This chapter discusses how supply chain strategies can impact a company's financial statements and profitability. It shows how cost savings can be converted to equivalent sales increases using a company's profit margin. The chapter analyzes the financial impact of reducing transportation, warehousing and inventory costs for a company called CBL Distributors.com. It demonstrates that these supply chain reductions increase CBL's net income, profit margin and return on assets. The chapter also examines the financial implications of improving on-time delivery and order fill rates for CBL's supply chain.

1. Chapter 15:
Supply Chain Finance

2. Learning Objectives - After reading this
chapter, you should be able to do the following:
 Convert cost savings into equivalent sales
increase.
 Understand a company’s income statement
and balance sheet.
 Demonstrate the impact of supply chain
strategies on the income statement, balance
sheet, profitability, and return on assets.

3. Learning Objectives
 Understand and use the strategic profit
model.
 Analyze the financial impact of supply chain
service failures.
 Utilize the spreadsheet computer software to
analyze financial implications of supply chain
decisions.

4. Logistics Profile: CBL
Book Distributors.com
 CBL’s mission was to be a low cost Internet
provider of college textbooks.
 Profits were good, but started to decline, and
this was causing concern among the
executives.
 Supply chain functions attracted the most
attention because increases here were higher
than in other areas of the firm.
 A financial analysis was done and now the
supply chain VP must decide what to do.

5. Introduction
 Throughout the text, emphasis has been placed
on cost and lowering cost, with the implication
that in so doing, profitability would increase.
 The importance of finance in the supply chain
context is demonstrated by the large number of
logistics managers that return to school to study
finance.
 Finance is fourth in popularity behind information
systems, E-commerce, and global processes.

6. The Supply Chain-Finance
Connection
 Landed costs of products impacts a buyer’s decision
to purchase a seller’s product thus affecting both
sales and profitability.
 Supply chain alternatives enable optimization of the
corporate goal of profit maximization.
 Inventory minimization is a direct result of the
competing needs for capital and the difficulty many
firms have in raising capital.
 Various cost levels of customer service must be
analyzed to find the most profitable level.

7. The Sales-Cost Saving
Connection
 Sales, cost, and profit drive the goals of top
management and supply chain managers
should convert cost savings into sales and
profit increases.
 Profit equation can be important in making
these conversions.

8. The Sales-Cost Saving
Connection
If Profit = Sales – Costs, where
Cost = (X%) * (Sales), then
Profit = Sales – (X%) * (Sales) * (1 – X%), where
(1 – X%) = Profit Margin

9. The Sales-Cost Saving
Connection
For example, if cost is 90% of sales, and the profit
margin is 10% of sales, a $100 cost saving is
equivalent to sales of $1,000.
Sales = Cost Saving (profit) ÷ Profit Margin
Sales = $100 ÷ 0.10
Sales = $1,000

10. The Sales-Cost Saving
Connection
 Profit margin
 Table 15-1 provides examples of
equivalent sales for different supply chain
cost savings found in the CBL Logistics
Profile.
 The lower the profit margin, the higher the
sales equivalent for a given supply chain
cost because it takes a higher volume to
produce a given profit. See Table 15-2.

11. Table 15-1 Sales Equivalent of
Supply Chain Cost Saving
CBL 2001 Sales Equivalent for Cost Savings of
(000) % $200,000 $500,000 $1,000,000
Sales $150,000 100.0% $2,857,143*
$7,142,857† $14,285,714‡
Total Cost 139,500 93.0 2,657,143 6,642,857 13,285,714
Net Profit 10,500 7.0 200,000 500,000 1,000,000
*$200,000 cost saving ÷ 0.07 profit margin
†$500,000 cost saving ÷ 0.07 profit margin
‡$1,000,000 cost saving ÷ 0.07 profit margin

12. Table 15-2 Equivalent Sales with
Varying Profit Margins
Profit Margins
20% 10% 5% 1%
Sales $50,000 $100,000 $200,000 $1,000,000
Total Cost 40,000 90,000 190,000 990,000
Cost Saving/Profit 10,000 10,000 10,000 10,000

13. The Supply Chain
Financial Impact
 Stockholder return – major financial objective
 Net worth – consider absolute and relative size of the
profit
 Return on assets – used as a benchmark
 Channel structure – consider outsourcing as a way to
improve ROA.
 Channel inventories – consider minimizing inventory
as a way to improve ROA.
 Order management – reduces costs and improves
sales, both of which improve the ROA.
 Transit time – reductions here improve sales and
reduce inventories, thereby improving ROA.

