Supply Chain Financial Analysis - MIT CTL
Transcript of Supply Chain Financial Analysis - MIT CTL
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Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011
ThefirstprincipleinacommonMBAfinancetextbook
“Acompany’sfinancesandoperationsareintegrallyconnected.”
Whyisoperationsundervalued?
• “Inourcompany,operationsisnotglamorous.Dealsare.”
• Operationsisabranchofengineeringrequiringadifferentskillsetandmindset
• Topmanagers– whoenteredthroughfinance,strategy,ormarketing– areignorantaboutoperationsanduninterestedinlearningmore,relyingonotherstomindthedetailsofactualwork
• “Financialdatadominatethediscourseinthemodernorganization,althoughoperationalperformanceisthedriveroffinancialresults.”
Source:“DeepChange:HowOperationalInnovationCanTransformYourCompany,”MichaelHammer,HarvardBusinessReview,Vol.82Issue4,April2004,pp.84-93.
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Answerthesequestionsforyourfirm
• WhatfinancialKPIsdoyouusetomeasuresupplychainperformance?
• Whatfinancialanalysisdoyouusetomakesupplychaindecisions?
TheLanguageofFinance
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TheLanguageofFinance
• FinancialStatements– BalanceSheet– IncomeStatement
• FinancialAnalysis– Ratios– Acronyms(ROA,ROIC,EVA,…)
BalanceSheet
• Snapshotofthefirm’svalue– Approximation:accountantsmeasuredvalueatthetimethetransactiontookplace– Bookvalueisthelowerofcostormarketvalue
• Assets(listedinorderofliquidity)– Current:cash,marketablesecurities,accountsreceivable,inventories– Fixed:property,plant,equipment(lessaccumulateddepreciation)– Intangible:patents,goodwill…“growthassets”
• Liabilities(listedinorderinwhichtheymustbepaid)– Current:accountspayable,notespayable,…– Long-term:notes,bonds,deferredincometaxes,…
• Shareholders’equity(a.k.a.networth)– Stock:preferred,common– Retainedearnings
Lasttobepaidifafirmisdissolved
consumedinthecurrentyear
consumedinthefuture
consumedtheoretically
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IncomeStatement
• Performancerecordbetweensnapshots• Explainswhyretainedearningshaschangedovertime
– Sales(netofmarkdowns)– Costofgoodssold– GROSSINCOME– Selling,general&administrative(SGA)expenses– OPERATINGINCOME– Depreciation&amortization– OPERATINGINCOME
– Interestexpense– Othernonoperatingexpenses/income
– Incometaxes– Extraordinaryitems– NETINCOME
EBITDA
EBIT
EIATBS
FinancialStatements
“Financialstatementsarelikefineperfume;tobesniffedbutnotswallowed.”
− AbrahamBrilloff
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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FinancialAnalysis
“accountantstrytomeasurethecurrentstandingandimmediatepastperformanceofafirm,whereasfinancialanalysisismuchmoreforwardlooking.”
− Aswath Damodaran,SternSchoolofBusiness
Source:http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/accstate.htm
FinancialAnalysis
• Analogyaboutmanagingacompany’sfinancialperformance– stick,throttle,rudder
• “Weanalyzefinancialstatementsforthepurposeof– evaluatingperformanceand– understandingtheleversofmanagementcontrol.”
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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FinancialAnalysis
• Higgins’threeleversofmanagementcontrol– Netmargin:Netincome/Sales– Assetturnover:Sales/Assets– Financialleverage:Assets/Shareholders’equity
• Studythe“tiesbetweenacompany’soperatingdecisions…anditsfinancialperformance.”– “Operatingdecisionsaretheleversbywhichmanagementcontrolsfinancialperformance.”
– Examplesgiven:howmanyunitstomakethismonth,howtopricethem
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
DupontAnalysis
assets TotalSalesoverAsset turn =
SalesincomeNet marginNet =
overAsset turn margin Net ROA ´=
Equityassets Totalleverage Financial =
leverage FinancialoverAsset turnmarginNet ROE ´´=
InventoryTurnover, anarrowerfocusthanAssetTurnover,isoftenametricforsupplychainprofessionals
GrossorOperatingMarginisamorecommonmetricforsupplychainprofessionalsthanNetMargin
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Financeandsupplychainworktogethertocreatestockholdervalue
Div
iden
dInvestors
(Equity)
Firm
Investors
(Debt)
Operational Assets
Firm invests
Future cash flows: revenues, expenses, etc.
