Strategic Financial Supply Chain Management For Value Creation

Transcription

1 Strategic Financial Supply Chain Management For Value Creation Mohammed Hanif Ajari Professor for Practice Institution of Business Administration Karachi

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3 A Bit of History: Bank Robber Slick Willie Sutton When asked why he robbed banks, Sutton simply replied "Because that's where the money is." DMSCA 2010 Supply Chain Measurement

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5 FINANCIAL SUPPLY CHAIN CHALLENGES 5 SCC New Member Introduction 1.0

6 TODAYS FINANCIAL SUPPLY CHAIN CHALLENGES IMPACT IN 2003 TO SCC New Member Introduction 1.0

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11 What Keeps You Up at Night? Stock Market Volatility, Oil Prices, Labor, Political Instability, Security Reducing Inventory/ Working Capital/ Asset Management Reducing Total Supply Chain Costs Supply Chain Resiliency & Sustainability: Risk Management & Green Providing Superior & Consistent Customer Service While Increasing Revenue & Margin Competing in a Global Market Business As Usual Has Been Cancelled Now What? 11 SCC New Member Introduction 1.0

12 Superior Supply Chain Management (SCM) has Long Been a Source of Competitive Advantage % of Revenue 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 5.4% 9.2% 5.3% 12.3% Total Supply Chain Management Costs (% of Revenue) 5.5% 10.7% Automotive Industrial Chemical & Advanced Materials 4.2% 10.0% 4.8% 10.7% 3.4% 9.1% 6.6% Best-in-Class Median 3.5% 3.6% 7.4% Computer Consumer Goods Pharmaceutical Semiconductor Telecommunications Equipment Best-in-class Companies Outperform Their Median Competitors with a 50% Cost Advantage Source: PRTM/The Performance Measurement Group 12 SCC New Member Introduction 1.0

13 But SCM is Paramount in Times of Economic Uncertainty In 2007, US business logistics costs rose to an all time high of $1.4 trillion (10.1% of US nominal Gross Domestic Product ) 3 Supply chain generally accounts for between 60% and 90% of all company costs 1 A 2% improvement in process efficiency for supplychain processes has 3000% 5000% the impact of a 2% improvement in efficiency for IT HR Finance 1 Sales 1 Exclusive of Financial Services companies 2 Source: Hoovers 2006 Financial Data, Supply-Chain Council 2006 SCM Benchmark data on SCM cost for discrete & process industries 3 CSCMP 19 th Annual State of the Logistics Industry Fortune-10 Company Supply-Chain Cost as % of Total Costs 2 GM 94% Ford 93% Conoco 90% Wal-Mart 90% Chevron 88% IBM 77% Exxon 75% GE 63% Citi 1 0% AIG 1 0% Focused initiatives in Supply Chain Management can result in 30-35% cost reductions, liberation of working capital, and revenue increases of 3-5%! 13 SCC New Member Introduction 1.0

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15 CUSTOMER VALUE PR0POSITION 15 SCC New Member Introduction 1.0

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20 MATCHING PRODUCTS, MARKETS, AND STRATEGIES PUSH, PULL, AND PUSH PULL STRATEGIES 20 SCC New Member Introduction 1.0

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26 1. Cost & Inventory levels rise Trends in Supply Chain Management 5. Focus on maximizing liquidity and minimizing risks 2. Continued Globalization 3. Increased Consolidation and regionalization 4. Shift from push to pull supply chains

27 Progression of Logistics Costs FIGURE 1-4: Logistics costs share of the U.S. economy

28 Composition of Logistics Costs FIGURE 1-5: Total U.S. logistics costs between 1984 and 2005

29 1.4 Uncertainty and Risk Factors Forecasting is not a solution Demand is not the only source of uncertainty Recent trends make things more uncertain Lean manufacturing Outsourcing Off shoring

30 1.4 Uncertainty and Risk Factors Fluctuations of Inventory and Backorders throughout the Supply Chain FIGURE 1-3: Order variations in the supply chain

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32 The SCM Network FIGURE 1.1: The logistics network

33 1.1 What Is Supply Chain Management? Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system wide costs while satisfying service level requirements.

34 1.1 What Is Supply Chain Finance? Supply chain Finance is all about the movement of money along the value chain. To optimize these financial processes, Supply Chain Management helps companies looking, from a more external point of view to the whole chain. This holistic approach is focusing on collaboration with otherr parties within the chain. (Research paper by Peter Kristofik) Faculty of Economics, Bel University in Banska)

35 And SCM Improvement Creates Shareholder Value The Supply Chain Impacts... All Financial Metrics... & Shareholder Value Improve customer service and response Optimize inventory flow, utilization & productivity Liberate Working Capital Reduce Improve Capital Efficiency Best-in-class customer relationships Differentiated service capabilities Best-in-class strategic supplier partnerships Leverage of outsourcing of business processes Unique supply chain models Fixed Capital Increase Revenue and Margin Optimize Cost Model Increase Profit Increase Shareholder Value Effective Supply Chain Management can increase a Return on Capital Employed by 30% and More! 35 SCC New Member Introduction 1.0

