Financial Implication of Supply

Chain Management on
organizations

Kiran Thomas Varghese

b2466
Introduction
 Businesses measure success through financial metrics such as
 Operating or net income
 Return on investment
 Earnings per share
 Financial performance metrics are valuable because they capture the economic
consequences of business decisions.
 Supply chain managers make decisions and use organizational resources that
eventually impact the financial outcomes of the firm.
 For that, they need to link the results of supply chain decisions to the
financial goals and related metrics of the company.
 So that, supply chain function can gain organizational visibility and
demonstrate the impact of supply chain decisions and resource utilization
on the firm’s financial performance.
Financial Statements

 Income Statement – a report of the firm’s earnings over a specific period of

time, calculated as sales activities (revenues) minus product costs (cost of goods
sold) and selling, general, and administrative costs
 Balance Sheet – a report of what the firm owns (assets) and owes to either
debtors (liabilities) or owners (shareholders’ equity)
 Statement of Cash Flows – a report detailing the sources and uses of cash from
three perspectives: operational, investment, and financial
 Statement of Stockholders’ Equity – a report that traces the generation and
distribution of stockholders’ equity through capital stock transactions,
retained earnings, and other related transactions
Income Statement

 Some components
 Gross margin
 Revenues minus product Costs
 Earnings before interest and taxes
 Gross margin minus administrative overhead costs
 EBITDA
 Earnings before interest and taxes minus depreciations and amortization
expense
Income Statement Component Supply Chain Issues that Affect
Financial Performance

Revenues • Lead time

• Time to market for new
products
• Response time to customer
requests
• On-time delivery
• Product quality
• Product returns
• Stock outs
• Fill rates
Income Statement Component Supply Chain Issues that Affect
Financial Performance
Product Costs • Transportation costs
• Network distance
• Procurement costs
• Inventory costs – raw materials,
work in progress, finished
goods
• Storage costs
• Packaging costs
• Waste
• Stock outs
• Forecast accuracy
• Number of suppliers
• Product remediation costs
Income Statement Component Supply Chain Issues that Affect
Financial Performance

Sales, General, and Administrative Costs • Warranty costs

• Selling costs
• Transaction accuracy
(invoices, shipping
documents, export
documentation)
• Exchange rate control
Balance Sheet

 One of the key component of organizational success (or failure) is the control of
working capital.
 Working capital = current assets - current liabilities
 Current Assets - cash and other assets that are expected to be converted to cash
within a year.
 Current Liabilities - amounts due to be paid to creditors within twelve months.
 The primary components of current assets are cash (and cash-like investments),
accounts receivables, and inventories
 The primary component of current liabilities accounts payables.
Working Capital Component Supply Chain Issues that Affect
Financial Performance

Inventory Days • Holding costs – financing,

warehousing, tracking, moving,
insurance
• Forecasting accuracy
• Sourcing time
• Delivery time

Accounts Receivable Days • Bad debt

• Follow-up calls to receive payments
• Unable to ship due to non-payment
• Exchange rate changes
• Proof of receipt

Accounts Payable Days • Discounts not taken

• Late payments; subsequent orders
delayed
• Correct invoicing terms
• Payment penalties
Working Capital Component Supply Chain Issues that Affect
Financial Performance
Fixed Assets - • Equipment
A long-term investment a company • Buildings
benefits from such as • Supply chain technologies
• Machinery
• Land
• Other intangible assets.
Total Assets – • Cash
Assets that are expected to provide • Accounts receivables
benefits for over a year or long term in • Fixed assets
general are presented as total assets in the
Balance sheet.
 FINANCIAL RATIOS USED IN THE
ANALYSIS OF SUPPLY CHAINS
Ratio Type Description
Cost of Goods Sold (% Efficiency ratio • Refers to the direct costs of
Revenue) (COGS) producing the goods sold by a
company.
COGS= Beginning • It includes the cost of the materials
Inventory+ P -Ending and labor directly used to create
Inventory the good.
• It excludes indirect expenses, such
P = Purchases during the as distribution costs and sales force
period​ costs
• The COGS formula is important as it
helps analyze purchase costs and
payroll costs are being controlled.
 FINANCIAL RATIOS USED IN THE
ANALYSIS OF SUPPLY CHAINS
Ratio Type Description
Inventory Turnover Efficiency ratio • This ratio helps analyze efficient
management of inventories and its
Inventory Turnover = Sales / movements across a company’s
Average Inventory supply chain.
• Inventory turnover is a ratio showing
where: how many times a company has sold
Average Inventory = and replaced inventory during a given
(Beginning Inventory + period. 
Ending Inventory) / 2 • Calculating inventory turnover can
help businesses make better
decisions on pricing,
manufacturing, marketing and
purchasing new inventory.
Cash conversion cycle

