Reaching for Common Ground – Finance vs. Supply Chain M. Bixby Cooper, Ph.D. Associate Professor of Supply Chain Management The Eli Broad College of Business Michigan State University Michigan State University, 2014
None of Us Doubt the Contribution • We “know” the value – Cost reduction and cost avoidance • Purchase Price • Total Cost of Ownership – Assets – Cash flow – Supplier Relationships Michigan State University, 2014 - 2 -
The Performance Hierarchy Cost Reduction Cost Avoidance Asset Management Revenue Generation Return on Assets Michigan State University, 2014 - 3 -
Importance of Supply Management • In the average manufacturing firm purchased goods and services account for 55% of every dollar of revenue the firm takes in. • Direct labor costs account for only about 10% of the sales dollar Michigan State University, 2014 - 4 -
Potential Payoff • Beginning Position Sales Revenue $100,000,000 – Purchases(55%) 55,000,000 – Labor (15%) 15,000,000 – Other (22%) 22,000,000 Pre-tax profit (8%) 8,000,000 Michigan State University, 2014 - 5 -
Potential Payoff (cont’d) Reduce Increase Reduce labor purchase cost sales by 68% cost by 36% by 10% $100,000,000 $168,000,000 $100,000,000 Sales Purchases 49,500,000 92,400,000 55,000,000 15,000,000 25,200,000 9,600,000 Labor 22,000,000 36,960,000 22,000,000 Other 13,500,000 13,440,000 13,400,000 Pre-tax Profit Michigan State University, 2014 - 6 -
Managing with the Strategic Profit Model • Supply Management requires managing multiple tradeoffs • The Strategic Profit (DuPont) Model Framework Offers a means for measurement and Assessment. Profit Margin x Asset Turnover = Return on Assets Profit Sales Profit Sales x Assets = Assets 100 2000 100 2000 x 1000 = 1000 5% x 2 times = 10% Michigan State University, 2014 - 7 -
Strategic Profit Model: A Simple Base Case SALES Price 2000 x GROSS MARGIN Quantity - 500 COST OF GOODS SOLD Cost of goods 1500 x PROFIT - Quantity 100 VARIABLE EXPENSES PROFIT MARGIN 300 ÷ Transportation 5% TOTAL EXPENSES Handling SALES Storage + 400 Space 2000 ( ) net profit FIXED EXPENSES Promotion net sales etc. 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 400 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 100 600 TOTAL ASSETS + + 1000 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 8 -
An Exercise Suppose that by working closer with suppliers to reduce their cost of serving you, suppliers are able to reduce their prices to you. The result is a 2% reduction in your cost of goods sold. This also reduces the value of your average inventory by 4%. Assume you inventory carrying cost is 20%. If all of the other elements (sales, non-inventory assets, and non-inventory related expenses) remain the same, what would be your profit margin, asset turnover and return on assets. Michigan State University, 2014 - 9 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 500 COST OF GOODS SOLD Cost of goods 1500 x PROFIT - Quantity 100 VARIABLE EXPENSES PROFIT MARGIN ÷ 300 5% Transportation TOTAL EXPENSES Handling SALES Storage + 400 2000 Space ( ) net profit FIXED EXPENSES Promotion, etc. net sales 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 400 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 100 600 TOTAL ASSETS + + 1000 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 10 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 500 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 100 VARIABLE EXPENSES PROFIT MARGIN ÷ 300 5% Transportation TOTAL EXPENSES Handling SALES Storage 400 + 2000 Space ( ) net profit FIXED EXPENSES Promotion, etc. net sales 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 400 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 600 100 TOTAL ASSETS + + 1000 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 11 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 500 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 100 VARIABLE EXPENSES PROFIT MARGIN ÷ 300 5% Transportation TOTAL EXPENSES Handling SALES Storage 400 + 2000 Space ( ) net profit FIXED EXPENSES Promotion, etc. net sales 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 384 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 100 600 TOTAL ASSETS + + 1000 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 12 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 500 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 100 VARIABLE EXPENSES PROFIT MARGIN ÷ 300 5% Transportation TOTAL EXPENSES Handling SALES Storage 400 + 2000 Space ( ) net profit FIXED EXPENSES Promotion, etc. net sales 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 384 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 100 600 TOTAL ASSETS + + 1000 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 13 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 500 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 100 VARIABLE EXPENSES PROFIT MARGIN ÷ 296.8 5% Transportation TOTAL EXPENSES Handling SALES Storage + 400 2000 Space ( ) net profit FIXED EXPENSES Promotion, etc. net sales 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 384 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 100 600 TOTAL ASSETS + + 1000 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 14 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 530 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 100 VARIABLE EXPENSES PROFIT MARGIN ÷ 296.8 5% Transportation TOTAL EXPENSES Handling SALES Storage + 396.8 2000 Space ( ) net profit FIXED EXPENSES Promotion, etc. net sales 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 384 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 600 100 TOTAL ASSETS + + 1000 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 15 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 530 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 133.2 VARIABLE EXPENSES PROFIT MARGIN ÷ 296.8 5% Transportation TOTAL EXPENSES Handling SALES Storage + 396.8 2000 Space ( ) net profit FIXED EXPENSES Promotion, etc. net sales 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 384 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 100 584 TOTAL ASSETS + + 984 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 16 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 530 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 133.2 VARIABLE EXPENSES PROFIT MARGIN ÷ 296.8 6.67% Transportation TOTAL EXPENSES SALES Handling + Storage 396.8 2000 Space ( ) net profit FIXED EXPENSES net sales Promotion, etc. 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 384 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2 100 584 TOTAL ASSETS + + 984 ( ) net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 17 -
Strategic Profit Model: Improved Supplier Relationship SALES Price 2000 x GROSS MARGIN Quantity - 530 COST OF GOODS SOLD Cost of goods 1470 x PROFIT - Quantity 133.2 VARIABLE EXPENSES PROFIT MARGIN ÷ 296.8 6.67% Transportation TOTAL EXPENSES SALES Handling + Storage 396.8 2000 Space ( ) net profit FIXED EXPENSES net sales Promotion, etc. 100 RETURN ON ASSETS 10% TIMES INVENTORY SALES 384 2000 + ASSET TURNOVER CURRENT ASSETS ACCOUNTS RECEIVABLE ÷ 2.03 100 584 TOTAL ASSETS + + ( ) 984 net sales total assets OTHER CURRENT ASSETS FIXED ASSETS 100 400 Michigan State University, 2014 - 18 -
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