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Chapter 15:

Supply Chain Finance

Chapter 15 Management of Business Logistics, 7th 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.


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.


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.


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.


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.


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.



If Profit = Sales – Costs, where

Cost = (X%) * (Sales), then

Profit = Sales – (X%) * (Sales) * (1 – X%), where

(1 – X%) = Profit Margin



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 MarginSales = $100 ÷ 0.10Sales = $1,000



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.


Table 15-1 Sales Equivalent of Supply Chain Cost Saving

‡$1,000,000 cost saving ÷ 0.07 profit margin

†$500,000 cost saving ÷ 0.07 profit margin

*$200,000 cost saving ÷ 0.07 profit margin

1,000,000500,000200,0007.010,500Net Profit

13,285,7146,642,8572,657,14393.0139,500Total Cost

$14,285,714‡$7,142,857†$2,857,143*100.0%$150,000Sales

$1,000,000$500,000$200,000%(000)

Sales Equivalent for Cost Savings ofCBL 2001


Table 15-2 Equivalent Sales with Varying Profit Margins

10,00010,00010,00010,000Cost Saving/Profit

990,000190,00090,00040,000Total Cost

$1,000,000$200,000$100,000$50,000Sales

1%5%10%20%

Profit Margins


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.


Figure 15-1 Supply Chain Impact on Return on Assets


Figure 15-2 Supply Chain Decisions and ROA


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.


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.


Figure 15-3 CBL Distributors.com Income Statement: 2001


Figure 15-4 CBL Distributors.com Balance Sheet: December 31, 2001


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.


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.



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.


Figure 15-5 Financial Impact of a 10 Percent Reduction in Transportation Cost



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.


Figure 15-6 Financial Impact of a 10 Percent Reduction in Warehousing Costs



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.


Figure 15-7 Financial Impact of a 10 Percent Reduction in Inventory



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.


Figure 15-8 Comparison of Supply Chain Alternatives


Figure 15-9 Strategic Profit Model for CBL 2001 and Reduced Transportation Costs


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 15-10.


Figure 15-10 Supply Chain Service Failure



The financial impact of improving on-time delivery is presented in Figure 15-11.

The financial impact of improving the order fill rate is presented in Figure 15-12.

The strategic profit model for on-time delivery improvement is presented in Figure 15-13.

The strategic profit model for order fill rate improvement is presented in Figure 15-14.


Figure 15-11 Financial Impact of Improving On-Time Delivery


Figure 15-12 Financial Impact of Improving Order Fill Rate


Figure 15-13 Strategic Profit Model for On-Time Delivery Improvement


Figure 15-14 Strategic Profit Model for Order Fill Rate Improvement



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

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