Slide 1Business Value HierarchySupply Chain Impact on ROIThe Cost of InventoryCash FlowTraditional Methods of MeasurementTraditional Assessment DeficienciesTypical SC Performance MetricsProcess MetricsProcess MetricsTotal Cost of OwnershipTotal Supply Chain CostsUsual Distribution of Customer (or Product) ProfitabilityAssessing DCPAccounting PerspectiveCost Accounting System DeficienciesSlide 17Functional vs. Activity Based CostsActivity Based Costing and ManagmentMeasuring CompetitivenessSlide 21Slide 22Slide 23Slide 24Slide 25Slide 26Drivers of Shareholder ValueBA331-Supply Chain ManagementChapter 3Shay Scott, Ph.D.Department of Marketing and SCMManaging Director, Global Supply Chain InstituteUniversity of [email protected] Chain ManagementBusiness Value HierarchyBetter Utilize Assets Equity & Cash FlowImprove EarningsIncrease Revenue Reduce CostsSource: Think Like Your Customer, McGraw-Hill, 2005Shay Scott2Supply Chain Impact on ROIShay Scott3Return on InvestmentCapital EmployedProfitSales RevenueFixed AssetsInventoryAR/APCashCostsCustomer ServiceAvailabilityProcurementEfficiencyPipeline MgmtAcct ReceivableAcct PayableJust-in-Time (JIT)Asset MgmtLet’s look a bit closer Investment ($) in Inventory Interest/Financing ExpensesCapitalCostsThe Cost of Inventory Insurance on Inventory Taxes on InventoryService Costs Mfg. Plant Warehouses Company owned Warehouses Rented Warehouses Public WarehousesStorage Space Costs Obsolescence Damage Shrinkage (Theft) RelocationInventory Risk CostsTheCostofInventoryShay Scott4Cash Flow5Cash-to-Cash Cycle = Days of Inv + Days Accts Rec – Days Accts PayTraditional Methods of MeasurementTraditional Goal: To increase scope and accuracy in functional measurement•Asset Management: inventory measures•Cost: costs of activities, functions•Productivity: relationship of input to output (usually labor and equipment)•Quality: physical and information•Customer Service: reliability, timeliness, etc. Shay Scott6Traditional Assessment Deficiencies•Bias toward cost and internal customer service metrics•Belief that internally generated customer service and quality metrics reflect a customer perspective•Customer service metrics are not jointly defined•Metrics are “on-average, over-time” rather than de-averaged absolute metrics•Functionally-oriented--Unable to assess performance along horizontal process•Unable to assess financial perspective Shay Scott7Typical SC Performance MetricsShay Scott8Focus on the total process performance as opposed to the functional viewInternal Supply Chain•Perfect Order (customer perspective)-Overall assessment of ability to achieve high levels of performance on all metrics of significance to the customer.•Cash-to-Cash (financial perspective)-The time it takes to convert an investment in raw materials to sales of finished goods. -Total Inventory Days Of Supply + Days Sales Outstanding - Days Payables OutstandingProcess MetricsShay Scott9Overall Supply Chain•Focus on the end consumer (customer perspective)-Increasing profitable consumer takeaway is the ultimate goal for all supply chain members.-Shelf level in-stock position is a key metric for the supply chain•Dwell time (operations perspective)-The ratio of the number of days that inventory (or other assets) sit idle to the number of days it is actually moving in the supply chain.•Inventory Days of Supply (operations perspective)-The total inventory in the supply chain relationship -- inbound, plant and all stocking locations in the channel -- expressed as calendar days of supply based on recent actual daily rate of sales (or forecasted rate of sales).•Total Landed Cost (financial perspective)-The sum of all fixed and variable costs in along a supply chain.Process MetricsShay Scott10AcquisitioncostManagement costMaintenance costTechnical support costInventory costOperatingcostTraining costDisposal costTotal Cost of OwnershipShay Scott11200%=Total Cost of Ownership150%100%Cost (%)Landed CostInventory Carrying CostSupport Cost Material price Transportation Customs Inspection Taxes++ Holding Inspection Insurance Obsolescence Technology Supplier Mgmt Mfg Support R&D Lost Sales Capital Costs Storage Handling Administration Warranty Field Failures Disposal+ +Life-Cycle Cost Opportunity CostTotal Supply Chain CostsShay Scott12Usual Distribution of Customer (or Product) ProfitabilityFrom Martin Christopher, Logistics and SCM, 4th ed., 2010, Prentice-Hall1314Note – this is the Mkt/Sales P&LFrom Martin Christopher, Logistics and SCM, 4th ed., 2010, Prentice-HallAssessing DCPBALANCE SHEET SA LES or REVENUELESS: COST OF GOODS SOLD (COGS) = GROSS MARGINLESS: EXPENSES = NET PROFIT (OR LOSS) BEFORE TAXESLESS: TAXES = NET PROFIT (OR LOSS) AFTER TAXESASSETSCurrent Assets (cash, accounts receivable, inventory, and other assets in varying states of being converted into cash within the next 12 months).Fixed Assets (equipment, vehicles, machinery, real estate, and other assets used in the operation of the business which are not intended for resale).LIABILITIESCurrent Liabilities (notes payable, accounts payable, income taxes, and other debts owed by the business to be paid within the next 12 months).Long-Term Liabilities (mortgages and other debts owed by the business to be paid beyond the next 12 months).NET WORTHThe Owner's claim on the assets of the business--that is, the owner's investment or equity.INCOME STATEMENT: SALES – COGS – EXPENSES – TAXES = PROFITAccounting PerspectiveShay Scott15Cost Accounting System Deficiencies •Originated for the purpose of reporting to the financial community, not for the purpose of taking managerial action.–Ex: Consider Inventory Carrying Cost•Measure revenues and costs at an aggregate level, not at a level appropriate for managerial action.•Don’t recognize that costs can vary substantially between products, services, customers, etc.Shay Scott16In both entrepreneurial and larger companies, we too often spend time focusingon the desired financial performance target, rather than the inputs that drivethose numbers. Because boards, investors and management demand an objectiveway to measure performance, we often go right to the result without focusing onwhat caused those results. Financial performance is a result, a by-product, a consequence of somethingelse. The financial "numbers" ultimately represent the scorecard we
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