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Chapter 15:

Supply Chain Finance

Learning Objectives

After reading this chapter, you should be able to do the following:


Convert cost savings into equivalent sales increase. Understand a companys income statement and balance sheet. Demonstrate the impact of supply chain strategies on the income statement, balance sheet, profitability, and return on assets.

Chapter 15

Management of Business Logistics, 7th Ed.

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 15

Management of Business Logistics, 7th Ed.

Logistics Profile: CBL

Book Distributors.com
CBLs 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 15 Management of Business Logistics, 7th Ed. 4

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.
Management of Business Logistics, 7th Ed. 5

Chapter 15

The Supply Chain-Finance Connection

Landed costs of products impacts a buyers decision to purchase a sellers 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.
Management of Business Logistics, 7th Ed. 6

Chapter 15

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 15

Management of Business Logistics, 7th Ed.

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
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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 15

Management of Business Logistics, 7th Ed.

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.
Management of Business Logistics, 7th Ed. 10

Chapter 15

Table 15-1 Sales Equivalent of

Supply Chain Cost Saving


CBL 2001 (000) Sales Total Cost % $200,000 $2,857,143* 2,657,143

Sales Equivalent for Cost Savings of $500,000 $1,000,000

$150,000 100.0% 139,500 93.0

$7,142,857 $14,285,714 6,642,857 13,285,714

Net Profit

10,500

7.0

200,000

500,000

1,000,000

*$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 15 Management of Business Logistics, 7th Ed. 11

Table 15-2 Equivalent Sales with

Varying Profit Margins

Profit Margins

20%
Sales Total Cost Cost Saving/Profit $50,000 40,000 10,000

10%
$100,000 90,000 10,000

5%
$200,000 190,000 10,000

1%
$1,000,000 990,000 10,000

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Management of Business Logistics, 7th Ed.

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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.
Management of Business Logistics, 7th Ed. 13

Chapter 15

Figure 15-1 Supply Chain Impact

on Return on Assets

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Figure 15-2 Supply Chain

Decisions and ROA

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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 companys 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.
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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.
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Figure 15-3 CBL Distributors.com

Income Statement: 2001

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Figure 15-4 CBL Distributors.com

Balance Sheet: December 31, 2001

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Financial Impact of Supply Chain Decisions

Based on the financial data provided in Figures 15-3 and 15-4, an analysis of CBLs 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.
Management of Business Logistics, 7th Ed. 20

Chapter 15

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.
Management of Business Logistics, 7th Ed. 21

Chapter 15

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.

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Figure 15-5 Financial Impact of a 10

Percent Reduction in Transportation Cost

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Financial Impact of Supply Chain Decisions

Warehousing cost reduction of 10% results in: Figure 15-6 compares results to CBLs 2000 performance. As might be expected, reduction in warehousing costs increases profit, profit margin, and ROA.

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Figure 15-6 Financial Impact of a 10

Percent Reduction in Warehousing Costs

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Financial Impact of Supply Chain Decisions

Inventory reduction of 10% results in: Figure 15-7 compares results to CBLs 2000 performance. As might be expected, reduction in inventory increases profit, profit margin, and ROA.

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Figure 15-7 Financial Impact of a 10

Percent Reduction in Inventory

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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.

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Figure 15-8

Comparison of Supply Chain Alternatives

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Figure 15-9 Strategic Profit Model for CBL

2001 and Reduced Transportation Costs

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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.

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Figure 15-10

Supply Chain Service Failure

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Supply Chain Service Financial Implications

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.
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Figure 15-11 Financial Impact of

Improving On-Time Delivery

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Figure 15-12 Financial Impact of

Improving Order Fill Rate

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Figure 15-13 Strategic Profit Model for

On-Time Delivery Improvement

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Figure 15-14 Strategic Profit Model for

Order Fill Rate Improvement

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Supply Chain Service Financial Implications

Outcomes Of the two alternatives, the profit margin, return on assets, and return on stockholders 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 Management of Business Logistics, 7th Ed. 38

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