While the financial impact of improved supply-chain performance can be found in the income statement, balance sheet, and statement of cash flows, it can also increase your company’s relevancy among customers and clients, help you to adapt to changes in the marketplace, and free up cash to drive strategic growth initiatives.
The supply chain is the activity that manages the flow of information, money and material across the extended enterprise, from the supplier all the way through the many functional silos of a firm to the end user and back.
A well-managed supply chain delivers long-term company growth and stock health through improvements in product availability, inventory productivity, and operational efficiency. By focusing supply-chain performance on in-stock conditions and the rightsizing of working capital, companies can drastically enhance the relationship between net income and the cost of capital.
As for the income statement, a company’s supply chain can have a direct impact on net income by boosting revenue and lowering both product costs and selling, general and administrative (SG&A) costs.
To gain a better understanding of where opportunities lie within a supply chain, executives should ask key questions within each of those three areas of the income statement. To add revenue, start by examining opportunities related to increasing customer expectations of faster access to products in more locations. To drive lower product costs, it’s critical to focus on better procurement, sourcing, and supplier collaboration. To lower SG&A expenses, removing friction in how product flows to customers makes a big difference.
The next key area to look at when trying to drive economic profit is the balance sheet. This is composed of the company’s assets, equities and liabilities. Understanding those components and the relationship among them is central to identifying a company’s financial opportunities.
From a long-term asset standpoint, the balance sheet measures utilization of a company’s physical assets. Plant, property and equipment (PP&E) productivity is measured by dividing sales revenues by the amount recorded for net PP&E. This measure gives an indication of how well a company is “sweating its assets.”
The cash on hand it takes to run your business is also referred to as working capital. Making sure there’s enough on hand to fulfill short-term debts and obligations in a timely manner is an important indicator of economic stability. Three components of working capital that are greatly influenced by supply chain are inventory days, accounts receivable days and accounts payable days. All three factors need to be managed through supply-chain initiatives to ensure that the right balance is achieved between serving the needs of the business and freeing up cash.
Inventory days of coverage need to be plentiful enough on the right items to keep customers happy, but managed down on less important items. This can be achieved through item segmentation, item life-cycle management, and shorter or more flexible production runs. Accounts receivable days can be reduced to generate cash as quickly as possible from sales, while working collaboratively with key customers to drive appropriate delivery frequency and in-stock levels. Accounts payable days can be extended to allow you to hold on to cash longer by strategically collaborating with key suppliers on longer-term contracts, joint business planning, and data visibility.
Working capital, as discussed above, directly impacts cash flow from operations, which is determined by starting with net income, then including any increase or decrease in working capital, and reconciling by combining non-cash expenses and non-cash income.
So why is supply-chain performance such a huge financial lever for companies? Simple: Supply chain controls all product flow in and out of the extended enterprise, along with all related information and funds. Driving improved supply chain performance to increase revenue, improve working capital leverage, and boost efficiency can combine to yield hundreds of millions, if not billions of dollars of financial benefit.
Jack Rosenberg is national director of Colliers Logistics & Transportation Practice.
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