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Week 3 SCM and financial contribution - Coggle Diagram
Week 3 SCM and financial contribution
The purpose of a company in my opinion
Economic
reduction in cost(operating etc)
increasing productivity
optimizing operating parameters to maximize efficiency
social
Increase average hours of training of employee
Switch from welfare to career retention
Generate charitable contributions
environment
reduction in energy consumption
reduction in input materials consumption
reduction in wastages(adopting lean practices)
using electrode with environment friendly coated materials
in reality
Profit
is a financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.
Any
profit
that is gained goes to
the business's owners, who may or may not decide to spend it on the business.
Definition of profit
Gross profit
subtracts variable costs from revenue for each product line.
Operating profit
includes both variable and fixed costs. Since it doesn't include certain financial costs, it's also commonly called EBITA. That stands for
Earnings Before Interest, Tax, Depreciation, and Amortization
. It's the most commonly used, especially for service companies that don't have products.
Net profit
includes all costs.It's the most accurate representation of how much money the business is making. On the other hand, it may be misleading.For example, if the company generates a lot of cash, and it's invested in a rising stock market, it may look like it's doing well. But it might just have a good finance department, and not be making money on its core products.
Financial Measures Of Performance
From a shareholder perspective,
return on equity (ROE)*
is the main summary measure of a firm’s financial performance
ROE is important because it a critical proof that the company is capable of generating cash internally. ROE=net income/average shareholder equity
Free cash flow
is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow— or FCF—is the cash left over after a company pays for its operating expenses and capital expenditures, also known as CAPEX.
Net income+depreciation/amortization-change in working capital-capital expenditure=
free cash flow
ROA – Return on assets
- can be written as the product of two ratios – profit margin and asset turnover
ROA=earnings before interest/sales revenue(profit margin)=sales revenue/total assets(asset turnover)
Working capital
is the amount of current assets minus the amount of current liabilities as of specific date. These amounts are obtained from your company's balance sheet.Even with a significant amount of working capital, a company can experience a cash shortage if its
current assets are not turning to cash
. For example, if a company has most of its current assets in the form of inventory, that inventory needs to be sold.
Financial ratios and SCM
gross profit margin=gross income/sales
operating profit margin=operating income/sales
returns on capital employed=net operating income/total assets-current liabilities
The opportunity to
increase shareholder value
in the future will have to take care of both the income statement and balance sheet through supply chain excellence.
Profit &Loss Statement and SCM
The net income figure is arguably the most focused-upon performance metric in the business community.
Firms may also focus on components of net income, such as:
gross margin (revenues minus product costs),
earnings before interest and taxes (gross margin minus administrative overhead costs),
EBITDA (earnings before interest and taxes minus depreciations and amortization expense).
Supply chain decisions and performance have direct impacts on income through each of the three primary components of the income statement
Supply Chain cost effecting bottom line in P&L
COGS (excluding sales cost)
Material cost
Inbound transportation
Customs operations (incl. documentation)
Inventory carrying (alternative cost + carrying)
Receiving
Operating expenses
Warehousing
Picking & packing
Labelling
Value add's
Shipping
Distributing
Customer service
Reverse logistics
Revenues---Supply Chain Issues that Affect Financial Performance
Lead time
Time to market for new products
Response time to customer requests
On-time delivery
Product quality
Product returns
Stock outs
Fill rates
Product Costs---Supply Chain Issues that Affect Financial Performance
Transportation costs
Network distance
Procurement costs
Inventory costs – raw materials, work in progress, finished goods
Storage costs
Packaging costs
Waste
Stock outs
Forecast accuracy
Number of suppliers
Product remediation costs
Sales, General, and Administrative Costs---Supply Chain Issues that Affect Financial Performance
Warranty costs
Selling costs
Transaction accuracy (invoices, shipping documents, export documentation)
Exchange rate control
Balance sheet and SCM
Within the balance sheet, a key component of organizational success (or failure) is the control of working capital.
Working capital is defined as current assets less current liabilities; think of working capital as the "lifeblood" of an organization, as it is essential to keeping the organization healthy and viable.
The primary components of current assets are cash (and cash-like investments), accounts receivables, and inventories;
The primary component of current liabilities for most firms is accounts payables.