Operations/supplychain:usefundstogeneratereturns
Finance:acquirefunds
Finance:allocatefunds
LeversofPerformancefor10DiverseCompanies,2010
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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Principalratiodefinitions(Higgins)*
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
*Excludingtheleverageandliquidityratios
Usingratioseffectively
• Ratiovaluesneedtobeunderstoodincontext• Usually,no“correct”valuesforratios• Relyonruleofthumbassessmenttechniques,comparisonwithindustryaveragesandspecificcompetitors,andlookingfortrends
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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YouarenowreadytobeCEO
SunflowerNutraceutical(SNC)Simulation
SunflowerNutraceutical(SNC)
• HowdidyoulikebeingCEO?• Whatwasyourobjectiveinmakingdecisions?• Whatapproachesdidyouusetoevaluateoptions?
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SunflowerNutraceutical(SNC)Results
TwoGoalsoftheCEO
• ProvideShareholderValue• …andstayoutofjail
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[email protected]:http://www.maaw.info/ArticleSummaries/ArtSumKaplanNorton2001.htm
Source:website,TradeDynamics,LLC
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Source:website,FinlisticsSolutions
DeloitteEnterpriseValueMap
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GoaloftheCEO
• ProvideShareholderValue
• DriversofShareholderValue– RevenueGrowth– OperatingMargin– AssetUtilization
Supplychainprofessionalscanaffectallthree!
Driversofshareholdervalue
RevenueGrowth
AssetUtilization
OperatingMargin
Risk
Leverage
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Howdoessupplychainperformancemakeanimpactonfinancialresults?
• Tradeoffsexist• Wheredoyoufocus?
AssetUtilizationOperatingMargin
RevenueGrowth
Responsiveness(productavailability)Capability(newmarkets)
Leanness(reduceassets)Agility(adaptcapacities)
Leanness(reducecost)Segmentation(identifyopportunities)
SunflowerNutraceutical(SNC)Analysis
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SunflowerNutraceutical(SNC)Analysis
SunflowerNutraceutical(SNC)Analysis
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SunflowerNutraceutical(SNC)Analysis
Dupont AnalysisassessestheMargin–AssetUtilizationtradeoffatahighlevel
AssetUtilizationOperatingMargin
RevenueGrowth
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DoyouseeanyextremeexamplesofProfitPathandTurnoverPath?
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
Leveragedrivesvalue+increasesrisk
RevenueGrowth
AssetUtilization
OperatingMargin
Risk
Leverage
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ROIC
• ReturnonInvestedCapitala.k.a.RONA(ReturnonNetAssets)
• ROIC=EBIT(1-Taxrate)/(Interest-bearingdebt+Equity)
• Numerator:earningsaftertaxifitwereallequityfinanced(i.e.,notconsideringinterestexpenseortaxbooks)
• Denominator:sumofallsourcesofcashonwhichareturnmustbeearned
ROICisnotaffectedbyfinancingscheme
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
BalanceSheet
IncomeStatement
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EVA™
• EVA™=economicvalueadded=NOPAT– (IC*COC)
• where– IC=investedcapital– COC=costofcapital[i.e.WACC]– NOPAT=netoperatingprofitaftertaxes[i.e.EBIT*(1-TaxRate)]
• Transformaccountingprofitintoeconomicprofit– Convertaccrual-basedearningsintoacash-basedNOPAT– Converttotalassetstoinvestedcapital– Assessthequantityofcapitalusedtogeneratetheincome– ThecomplexityandefforttoadjustGAAPisaweaknessofEVA
[email protected]:EVA™isatrademarkedsymbolof Stern,Stewart&Co.