 A useful supply chain performance measure to evaluate working capital

performance
 Cash conversion cycle = Inventory Days + Accounts Receivable Days - Accounts
Payable Days.
 Inventory Days - cost of goods sold / average inventory balance
 Accounts Receivable Days - sales / average accounts receivables balance
 Accounts Payable Days - cost of goods sold / average accounts payables
balance
 One goal of cash conversion is to balance the investments a company makes in
inventory and extending credit to customers with payments that a company
makes for purchases.
 FINANCIAL RATIOS USED IN THE
ANALYSIS OF SUPPLY CHAINS
Ratio Type Description
Cash Conversion Cycle (C- Efficiency • It measures to what extent trade is tied up
C-C) ratio in stock before the stock is sold and cash is
collected from clients.
CCC=DIO+DSO−DPO • It is a metric that expresses the time
(measured in days) it takes for a company
where: to convert its investments in inventory and
DIO=Days of inventory outst other resources into cash flows from sales
anding(also known as days s • This metric takes into account how much
ales of inventory) time the company needs to sell its
inventory, how much time it takes to collect
DSO=Days sales outstanding receivables, and how much time it has to
pay its bills without incurring penalties.
DPO=Days payables outstan
ding​
 FINANCIAL RATIOS USED IN THE
ANALYSIS OF SUPPLY CHAINS
Ratio Type Description
Return on Capital Employed Profitability • The ratio is based on operating profit and
(ROCE) Ratio capital employed. This can be used to
refer to many different ratios
​ OCE= Capital Employed/
R • Return on capital employed is a financial
EBIT ratio that measures a company’s
profitability in terms of all of its capital.
​where:

EBIT=Earnings before intere
st and tax

Capital Employed=Total asse
ts − Current liabilities​
 FINANCIAL RATIOS USED IN THE
ANALYSIS OF SUPPLY CHAINS
Ratio Type Description
Operating Margin Profitability • This ratio shows how strong and
Ratio profitable the company’s operations are
Operating Margin=Operating • It measures how much profit a company
 Earnings​​/ Revenue makes on unit sales, after paying
for variable costs of production, such as
wages and raw materials, but before
paying interest or tax. It is calculated
by dividing a company’s operating profit
by its net sales.
• It shows the proportion of revenues that
are available to cover non-operating
costs, like paying interest
References

 https://www.scmr.com/article/linking_supply_chain_performance_to_a_firms_financial_pe
rformance
 https://www.csupom.com/uploads/1/1/4/8/114895679/v14n1p9.pdf
Term reference

 https://www.investopedia.com/terms/c/cogs.asp
 https://www.investopedia.com/terms/i/inventoryturnover.asp
 https://www.investopedia.com/terms/c/cashconversioncycle.asp
 https://www.investopedia.com/terms/r/roce.asp
 https://www.investopedia.com/terms/o/operatingmargin.asp
 https://www.skuvault.com/blog/everything-you-need-to-know-about-sourcing/
 https://www.extension.iastate.edu/AGDM/wholefarm/html/c3-24.html
 https://www.myaccountingcourse.com/accounting-dictionary/profitability
Thank You