14. Figure 15-1 Supply Chain Impact
on Return on Assets

15. Figure 15-2 Supply Chain
Decisions and ROA

16. On the Line:
Hard Sell
 The benefits of logistics management are
evident, but it remains a hard sell to convince
senior management that logistics is vital to a
company’s financial performance and therefore
deserves continued investment.
 Creating value, reducing costs, increasing both
asset utilization and economic profit, and
enabling growth are ways to sell logistics.

17. Financial Statements
 Sales, cost, and profit
 Figure 15-3 contains CBL Distributors.com
spreadsheet-prepared income statement.
 Symbol column contains the equations
used.
 Assets and liabilities
 Figure 15-4 contains CBL Distributors.com
spreadsheet-prepared balance sheet.
 Symbol column contains the equations
used.

18. Figure 15-3 CBL
Distributors.com Income
Statement: 2001

19. Figure 15-4 CBL Distributors.com
Balance Sheet: December 31, 2001

20. Financial Impact of
Supply Chain Decisions
 Based on the financial data provided in
Figures 15-3 and 15-4, an analysis of CBL’s
supply chain alternatives based on a 10%
reduction in transportation and warehousing
costs and a 10% reduction in inventory is
illustrated.
 The results from the analysis are presented in
the next slides.

21. Financial Impact of Supply Chain
Decisions: Figure 15-5
 Transportation cost reduction results in:
 Net income increases by $360,000.
 Profit margin increases to 7.24%.
 ROA increases to 7.49%.
 Transportation costs decrease to 3.6% of
sales.
 No change in warehousing or inventory
costs as a percentage of sales.

22. Financial Impact of
Supply Chain Decisions
 Transportation cost reduction of 10% results in:
 Net income increases by $360,000.
 Profit margin increases to 7.24%.
 ROA increases to 7.49%.
 Transportation costs decrease to 3.6% of sales.
 No change in warehousing or inventory costs as a
percentage of sales.
 Examine Figure 15-5.

23. Figure 15-5 Financial Impact of a 10
Percent Reduction in Transportation Cost

24. Financial Impact of
Supply Chain Decisions
 Warehousing cost reduction of 10% results in:
 Figure 15-6 compares results to CBL’s 2000
performance.
 As might be expected, reduction in
warehousing costs increases profit, profit
margin, and ROA.

25. Figure 15-6 Financial Impact of a 10
Percent Reduction in Warehousing Costs

26. Financial Impact of
Supply Chain Decisions
 Inventory reduction of 10% results in:
 Figure 15-7 compares results to CBL’s 2000
performance.
 As might be expected, reduction in inventory
increases profit, profit margin, and ROA.

27. Figure 15-7 Financial Impact of a 10
Percent Reduction in Inventory

28. Financial Impact of
Supply Chain Decisions
 Figure 15-8 provides a comparison of supply
chain alternatives
 Figure 15-9 provides a strategic profit model for
CBL in 2001 based on reduced transportation
costs.

29. Figure 15-8
Comparison of Supply Chain Alternatives

30. Figure 15-9 Strategic Profit Model for CBL
2001 and Reduced Transportation Costs

31. Supply Chain Service
Financial Implications
 CBL incurs service failures resulting from 95%
on-time deliveries and 97% order fill rates.
 5% of the orders are delivered late and 3% are
filled incorrectly.
 These failures result in increased costs for
CBL.
 A model for calculating supply chain service
failures is presented in Figure 15-10.

32. Figure 15-10
Supply Chain Service Failure

33. Supply Chain Service
Financial Implications
 The financial impact of improving on-time
delivery is presented in Figure 15-11.
 The financial impact of improving the order fill
rate is presented in Figure 15-12.
 The strategic profit model for on-time delivery
improvement is presented in Figure 15-13.
 The strategic profit model for order fill rate
improvement is presented in Figure 15-14.

34. Figure 15-11 Financial Impact of
Improving On-Time Delivery

35. Figure 15-12 Financial Impact of
Improving Order Fill Rate

36. Figure 15-13 Strategic Profit Model for
On-Time Delivery Improvement

37. Figure 15-14 Strategic Profit Model for
Order Fill Rate Improvement

38. Supply Chain Service
Financial Implications
 Outcomes
 Of the two alternatives, the profit margin, return on
assets, and return on stockholder’s equity are
greater with the order fill rate improvement strategy
than with the on-time delivery strategy.
 The financial goal for supply chain management is to
increase return to stockholders.
 Examining alternative courses of action in light of
impact on net income and the resulting change to
return on equity accomplishes this goal.

39. Chapter 15:
Summary and Review Questions
Students should review their knowledge of the chapter
by checking out the Summary and Study Questions
for Chapter 15.

40. End of Chapter 15 Slides
Supply Chain Finance