The amount of money organizations spend with suppliers is huge.

Dollars spent with suppliers as a percentage of tot

revenues is a good indicator of supply's financia impact. The financial impact of the corporate spend is often illustrat
the profit-leverage effect and the return-on-assets effect.
The profit-leverage effect of supply savings is measured by the increase in profit obtained by a decrease in purchase
spend. For example, for an organization with revenue of $100 million, purchases of $60 million, and profit of $8 milli
10% reduction in purchase spend would result in an increase in profit of 75%.
The Return-on-assets effect (ROA) is an indicator of how profitable a company is relative to its total assets. ROA give
idea as to how efficient a company's management is at using its assets to generate earnings. Financial experts are
increasingly interested in ROA as a measure of corporate performance. For example, for an organization with revenu
$100 million, purchases of $60 million, and profit of $8 million, and inventory accounts for 30% of total assets, if pur
costs were reduced by 10%, that would lead to an extra benefit of a 10% reduction in the inventory asset base.
uppliers as a percentage of total
rporate spend is often illustrated by

ned by a decrease in purchase

0 million, and profit of $8 million, a

tive to its total assets. ROA gives an

rnings. Financial experts are
or an organization with revenue of
s for 30% of total assets, if purchase
the inventory asset base.
How much would profit increase with a 10% purchase cost reduction?

Profit Leverage Effect

Normal Scenario 10% Purchase Cost Reduction

Revenue 200,000,000 200,000,000
- Purchases 130,000,000 117,000,000
= Gross Profit 70,000,000 83,000,000
- Sales, General, & Administrative 57,000,000 57,000,000
= Profit Before Tax 13,000,000 26,000,000

Change in Profit - 100%

How much is the Return-On-Asset (ROA) after the 10% cost reduction if assets were $130,000?

Return on Assets Effect

Normal Scenario
Revenue 200,000,000
- Purchases 130,000,000
= Gross Profit 70,000,000
- Sales, General, & Administrative 57,000,000
= Profit Before Tax 13,000,000
Assets 13,000,000
Return on Assets 100%
ROA After 10% cost reduction
200,000,000
117,000,000
83,000,000
57,000,000
26,000,000
13,000,000
200%
How does this affect the company's Inventory Investment?

Since accountants value inventory items at the purchases at purchased cost, including
transportation, but the inventory at the supplier at manufacturing cost, the same
items stored at the supplier typically have a lower inventory investment and carrying
cost. Thus, it is a prime responsibility of supply to manage the supply process with the
lowest reasonable levels of inventory attainable. Inventory turnover and level are two
major measures of SCM. The financial impact of supply is on the balance sheet and
the income statament.