Supply Chain Financial Analysis - MIT CTL
Transcript of Supply Chain Financial Analysis - MIT CTL
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Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011
ThefirstprincipleinacommonMBAfinancetextbook
âAcompanyâsfinancesandoperationsareintegrallyconnected.â
Whyisoperationsundervalued?
⢠âInourcompany,operationsisnotglamorous.Dealsare.â
⢠Operationsisabranchofengineeringrequiringadifferentskillsetandmindset
⢠Topmanagersâ whoenteredthroughfinance,strategy,ormarketingâ areignorantaboutoperationsanduninterestedinlearningmore,relyingonotherstomindthedetailsofactualwork
⢠âFinancialdatadominatethediscourseinthemodernorganization,althoughoperationalperformanceisthedriveroffinancialresults.â
Source:âDeepChange:HowOperationalInnovationCanTransformYourCompany,âMichaelHammer,HarvardBusinessReview,Vol.82Issue4,April2004,pp.84-93.
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Answerthesequestionsforyourfirm
⢠WhatfinancialKPIsdoyouusetomeasuresupplychainperformance?
⢠Whatfinancialanalysisdoyouusetomakesupplychaindecisions?
TheLanguageofFinance
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TheLanguageofFinance
⢠FinancialStatementsâ BalanceSheetâ IncomeStatement
⢠FinancialAnalysisâ Ratiosâ Acronyms(ROA,ROIC,EVA,âŚ)
BalanceSheet
⢠Snapshotofthefirmâsvalueâ Approximation:accountantsmeasuredvalueatthetimethetransactiontookplaceâ Bookvalueisthelowerofcostormarketvalue
⢠Assets(listedinorderofliquidity)â Current:cash,marketablesecurities,accountsreceivable,inventoriesâ Fixed:property,plant,equipment(lessaccumulateddepreciation)â Intangible:patents,goodwillâŚâgrowthassetsâ
⢠Liabilities(listedinorderinwhichtheymustbepaid)â Current:accountspayable,notespayable,âŚâ Long-term:notes,bonds,deferredincometaxes,âŚ
⢠Shareholdersâequity(a.k.a.networth)â Stock:preferred,commonâ Retainedearnings
Lasttobepaidifafirmisdissolved
consumedinthecurrentyear
consumedinthefuture
consumedtheoretically
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IncomeStatement
⢠Performancerecordbetweensnapshots⢠Explainswhyretainedearningshaschangedovertime
â Sales(netofmarkdowns)â Costofgoodssoldâ GROSSINCOMEâ Selling,general&administrative(SGA)expensesâ OPERATINGINCOMEâ Depreciation&amortizationâ OPERATINGINCOME
â Interestexpenseâ Othernonoperatingexpenses/income
â Incometaxesâ Extraordinaryitemsâ NETINCOME
EBITDA
EBIT
EIATBS
FinancialStatements
âFinancialstatementsarelikefineperfume;tobesniffedbutnotswallowed.â
â AbrahamBrilloff
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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FinancialAnalysis
âaccountantstrytomeasurethecurrentstandingandimmediatepastperformanceofafirm,whereasfinancialanalysisismuchmoreforwardlooking.â
â Aswath Damodaran,SternSchoolofBusiness
Source:http://pages.stern.nyu.edu/~adamodar/New_Home_Page/AccPrimer/accstate.htm
FinancialAnalysis
⢠Analogyaboutmanagingacompanyâsfinancialperformanceâ stick,throttle,rudder
⢠âWeanalyzefinancialstatementsforthepurposeofâ evaluatingperformanceandâ understandingtheleversofmanagementcontrol.â
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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FinancialAnalysis
⢠Higginsâthreeleversofmanagementcontrolâ Netmargin:Netincome/Salesâ Assetturnover:Sales/Assetsâ Financialleverage:Assets/Shareholdersâequity
⢠StudytheâtiesbetweenacompanyâsoperatingdecisionsâŚanditsfinancialperformance.ââ âOperatingdecisionsaretheleversbywhichmanagementcontrolsfinancialperformance.â
â Examplesgiven:howmanyunitstomakethismonth,howtopricethem
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
DupontAnalysis
assets TotalSalesoverAsset turn =
SalesincomeNet marginNet =
overAsset turn margin Net ROA ´=
Equityassets Totalleverage Financial =
leverage FinancialoverAsset turnmarginNet ROE ´´=
InventoryTurnover, anarrowerfocusthanAssetTurnover,isoftenametricforsupplychainprofessionals
GrossorOperatingMarginisamorecommonmetricforsupplychainprofessionalsthanNetMargin
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Financeandsupplychainworktogethertocreatestockholdervalue
Div
iden
dInvestors
(Equity)
Firm
Investors
(Debt)
Operational Assets
Firm invests
Future cash flows: revenues, expenses, etc.