Simplebottomline
Ifeconomicvalueaddedispositiveinagivenyear,thefirmhasearnedmorethan
theamountrequiredtocompensatedebtholdersandshareholders
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EconomicValueAdded
SALES
COGS
GROSSMARGIN
TOTALEXPENSES
NETPROFIT(EBIT)
TAXES
NOPAT
CAPITALCHARGE
TOTALCAPITAL
COSTOFCAPITAL(%)
CURRENTASSETS
FIXEDASSETS
OTHERCURRENTASSETS
INVENTORY
EVA
−
−
−
+
+
X
−
OTHER+
Source:“Supplychainmetrics,”DouglasM.LambertandTerranceL.Pohlen.InternationalJournalofLogisticsManagement,Vol.12No.1,2001,pp.1-19.
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Source:“Supplychainmetrics,”DouglasM.LambertandTerranceL.Pohlen.InternationalJournalofLogisticsManagement,Vol.12No.1,2001,pp.1-19.
Example:supplychaintradeoff
New Proposal
100,000$
86,500$ 11,500$ 75,000$
13,500$ 5,130$ 8,370$
60,000$ 44,000$ 16,000$
6,000$ 4,400$ 1,600$
2,370$ 103.0%
Base
Revenues 100,000$
Operating Costs - 85,000$ SC 10,000$ Non-SC 75,000$
EBIT = 15,000$ Taxes 38% - 5,700$ NOPAT = 9,300$
Capital 70,000$ SC 54,000$ Non-SC 16,000$
Cost of Capital 10%Capital Charge - 7,000$
SC 5,400$ Non-SC 1,600$
EVA = 2,300$
Base
Revenues 100,000$
Operating Costs - 85,000$ SC 10,000$ Non-SC 75,000$
EBIT = 15,000$ Taxes 38% - 5,700$ NOPAT = 9,300$
Capital 70,000$ SC 54,000$ Non-SC 16,000$
Cost of Capital 10%Capital Charge - 7,000$
SC 5,400$ Non-SC 1,600$
EVA = 2,300$
New Proposal
100,000$
86,500$ 11,500$ 75,000$
13,500$ 5,130$ 8,370$
60,000$ 44,000$ 16,000$
6,000$ 4,400$ 1,600$
2,370$ 103.0%
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Example:supplychainimprovement
Ops better 10%
100,000$
84,000$ 9,000$
75,000$
16,000$ 6,080$ 9,920$
70,000$ 54,000$ 16,000$
7,000$ 5,400$ 1,600$
2,920$ 127.0%
Base
Revenues 100,000$
Operating Costs - 85,000$ SC 10,000$ Non-SC 75,000$
EBIT = 15,000$ Taxes 38% - 5,700$ NOPAT = 9,300$
Capital 70,000$ SC 54,000$ Non-SC 16,000$
Cost of Capital 10%Capital Charge - 7,000$
SC 5,400$ Non-SC 1,600$
EVA = 2,300$
Cap better 10%
100,000$
85,000$ 10,000$ 75,000$
15,000$ 5,700$ 9,300$
64,600$ 48,600$ 16,000$
6,460$ 4,860$ 1,600$
2,840$ 123.5%
EVAisalignedwithNPV
ThepresentvalueofEVAsfromagivenprojectismathematicallyequivalenttotheNPVoftheproject
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EVAisnotnew,sowhyisitpopular?
• Consultantsaregoodatrepackagingoldideas– BasicideausedbyGeneralMotorsin1920s– LabeledbyGeneralElectricin1950sas“residualincome”– TrademarkedbySternStewartin1990sasEVA™(withfurthernewterminologysuchasNOPAT)
• Uniformity:itcanbeusedforthreecrucialmanagementfunctions– Investmentanalysis(insteadofNPV,IRR,BCR)– Businessunitperformanceappraisal(insteadofROE,ROA)– Compensationincentive(turnmiddlemanagersinto“owners”)
• ItismorestreamlinedthanrelyingonahostofmeasuressuchasNPV,IRR,BCR,ROE,ROIC,EPS,etc.
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011
“EVApromisestocompletethetransformationofvaluecreationfromameresloganintoapowerfulmanagementtool,onethatmayatlastmove
modernfinanceoutoftheclassroomandintotheboardroom– andperhapsevenontotheshopfloor.”