5. Supply Chain Financial Impacts


[MUSIC] Welcome back to our lesson on the financial impacts of the supply chain.
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Upon completing this lesson, learners should be able to discuss how supply chain management impacts an organization’s financial performance, and describe the types of inventory in a supply chain and the importance of inventory in a supply chain. Let’s turn our attention to one of the major reasons that corporations exist. That is to provide an adequate return on the invested capital provided by stakeholders in the organization. To improve the return on invested capital, and be attractive for stakeholder funding, organizations must focus on a combination of increasing net profits, and more efficiently, utilizing capital.
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To improve profitability, organizations can increase gross profit on the sales side of the business and/or decrease operating expenses from the operations side of which supply chain is typically a huge portion of the overall operating costs. On the capital efficiency side, organizations can focus on the amount of capital that is deployed to support the organization, and/or reducing the cost of that capital. As we drive further back into the operational levers that can be adjusted, we see a wide variety of components feeding into profit improvement and capital efficiency improvement. And if you look closely at these components, I think you can start to see that many of them are impacted quite directly by supply chain performance, as we have previously defined it. The various operational levers, highlighted in red, are elements directly attributed to supply chain performance, supply chain strategies, tactics, etc. If you look across from right to left with the goal of improving return on invested capital, you can see that the comprehensive impact supply chain has on an organization meeting, that is trying to meet its financial performance targets, that is. Looking more closely at the specific supply chain value levers, we see tat many of them are associated with physical movement and storage of goods such as reducing freight cost and indirect labor and warehousing. Many of the levers deal with manufacturing operations and plant productivity and asset utilization. A good many of the supply chain levers are associated with management of inventory, whether it’s purchased products, work in process, or finished goods that have been manufactured or purchased by an organization. If you think about what we’ve discussed on prior lessons about the definition of supply chain, I think you can see where these levers tie to the various domains in the integrated supply chain concept. Let’s take a minute to discuss the importance of inventory and what inventory is, as I believe it is often overlooked and out of sight, out of mind with most companies.
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There are many types of inventory including raw materials, component parts, work in process, and parts dedicated for service or repair operations. And of course, finished products held at various locations throughout the supply chain. Inventory needs to be viewed as money, a use of invested resources. The key question to ask is, is this investment in inventory being most effectively applied? Why do organizations hold inventory?
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In the ideal environment, there would be no need for inventory. As a demand signal, such as a request to purchase a finished product by an end consumer would signal the instant delivery of the finished product to satisfy that demand. I like to think of this as being similar to Captain Jean-Luc Picard on Star Trek Enterprise of The Next Generation television show, who frequently would utter the words, Tea, Earl Grey, Hot, and he would instantly receive a cup of tea.
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But this is the real world of the 21st century and it takes time to produce products and deliver products. And many times, customers willingness to wait is very limited, especially in a competitive industry. As we looked at the network view of supply chains, we saw that there are generally many tiers that materials and products flow through, both on the supply and demand sides of the supply chain. And there’s time and effort that takes place to move through the supply chain. Are there any ideal environments in the current century? Well, when you think about it, we used to purchase our music via eight-track tapes and records, whereas today, we receive our music digitally, nearly instantaneously over the Internet.
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While we have primarily discussed manufacturing related supply chains,
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it is important to note that in addition to product related supply chains, there are service operations supply chains. Services are operations like a barber shop, a car wash, etc, where individuals go to receive the service, but in order to provide that service, the service provider has to have a set of materials already in place. In most cases, service providers are pretty good at having the tools of their trade available, and are able to instantly meet certain service needs. When you think of tax preparation service, they generally have everything they need to instantly provide service to a customer. Not a lot of materials are needed in that case, though there are some. Continuing the discussion on the inventory, perhaps the most important metric to evaluate inventory performance which, as we saw a few moments ago, has big impact on companies financial performance, is inventory turns. Inventory turns is defined as the cost of goods sold divided by the average inventory. There are a number of different ways that companies specifically define these two items. It is important to make sure that the numerator and the denominator are from a common cost basis. Companies may have different approaches to calculate average inventory, however one straightforward approach is to take beginning inventory for a given time period, perhaps a month, and add ending inventory for that time period, and divide the sum by two. Over the years, Walmart became a world class leader in the retail industry, and they did so by focusing on supply chain process excellence, which can be seen in their inventory turns performance when compared to a competing organization. When you think about the billions of dollars in sales that these retailers have, and the associated billions of dollars of inventory, it’s easy to see how a company such as Walmart, with significantly better inventory turns, outperforms competitors in the eyes of stakeholders. It’s important to note that inventory turns vary greatly by industry. Here are some examples, and you may notice that grocery retailers with many products such as produce flying off the shelves on a weekly basis, have a comparatively higher inventory turns rate than other industries. The impacts of ineffective inventory management can have a big impact on a company’s reputation and a ripple effect across the extended supply chain.
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High-tech companies with short product life cycles and declining product values are at enhanced risk of disappointing stakeholders if inventory is out of alignment with demand. Does anyone remember PalmPilots?
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And another example, from Liz Claiborne, of where unexpected high inventory levels can cause unwanted attention by investors. In this lesson, we have discussed how supply chain management impacts an organization’s financial performance, and described the types of inventory in a supply chain and the importance of inventory in a supply chain. Thank you and we’ll see you on the next lesson. [MUSIC]

Jim Rohn Sứ mệnh khởi nghiệp