Inventory Days----Supply Chain Issues that Affect Financial Performance
Holding costs – financing, warehousing, tracking, moving, insurance
Obsolescence
Theft
Forecasting accuracy
Sourcing time
Delivery time
Accounts Receivable Days----Supply Chain Issues that Affect Financial Performance
Bad debt
Follow-up calls to receive payments
Unable to ship due to non-payment
Exchange rate changes
Correct invoicing terms
Proof of receipt
Accounts Payable Days
Discounts not taken
Late payments; subsequent orders delayed
Correct invoicing terms
Payment penalties
B/S ratios relating to SCM
number of days of inventory=inventory/average day's cost of goods sold=inventory/cost of goods sold/365
current ratio=current assets/current liabilities
inventory turnover=cost of goods sold/inventory
Impact of SC on ROCE (return on capital employed)
ROCE=Profit/capital empolyed
profit=sales revenue(customer service)-costs(logistics)
capital employed=inventory+accounts receivable+cash+fixed assets(asset deployment&utilization)
The measurement of value creation
Economic profit (EP) and economic value added (EVA®)
net sales-operating expenses=operating profit(EBIT)-tax on EBIT=NOPAT-capital charges(invested capital*WACC)=EP or EVA
Economic Profit contribution of SCM
Net operating profit after taxes(NOPAT)
Revenue
customer service levels
expenses
transportation costs
warehousing costs
ECQ costs
information system costs
capital charge
cost of capital
working capital
inventory
accounts receivable
fixed assets
euipment/vehicles
land/facilities(owned)
equipment/facilities(leased)
Supply Chain Cost structure
Measured as a % to sales (general practice)
Warehousing (activity + rent+maintenance)
Customs operations (agent expenses, labs &certifications,)
Import/Export operations(people cost - salaries)
Customer Service (people cost-salaries - systems)
Outbound distribution (value add + phy.distribution cost)
Share fm fixed expenses(office rent, IT etc)
Benchmarks
*Total supply chain costs : Best in class 4-5 % to sales Median 6-8% to sales
transport----2.7%
warehousing---1.5%
inventory charge---2.5%
customer service and administration---0.9%
Definition of Schain costs
INBOUND COSTS:
Inbound transportation : cost of transportation fm source to mfg warehouse – to distr. warehouse; WH receiving costs
Customs operations : costs incurred when importing goods(comissions, document costs etc)----Shown on customs declaration file
Operations costs : people costs for planners, purchasers, IT
OUTBOUND COSTS :
Outbound distribution cost : trp costs to get goods fm wh to customer
Warehouse costs – relating to strorage, Fixed costs : i.e rent, electricity; Storage costs : inventory holding costs; Handling costs : receiving, shipping, packaging,labelling etc
Warehouse costs – relating to order : order picking, labelling, value add’s etc.
Administrative services costs :people costs to prepare & finalize an order
Documentation costs : Invoice, certificates etc...
Operations costs : people costs for planners, purchasers, IT
Asset Related Costs .
Cost of capital for holding inventory : investment value calculated
with prevailing interest rate
Cost of obsolescence : for perishable products that lose in quality when waiting
Capacity and occupancy costs :buildings, areas used for storage
Equipment costs : fork trucks, similar equipments used in
operations
Misc. : insurance, theft, damage etc.
The supply chain manager
Key Objectives of SC Manager
Enable growth
Increase profitability
Increase ROI*return on investment = (revenue − cost of goods sold) / cost of goods sold
Free up cash – Create Value
Supply Chain Leader+Supply Chain Council=Contract Management
PROCUREMENT
Strategic Sourcing
KAP（Key Alliance Partners）-Vendors
$ Volume Driven
Qualification
Spend Areas-Future
CORE Commodities
Operations
Release orders-KAP’s
Spot Orders
Non-Repetitive Orders
NON-CORE Commodities
LOGISTICS
Warehousing
Inventory
Transportation
Environmental
Disposal
SCM ADMIN
Strategies
Efficiencies
Process Review
Demand & Forecasting
Customer Service &Order Man.
CSCO – Chief SC Officer
COGS management and strong financial and analytic perpective
Technological know-how
Agile leadership
Cultural savvy and a strong international perspective
Change management skills