Financial Intelligence for Supply Chain Managers: Understand the Link between Operations and Corporate Financial Performance

256 Pages·2015·2.44 MB·English

by  Steven M. Leon

ptg16393080
F I
INANCIAL NTELLIGENCE
S C
FOR UPPLY HAIN
M
ANAGERS
ptg16393080
This page intentionally left blank
ptg16393080
F I
INANCIAL NTELLIGENCE
S C
FOR UPPLY HAIN
M
ANAGERS
ptg16393080
Understand the Link between
Operations and Corporate
Financial Performance
STEVEN M. LEON
Publisher: Paul Boger
Editor-in-Chief: Amy Neidlinger
Executive Editor: Jeanne Glasser Levine
Development Editor: Natasha Wolmers
Editorial Assistant: Kristen Watterson
Cover Designer: Chuti Prasertsith
Managing Editor: Kristy Hart
Project Manager: Namita Gahtori, Cenveo® Publisher Services
Copy Editor: Cenveo Publisher Services
Proofreader: Cenveo Publisher Services
Indexer: Cenveo Publisher Services
Compositor: Cenveo Publisher Services
Manufacturing Buyer: Dan Uhrig
©2016 by Steven M. Leon
Published by Pearson Education, Inc.
Old Tappan, New Jersey 07675
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All rights reserved. No part of this book may be reproduced, in any form or by any means,
without permission in writing from the publisher.
Printed in the United States of America
First Printing November 2015
ISBN-10: 0-13-383831-5
ISBN-13: 978-0-13-383831-2
Pearson Education Ltd.
Pearson Education Australia PTY, Limited
Pearson Education Singapore, Pte. Ltd.
Pearson Education Asia, Ltd.
Pearson Education Canada, Ltd.
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Pearson Education—Japan
Pearson Education Malaysia, Pte. Ltd.
Library of Congress Control Number: 2015950135
Contents
Acknowledgments . . . . . . . . . . . . . . . . . . . . . .x
About the Author . . . . . . . . . . . . . . . . . . . . . . xii
Chapter 1 I ntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
What Is Important to the CEO? . . . . . . . . . . . . . . . 3
Supply Chain and Operations Value Proposition. . . 4
The Role of Supply Chain and Operations . . . . . . . 5
Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Supply Chain and Operations Financial Impact . . . 8
Value from a Different Perspective . . . . . . . . . . . . 11
Structure of the Book . . . . . . . . . . . . . . . . . . . . . . . 13
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Chapter 2 F inancial Statements Overview . . . . . . . . . . . 17
What Are Financial Statements? . . . . . . . . . . . . . . 17
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What Are Financial Statements Used For? . . . . . . 20
A Closer Look at the Elements of Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Income Statement . . . . . . . . . . . . . . . . . . . . . . 26
Statement of Cash Flows . . . . . . . . . . . . . . . . . 30
Relationship between Financial Statements . . . . . 34
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Chapter 3 F inancial Statement Primer
Essentials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Value of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Property Example . . . . . . . . . . . . . . . . . . . . . . . 41
Plant and Building Example . . . . . . . . . . . . . . 41
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Noncash Transactions . . . . . . . . . . . . . . . . . . . . . . . 42
Tangible Assets and Depreciation . . . . . . . . . . 42
v
vi CONTENTS
Net Fixed Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Nontangible Assets and Amortization . . . . . . . . . . 47
Inventory Costing and Cost of Goods Sold . . . . . . 47
Operating Leases and Off-Balance Sheet
Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Net Accounts Receivable . . . . . . . . . . . . . . . . . . . . 53
Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Net Credit Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Foreign Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Inventory Purchases . . . . . . . . . . . . . . . . . . . . . 57
Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Chapter 4 R atio Analysis with
Financial Statements . . . . . . . . . . . . . . . . . . . 61
Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Ratio Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
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Caveats to Ratio Analysis . . . . . . . . . . . . . . . . . 66
Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Liquidity Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Operating Cash Flow Ratio . . . . . . . . . . . . . . . 75
Profitability Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Profit Margin . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Operating Profit Margin Ratio . . . . . . . . . . . . . 79
Gross Profit Margin Ratio . . . . . . . . . . . . . . . . 80
Basic Earnings Power Ratio . . . . . . . . . . . . . . . 80
Return on Total Assets Ratio . . . . . . . . . . . . . . 80
Return on Equity Ratio . . . . . . . . . . . . . . . . . . 81
Valuation Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Earnings per Share (EPS) . . . . . . . . . . . . . . . . 82
Price-to-Earnings (P/E) Ratio . . . . . . . . . . . . . 83
Price/Cash Flow Ratio . . . . . . . . . . . . . . . . . . . 83
Market/Book (M/B) Ratio . . . . . . . . . . . . . . . . 84
Dividend Yield . . . . . . . . . . . . . . . . . . . . . . . . . 85
Dividend Payout Ratio . . . . . . . . . . . . . . . . . . . 85
CONTENTS vii
Asset Management Ratios . . . . . . . . . . . . . . . . . . . 86
Inventory Turnover Ratio . . . . . . . . . . . . . . . . . 86
Days in Inventory . . . . . . . . . . . . . . . . . . . . . . . 87
Accounts Receivable Turnover Ratio . . . . . . . . 88
Days Sales Outstanding . . . . . . . . . . . . . . . . . . 88
Fixed Asset Turnover Ratio . . . . . . . . . . . . . . . 89
Total Assets Turnover Ratio . . . . . . . . . . . . . . . 89