Operations/supplychain:usefundstogeneratereturns
Finance:acquirefunds
Finance:allocatefunds
LeversofPerformancefor10DiverseCompanies,2010
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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Principalratiodefinitions(Higgins)*
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
*Excludingtheleverageandliquidityratios
Usingratioseffectively
⢠Ratiovaluesneedtobeunderstoodincontext⢠Usually,noâcorrectâvaluesforratios⢠Relyonruleofthumbassessmenttechniques,comparisonwithindustryaveragesandspecificcompetitors,andlookingfortrends
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
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YouarenowreadytobeCEO
SunflowerNutraceutical(SNC)Simulation
SunflowerNutraceutical(SNC)
⢠HowdidyoulikebeingCEO?⢠Whatwasyourobjectiveinmakingdecisions?⢠Whatapproachesdidyouusetoevaluateoptions?
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SunflowerNutraceutical(SNC)Results
TwoGoalsoftheCEO
⢠ProvideShareholderValue⢠âŚandstayoutofjail
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[email protected]:http://www.maaw.info/ArticleSummaries/ArtSumKaplanNorton2001.htm
Source:website,TradeDynamics,LLC
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Source:website,FinlisticsSolutions
DeloitteEnterpriseValueMap
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GoaloftheCEO
⢠ProvideShareholderValue
⢠DriversofShareholderValueâ RevenueGrowthâ OperatingMarginâ AssetUtilization
Supplychainprofessionalscanaffectallthree!
Driversofshareholdervalue
RevenueGrowth
AssetUtilization
OperatingMargin
Risk
Leverage
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Howdoessupplychainperformancemakeanimpactonfinancialresults?
⢠Tradeoffsexist⢠Wheredoyoufocus?
AssetUtilizationOperatingMargin
RevenueGrowth
Responsiveness(productavailability)Capability(newmarkets)
Leanness(reduceassets)Agility(adaptcapacities)
Leanness(reducecost)Segmentation(identifyopportunities)
SunflowerNutraceutical(SNC)Analysis
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SunflowerNutraceutical(SNC)Analysis
SunflowerNutraceutical(SNC)Analysis
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SunflowerNutraceutical(SNC)Analysis
Dupont AnalysisassessestheMarginâAssetUtilizationtradeoffatahighlevel
AssetUtilizationOperatingMargin
RevenueGrowth
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DoyouseeanyextremeexamplesofProfitPathandTurnoverPath?
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
Leveragedrivesvalue+increasesrisk
RevenueGrowth
AssetUtilization
OperatingMargin
Risk
Leverage
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ROIC
⢠ReturnonInvestedCapitala.k.a.RONA(ReturnonNetAssets)
⢠ROIC=EBIT(1-Taxrate)/(Interest-bearingdebt+Equity)
⢠Numerator:earningsaftertaxifitwereallequityfinanced(i.e.,notconsideringinterestexpenseortaxbooks)
⢠Denominator:sumofallsourcesofcashonwhichareturnmustbeearned
ROICisnotaffectedbyfinancingscheme
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011.
BalanceSheet
IncomeStatement
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EVAâ˘
⢠EVAâ˘=economicvalueadded=NOPATâ (IC*COC)
⢠whereâ IC=investedcapitalâ COC=costofcapital[i.e.WACC]â NOPAT=netoperatingprofitaftertaxes[i.e.EBIT*(1-TaxRate)]
⢠Transformaccountingprofitintoeconomicprofitâ Convertaccrual-basedearningsintoacash-basedNOPATâ Converttotalassetstoinvestedcapitalâ Assessthequantityofcapitalusedtogeneratetheincomeâ ThecomplexityandefforttoadjustGAAPisaweaknessofEVA
[email protected]:EVAâ˘isatrademarkedsymbolof Stern,Stewart&Co.
