Company Meeting Title

1
The PICOmeter A Valuable Tool for Analyzing the
Financial Performance of Supply Chains
July 19, 2009 MIT Speakers Bruce Arntzen
2
Contents

• Why Supply Chain Finance?
• A Bridge to the Boardroom
• Cash Flow Models
• Financial Benchmarking The PICOmeter

3
Supply Chain Transformation

• Enormous energy is spent by Supply Chain
  professionals trying to improve SC operations.
• But to implement SC changes you need cooperation
  commitment from many functions Sales,
  Marketing, Engineering, Finance, Manufacturing,
  Suppliers, etc.
• You need to rally the company behind the change
  program.

4
Enterprise-wide and Inter-enterprise Processes
How many groups participate in these processes?
Order Creation through Collections
Outbound Transport
Customers Needs
Credit Check
Delivery
Order Entry
Collections
Order Picking
Customer Management
Invoicing
Selling
Shipping
Quoting
Forecasting through Production
Capacity Planning
Supply Planning
Production
Purchasing
Supplier Mgt
Customers Plans
SOP
Raw Material Positioning
Finished Goods Positioning
Sales Forecast
Demand Planning
Inbound Transport
New Product Design through Introduction
Sourcing
Supplier Qualification
Customers Vision
Product Specs
Material Specs
Pilot Builds
Ramp-Up
Quality Validation
Market Research
Product Design
Manufacturing Process Design
Portfolio Mgmt
Prototype Build
Return Request through Problem Resolution
Customer Return Request
Spare Shipped
Customer Management
Repaired Part Repositioned
Defective Received
Returns Authorization
Spares Positioned
Repair Process
Diagnosis
5
Other Functions Need to Help the Supply Chain
Cooperation is needed from many other functions
to achieve Operational Excellence
Reliable Forecasts Collaborative Demand
Planning Sales Operations Planning No End of
Period Bargains
Portfolio Management Fewer Saleable Items End of
Life Planning Product Life Cycle Mgt. SC included
in CM Sourcing Forewarning of Promotions
High Part Commonality Use of Standard Parts
List DFM / DFX Design for Postponement Use of
Preferred Suppliers Visibility to Prelim. BOMS
Operational Excellence
VMI Raw Material Risk Mgt Visibility to
Inventories Visibility to Orders Early Design
Involvement Lead Time reduction
6
The Problem

• To make meaningful change, you need top-level
  commitment.
• Supply chain managers do a poor job of
  communicating with and influencing their senior
  management.
• They dont think about the same issues...
• They dont speak the same language
• They dont get the board excited about the
  changes they want to make in the supply chain.

7
What does YOUR Board think about?
Board Concerns
Primary Concerns

• Profits
• Market Share Growth
• Return on Investment
• Stock Price

This guy never sees the big picture.

• Strategic Direction
• Markets Products
• Markets - Geographies
• Customer Segments
• Technologies
• Competitors

Secondary Concerns
8
Learn to Think and Speak in Financial Terms
Operations Speak
Board Room Speak
Availability Pull Flow Lead Time Fulfillment Takt
time Quality Value Stream Costs Inventory Waste
Revenue Net Income SGA COGS IDS DSO
DPO Growth ROA, ROCA EBITDA Working Capital P/E
Ratio
YOU MUST TRANSLATE
CTC is a good place to start.
Cash to Cash Cycle Time Inventory Days of
Supply Days of Sales Outstanding (A/R) -
Days of Payables Outstanding (A/P)
9
The Challenge
You want 1. Top Mgt commitment for a SC
Transformation 2. SC-Friendly behavior from
Sales, Engineering, Marketing,
Manufacturing How are you going to get senior
managements attention?
10
The ULTIMATE attention-getter
Executives love meaningful financial benchmarking!
So use it to get the support you want!
11
Contents

• Why Supply Chain Finance?
• A Bridge to the Boardroom
• Cash Flow Models
• Financial Benchmarking The PICOmeter

12
Building a Bridge to the Board Room
Board Room
Supply Chain
Selected METRICS

• Select Metrics that
• The Board cares about, and
• The Supply Chain can affect!