36 Physical SCM Vs Financial SCM Movement of Documents Data & Physical Goods Movement of Documents Data & Money Raw Goods Supplier Manufacturer Retailer / Distributor Customer What to buy? When to buy? How much to buy? From whom to buy? Just-in-time-manufacturing What and how to pay? When to pay? How much to pay? Who to pay? Just-in-time-cash Source: / li h/ t/c lw t

37 Physical and Financial Supply Chains across a Transaction Physical Supply Chain Transportation process Purchase Order Booking Request Inventory Update Factory Containers loaded ASN Inland Dray Containers moved to port of lading. Status Update Port of Lading- Terminal Bill of Lading Containers are loaded on ship Steamship Line Vessel at sea Status Update Port of Discharge- Terminal Containers are loaded on ship Customs Clearance Inland Dray Containers moved DC. Status Update Distribution Center Final delivery Proof of Delivery Inventory Update Flow of Goods, Information and Funds Physical Supply Chain and the Financial Supply chain are closely integrated Receivables Pre-shipment Finance Financing Invoice PO Financial Supply Chain Factoring Financing Forfaiting Letters of Credit Buyer Financing Inventory Financing Documentary Post-shipment Collections Finance Buyer s Credit Supplier s Credit Source:

38 Unlocking the value in the supply chain Finance Extending buyers Accounts Payables terms (Spontaneous Financing ) Accelerating seller s access to lower cost capital Reducing risks imbedded in the supply chain. Enhancing cash forecasting capabilities Supporting advanced treasury and working capital business strategies Strengthening buyer seller relationships 38 SCC New Member Introduction 1.0

39 Survey report 1. Aberdeen Group working capital optimization Finance and supply chain strategies for today's business environment 2. The McKinney Quarterly Managing Global Supply Chain 3. Aberdeen group State of the marketing in supply Chain Finance 4. Demica group. 39 SCC New Member Introduction 1.0

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41 Functional Perspective of Financial Supply Chain Collaboration Investors/ governmen t Source of financial resources (external Use financing) of financial resources (dividends & taxes) Investme nt Use of financial resources (investment) Accountin g Financing Source of financial resources (internal financing) Source of financial resources (external financing) Use of financial resources (pay loans & fees) Financial activities Operating activities Financial services/ banks Procurement Productio n Sales (Outsourci ng) Logistics provider Source:

42 Financial and Supply Chain Connection Top Down Approach CFO adopts a 3 step, top-down approach to make this connection Identify gaps in the financial metrics as motivation of change Investigate gaps in SCM related business processes like distribution and logistics, forecasting, demand planning etc Gaps in business processes are linked to activities, tasks, KPIs like collaborative forecasting, CPFR, strategic outsourcing Top-Down Approach Source: Financial Supply Chain by Dr. Stephen G.Timme (FinListics

43 Characterization of SCF Collaboration Characteristics Institutions Functions Instruments Traditional SCM Macro: Trade, logistics service industry, Suppliers Micro: Operations department Procurement and purchase Production Logistics Tools for planning, steering and controlling operating activities Financial SCM Macro: Special financial services, Banks, Investors. Micro: Finance department Accounting Financing Investment Financial control instruments like cash flow analysis etc. Source:

44 Characterization of SCF Collaboration Characteristics Perspective Goals Measures Traditional SCM Production, marketing, Logistics, Suppliers Operating, optimizing and performance for material and Information flow ROI Cycle time Time to deliver/ Time to market Balanced scorecard Financial SCM Financial Optimizing financial resources Shareholder value ROI ROE Source:

45 SCM Asset Returns: Superior Valuation 40-Point spread between SCOR Companies and Major US Indices DMSCA 2010 Supply Chain Measurement

46 Supply Chain Management Requires Many Different Functions

47 Cycle View of Supply Chains Customer Customer Order Cycle Replenishment Cycle Retailer Distributor Manufacturing Cycle Procurement Cycle Manufacturer Supplier 1-47

48 SCOR Performance Metrics Mapping the Impact of Specific Activities on Each Key SCM Metric Standard Strategic (Level 1) Metrics Customer Internal Attribute Reliability Responsiveness Agility Cost Assets Metric (Strategic) Perfect Order Fulfillment Order Fulfillment Cycle Time Supply Chain Flexibility Supply Chain Adaptability Supply Chain Management Cost Cost of Goods Sold Cash to Cash Cycle Time Return on Supply Chain Fixed Assets Return on Working Capital upside and downside adaptability metrics 48 SCC New Member Introduction 1.0

49 How Does SCOR Help Improve Supply Chains? SCOR can be used to describe supply chains that are very simple or very complex using a common set of definitions and enabling a common understanding It helps companies: Compare the performance of supply chain and related operations within their company or against other companies Determine what processes to improve and by how much to improve them Guide the consolidation of internal supply chains (which results in significant cost reductions from eliminating duplicative assets) Create standard processes and common information systems across business units (which generates major cost savings, cycletime and quality improvements) Create a common scorecard by which customers can measure their performance and by which SCC members can measure suppliers performance (which can lead to major cross organizational process improvements). 49 SCC New Member Introduction 1.0

50 Our Journey through this course. 1 Learning 2 Piloting 3 Deploying 4 Integrating 5 Renewing 50 SCC New Member Introduction 1.0

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52 Many Thanks