Debt Management Ratios . . . . . . . . . . . . . . . . . . . . 90
Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Debt-to-Equity Ratio . . . . . . . . . . . . . . . . . . . . 91
Times Interest Earned . . . . . . . . . . . . . . . . . . . 92
Debt Service Coverage Ratio . . . . . . . . . . . . . . 92
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Chapter 5 C ompany Valuation . . . . . . . . . . . . . . . . . . . .9 6
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Competitive Advantage . . . . . . . . . . . . . . . . . . . . . . 99
Reorganizing Traditional Financial
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Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
NOPLAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Invested Capital . . . . . . . . . . . . . . . . . . . . . . . 103
Return on Invested Capital . . . . . . . . . . . . . . 105
Free Cash Flow . . . . . . . . . . . . . . . . . . . . . . . 107
Cost of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Performance Trees . . . . . . . . . . . . . . . . . . . . . . . . 110
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Chapter 6 D ecision-Making Tools . . . . . . . . . . . . . . . . 112
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
DuPont Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Extended DuPont Model . . . . . . . . . . . . . . . . . . . 116
Capital Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . 118
Net Present Value . . . . . . . . . . . . . . . . . . . . . . 119
Internal Rate of Return . . . . . . . . . . . . . . . . . 124
Payback Period . . . . . . . . . . . . . . . . . . . . . . . . 125
Risk and Decision Making . . . . . . . . . . . . . . . . . . 126
Decision Trees . . . . . . . . . . . . . . . . . . . . . . . . 126
Simulation Models . . . . . . . . . . . . . . . . . . . . . 128
viii CONTENTS
Break-Even Analysis . . . . . . . . . . . . . . . . . . . . . . . 129
Break-Even and Make or Buy Decisions . . . 132
Real Options . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Chapter 7 P roject Management . . . . . . . . . . . . . . . . . . 136
Managing Projects . . . . . . . . . . . . . . . . . . . . . . . . . 137
Project Success and Failure . . . . . . . . . . . . . . . . . 139
Project Selection . . . . . . . . . . . . . . . . . . . . . . . . . . 140
Project Implementation . . . . . . . . . . . . . . . . . . . . 143
Project Completion . . . . . . . . . . . . . . . . . . . . . . . . 149
Projects and KPI Trees . . . . . . . . . . . . . . . . . . . . . 152
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Chapter 8 S upply Chain Network Design and
Location Analysis . . . . . . . . . . . . . . . . . . . . . 154
Business Strategy and Competition . . . . . . . . . . . 154
Supply Chain Network Design . . . . . . . . . . . . . . . 156
Location Selection. . . . . . . . . . . . . . . . . . . . . . . . . 158 ptg16393080
Cost Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Supply Chain Network Modeling . . . . . . . . . . . . . 161
Case Example Mid-Atlantic
Hospital System . . . . . . . . . . . . . . . . . . . . . . . 162
Network Design Analysis . . . . . . . . . . . . . . . . . . . 163
Capital Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . 167
DuPont Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Chapter 9 I nventory Management . . . . . . . . . . . . . . . . 174
How Much Inventory to Order . . . . . . . . . . . . . . 176
Total Inventory Costs . . . . . . . . . . . . . . . . . . . . . . 177
When to Reorder Inventory . . . . . . . . . . . . . . . . . 180
Inventory Reduction . . . . . . . . . . . . . . . . . . . . . . . 182
Safety Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Just-in-Time . . . . . . . . . . . . . . . . . . . . . . . . . . 184
Inventory Tracking . . . . . . . . . . . . . . . . . . . . . . . . 185
Demand Forecasts . . . . . . . . . . . . . . . . . . . . . . . . 187
Financial Performance . . . . . . . . . . . . . . . . . . . . . 190
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
CONTENTS ix
Chapter 10 S ourcing and Supply Management . . . . . . . 193
Why Is Sourcing and Supply Management
Important . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Financial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Environmental . . . . . . . . . . . . . . . . . . . . . . . . 196
Social . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Organizational Purchasing Structure . . . . . . . . . . 198
Sourcing and Supply Management
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Purchasing Strategies that Support
Organizational Goals and Objectives . . . . . . . 200
Supply Continuity to Support Operations . . . 205
Obtain and Develop Suppliers . . . . . . . . . . . . 208
Reasons to Outsource . . . . . . . . . . . . . . . . . . . 209
Selecting and Evaluating Suppliers . . . . . . . . 210
How Many Suppliers to Use . . . . . . . . . . . . . 211
Supplier Involvement and
Development . . . . . . . . . . . . . . . . . . . . . . . . . 213 ptg16393080
Managing the Sourcing Process
Effectively and Efficiently . . . . . . . . . . . . . . . 213
Supplier Location and Total Cost of
Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Purchase at Lowest Total Cost of
Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
Supply Management and the
Financial Connection . . . . . . . . . . . . . . . . . . . . . . 217
DuPont Model . . . . . . . . . . . . . . . . . . . . . . . . 217
Accounts Payable Turnover . . . . . . . . . . . . . . 220
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Chapter 11 S upply and Value Chain Metrics . . . . . . . . . 223
Supply Chain and Competition . . . . . . . . . . . . . . 224
A Case of Outsourcing Production . . . . . . . . . . . . 231
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237