms Payment Practices

Fixed Asset Utilization Warehouse ManagementTransportation Management

IT ManagementSelective Outsourcing


SCM solutions help companies

better manage business

processes like these.

1

Transportation Services

Technology Services

Days Sales Outstanding

Distribution Management

Transportation Management

Supply Chain Management

Fixed Asset

Utilization

Days Purchases

Outstanding

Days In Inventory

% SG&A

% Cost of Goods Sold

Revenue GrowthMeridian IQ Solution

+ = Capital Utilization= Growth = Profitability

Transportation Services

Technology Services

Days Sales Outstanding

Distribution Management

Transportation Management

Supply Chain Management

Fixed Asset

Utilization

Days Purchases

Outstanding

Days In Inventory

% SG&A

% Cost of Goods Sold

Revenue GrowthMeridian IQ Solution

+ = Capital Utilization= Growth = Profitability + = Capital Utilization+ = Capital Utilization= Growth= Growth = Profitability= Profitability

Better managing business processes increases financial performance.2

Example of SCM Solution Mapping

Solution

Much Potential to Unlock Hidden Value


W/D Durable – North America*

*Note: Variations due in part to unique company factors like product mix and not benefits likely achievable by improved SCM.

Benefits scaled for company with $50 in Revenue.


W/D Non-Durable – North America*




Food Products – North America*




Printing & Publishing – North America*




Ind Machinery & Equipment – North America*




12.0%

8.0%

6.0%4.8%

4.0% 3.4% 3.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%1

.00

1.5

0

2.0

0

2.5

0

3.0

0

3.5

0

4.0

0

Asset Turnover

Bre

akev

en P

rofi

tab

ility

Need for SCM Speed*

*Graph for 12% minimum Return On Assets

Base case:7% Profitability x 2.00 Asset Turnover

= 14% ROA

Competition Lowers Profitability to 5% but no Change in Asset Turnover:

5% x 2.00 = 10% ROA

Asset Turnover Increases to 2.5:5% Profitability x 2.5 Asset Turnover =

12.5% ROA


Total Cost of Holding Inventory

Non-Capital Carrying Charges

+

Capital Charges


Inventory Trade-Offs

Revenue

CapitalInvestment

OperatingExpenses


Total Cost of Holding Inventory:W/D Durable Goods

*Reported Operating Income + Non-Capital Carrying Costs.

• Sales $50M• Inventory $6.6• Pre-Tax Cost of Capital 20%• Inventory Non-Capital

Carrying Charge 10% 30%• Total Annual Costs $2.0

• Adjusted Operating Income* $2.7• Total Annual Costs Absorption

of Adjusted Operating Income 75%

9 months of sales needed to fund total inventory costs.


Purpose

• Establish how SCM contributes to achieving company goals.

• Identify Gaps in Financial Metrics.

• Map gaps to SCM-related business processes (BP’s).

• Map gaps in BP’s to potential SCM solutions.

• Estimate SCM Solution benefits.

• Develop Business Case.

• Manage the project and measure results.

Key Questions

• Who’s perspective?

• How SCM currently viewed – “Backroom or Boardroom?”

• Scorecards aligned?

• Value of gaps?

• Change needed in SCM-related processes and strategies to help close gaps?

• “How” are gaps related to SCM-related business processes?

• “How” gaps in BP’s are linked to SCM solutions?

• “How much” value may SCM solutions provide and at what cost?

• What are costs and value added?

• Need for change management?

• Resources needed?

• Actual results? Why variances? Lesson Learned?

Analysis

• Educate on benefits of improved SCM.

• Define “How” SCM helps achieve goals.

• Analyze scorecards to determine if change is needed to maximize SCM value.

• Define benchmarks for financial metrics.

• Measure value of gaps relative to benchmarks.

• Develop maps linking financial performance gaps to SCM-related BP’s, activities, tasks and KPI’s.

• Map BP’s to SCM solutions.

• Conduct risk assessment and qualitative analysis.

• Estimate costs and benefits.

• Develop alternatives

• Obtain buy-in.

• Prioritize initiatives.

• Establish critical success factors.

• Value benefits.

• Conduct breakeven analysis.

• Plan resources.

• Incorporate costs and solution benefits into business plans

• Conduct on-going project post-mortem.

Output

• Executive summary of importance of SCM and its role in achieving company goals.

• Executive summary of gaps and motivation for change.

• Summarize likely areas for greatest improvement.

• Summary of feasibility of improving gaps with SCM solutions

• Summary of “How” and “How Much” SCM solutions benefits.

• Project justification.

• Link to business needs.

• Contingency plans.

• Implementation Plan.

• Incorporate into business plans.

• Disseminate lessons learned.

Financial Gap Analysis

BusinessProcessMapping

SCM Solution Mapping

Solution Benefits

Estimates

BusinessCase

Development

Implement &Measure

Stage 1 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 Stage 7

Roadmap to Connecting Supply Chain to Financial Performance

Copyright © 2007 FinListics Solutions. No part of this presentation may be reused or redistributed without explicit permission from FinListics Solutions.

Establish Enterprise-Wide

View of SCM

Questions?

Making the Financial-Supply Chain Management Connection

Dr. Stephen G. Timme

President, FinListics Solutions and Adjunct Professor, Georgia Institute of Technology

supply chain industry forum sponsored by yrc logistics

Documents

improved scm

financialscm connection

scm speed

inventory noncapital

terms of inventory

total inventory costs

financial goals

growing revenue