Simplebottomline
Ifeconomicvalueaddedispositiveinagivenyear,thefirmhasearnedmorethan
theamountrequiredtocompensatedebtholdersandshareholders
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EconomicValueAdded
SALES
COGS
GROSSMARGIN
TOTALEXPENSES
NETPROFIT(EBIT)
TAXES
NOPAT
CAPITALCHARGE
TOTALCAPITAL
COSTOFCAPITAL(%)
CURRENTASSETS
FIXEDASSETS
OTHERCURRENTASSETS
INVENTORY
EVA
â
â
â
+
+
X
â
OTHER+
Source:âSupplychainmetrics,âDouglasM.LambertandTerranceL.Pohlen.InternationalJournalofLogisticsManagement,Vol.12No.1,2001,pp.1-19.
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Source:âSupplychainmetrics,âDouglasM.LambertandTerranceL.Pohlen.InternationalJournalofLogisticsManagement,Vol.12No.1,2001,pp.1-19.
Example:supplychaintradeoff
New Proposal
100,000$
86,500$ 11,500$ 75,000$
13,500$ 5,130$ 8,370$
60,000$ 44,000$ 16,000$
6,000$ 4,400$ 1,600$
2,370$ 103.0%
Base
Revenues 100,000$
Operating Costs - 85,000$ SC 10,000$ Non-SC 75,000$
EBIT = 15,000$ Taxes 38% - 5,700$ NOPAT = 9,300$
Capital 70,000$ SC 54,000$ Non-SC 16,000$
Cost of Capital 10%Capital Charge - 7,000$
SC 5,400$ Non-SC 1,600$
EVA = 2,300$
Base
Revenues 100,000$
Operating Costs - 85,000$ SC 10,000$ Non-SC 75,000$
EBIT = 15,000$ Taxes 38% - 5,700$ NOPAT = 9,300$
Capital 70,000$ SC 54,000$ Non-SC 16,000$
Cost of Capital 10%Capital Charge - 7,000$
SC 5,400$ Non-SC 1,600$
EVA = 2,300$
New Proposal
100,000$
86,500$ 11,500$ 75,000$
13,500$ 5,130$ 8,370$
60,000$ 44,000$ 16,000$
6,000$ 4,400$ 1,600$
2,370$ 103.0%
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Example:supplychainimprovement
Ops better 10%
100,000$
84,000$ 9,000$
75,000$
16,000$ 6,080$ 9,920$
70,000$ 54,000$ 16,000$
7,000$ 5,400$ 1,600$
2,920$ 127.0%
Base
Revenues 100,000$
Operating Costs - 85,000$ SC 10,000$ Non-SC 75,000$
EBIT = 15,000$ Taxes 38% - 5,700$ NOPAT = 9,300$
Capital 70,000$ SC 54,000$ Non-SC 16,000$
Cost of Capital 10%Capital Charge - 7,000$
SC 5,400$ Non-SC 1,600$
EVA = 2,300$
Cap better 10%
100,000$
85,000$ 10,000$ 75,000$
15,000$ 5,700$ 9,300$
64,600$ 48,600$ 16,000$
6,460$ 4,860$ 1,600$
2,840$ 123.5%
EVAisalignedwithNPV
ThepresentvalueofEVAsfromagivenprojectismathematicallyequivalenttotheNPVoftheproject
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EVAisnotnew,sowhyisitpopular?
⢠Consultantsaregoodatrepackagingoldideasâ BasicideausedbyGeneralMotorsin1920sâ LabeledbyGeneralElectricin1950sasâresidualincomeââ TrademarkedbySternStewartin1990sasEVAâ˘(withfurthernewterminologysuchasNOPAT)
⢠Uniformity:itcanbeusedforthreecrucialmanagementfunctionsâ Investmentanalysis(insteadofNPV,IRR,BCR)â Businessunitperformanceappraisal(insteadofROE,ROA)â Compensationincentive(turnmiddlemanagersintoâownersâ)
⢠ItismorestreamlinedthanrelyingonahostofmeasuressuchasNPV,IRR,BCR,ROE,ROIC,EPS,etc.
Source:Higgins,R.AnalysisforFinancialManagement.10thed.McGraw-HillIrwin,2011
âEVApromisestocompletethetransformationofvaluecreationfromameresloganintoapowerfulmanagementtool,onethatmayatlastmove
modernfinanceoutoftheclassroomandintotheboardroomâ andperhapsevenontotheshopfloor.â