REVENUE GROWTH COGS SGA
IDS DSO C2C DPO
EBITDA ROA ROCE
13
S. C. Activities to Improve Financial Performance
Grow Revenue
Reduce COGS
Reduce SGA
Reduce Inv. IDS
Optimize DPO
Reduce DSO
14
SC Activities to Improve Revenue Growth

• Speed up Customer Order Cycle Time
• Streamline and speed up the New Product
  Introduction (NPI) Process
• Improve Forecasting Process
• Execute Sales Operations Planning (SOP)
• Implement Pricing Promotions Planning (PPP)
• Examine Channel/Distribution Strategy

15
Supply Chain Activities to reduce COGS

• Optimize use of Standard Parts
• Focus on Fewer Saleable Items
• Implement Pricing Strategy/Target Pricing
• Operate in a Build To Order model
• Implement Customer/Vendor Scorecards and Business
  Intelligence
• Consider Logistics Outsourcing
• Deploy Enterprise Spend Management
• Adopt DFX (Design for Manufacturing/Logistics/Stor
  age/Repair)

16
Supply Chain Activities to reduce SGA

• Offer Fewer Saleable Items
• Employ Back Office Outsourcing
• Implement Market Development Planning (MDP)
  portfolio management
• Deploy Vendor Managed Inventory (VMI)
• Consider Logistics Outsourcing

17
Supply Chain Activities to improve IDS

• Optimize use of Standard Parts
• Focus on Fewer Saleable Items
• Implement Direct Ship Capability
• Improve Forecasting Process
• Improve Demand Planning
• Deploy Build To Order (BTO)
• Consider Off-Balance Sheet Financing
• Deploy Vendor Managed Inventory (VMI)
• Activate a Quick Response Program (QRP)
• Implement Procurement Practices
• Perform Network Optimization
• Optimize Transportation Management
• Improve Warehouse Management
• Consider RFID/Auto-ID
• Improve Procurement Practices

18
Supply Chain Activities to Improve DPO

• Deploy Enterprise Spend Management
• Improve Payment Timing
• Understanding your Cost of Trade Credit to
  improve Terms Conditions
• Deploy Vendor Managed Inventory (VMI)
• Leverage Consigned Inventory

19
Supply Chain Activities to Improve DSO

• Provide Simple, Understandable and Accurate
  Invoices
• Improve Fill Rates
• Execute Excellent Shipment Accuracy
• Implement Real-time Communication
• Implement Detailed Ageing Accounts Receivable
  Reports
• Perform Proactive Calling of Accounts Receivables
• Understanding your Cost of Trade Credit to
  improve Terms Conditions
• Consider Commercial Finance
• Implement Risk Management Programs
• Deploy Pay-at-Scan and Real-time Electronic
  Payment Processing
• Implement Direct Ship/Merge In-Transit

20
Contents

• Why Supply Chain Finance?
• A Bridge to the Boardroom
• Cash Flow Models
• Financial Benchmarking The PICOmeter

21
Cash Flow Model
Typical Company
Cash is King. The board is always looking for
ways to free up cash.
Raw Material Supplier
FG Stocking 21 days on hand
Raw Material Stocking 14 days on hand
Manu- Facturing 6 day cycle time
Goods
Goods
Past Due 5 days
Customer 30-day Payment Terms
Billed upon shipping
Bill on Ship, 10d transit


30-day Supplier Payment Terms

Company Treasury funds 56 days of Working Capital
Note Cash to Cash Cycle Time is 56 days
22
Cash Flow Model
Dell Model
Dell Plant
Bill on ship
Bill on JIT
VOI
Raw Material Supplier
Vendor Owned Raw Material 14 DOH
Manu- Facturing 1 day cycle time
Customer
Goods
Goods
10d transit
JIT
Customer Credit Card charged at shipping


Company Treasury has 29 days of Customers
Working Capital

30-day Supplier Payment Terms
Note VOI delays transfer of ownership by 24
days Payment by Credit Card accelerates payment
by 35 days Resulting Cash to Cash Cycle Time is
negative 29 days
23
Contents

• Why Supply Chain Finance?
• A Bridge to the Boardroom
• Cash Flow Models
• Financial Benchmarking The PICOmeter

24
Financial Benchmarking for the Supply Chain
Publicly Traded Companies Globally
Thomson Reuters Financial (scrub)

• Optional
• Manual Inputs
• Divisions of conglomerates,
• New companies
• Private firms

10K
Govt Agencies SEC EDGAR
PICOmeter Database
10Q
Free Stuff Edgar, Hoovers, Yahoo Finance
Metrics connecting the supply chain to the board
room.
c
PICOmeter
25
PICOmeter Industry-wide benchmarking of key
financial metrics
Refer to example PICOmeters
REVENUE GROWTH COGS SGA
IDS DSO C2C DPO
EBITDA ROA ROCE
26
Review of Example PICOmeters
Open up live models and review.
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