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11
ISyE 6203Transportation & Supply
Chain Systems John H. Vande Vate
Spring 2012
22
My Approach• What aspects of the financial goals of the
organization do Supply Chain activities contribute to?
• How do we measure these aspects of Supply Chain activities?
• Financial goals often conflict. What tools are available to help Supply Chain find the right balance
• What tools are available to help improve SC performance
• Motivate by simple examples• Integrate via an industrial project
33
Goals• That we understand the main SC objectives• That we can assess the effects of proposed
initiatives on those objectives• That we develop some skill and intuition for
identifying effective initiatives• That we are armed with some practical tools
for designing, balancing and optimizing SC activities.
• That we have some real experience doing all of these
44
Deterministic vs Stochastic• Organizations are adept at managing
forecasted flows
• Most still struggle with forecast (in)accuracy and unforecasted variability
• We will start with a deterministic view through the mid-term.
• Focus on managing variability after the mid-term
55
Class Presentation Teams• We will work in teams of 4-5 on a project and
on improving “Our Company” performance• You should select your team members by
Friday, January 13th end of business day • One person from each team should send me an
e-mail with the subject line 6203 Teams with– The names of the team members
– A designated contact (with e-mail) for the team
– I will refer to the team by the contact’s last name
66
Class Presentations• Each Tuesday I will call on one or two teams
to present their solutions to assigned “Challenges”
• I expect a brief presentation that explains briefly how you answered the challenge (what method you used), shows your answer and explains the impact
• Remember, we will be improving the performance of Our Company so relative improvements are of primary interest
77
Projects• Around the mid-term we will stop
working on Challenges and change our focus to industrial projects
• I will be announcing these over the coming weeks
• You will work with a team (possibly different from your Class Presentation Team) on 1 industrial project
88
Project Structure3 Steps (Adaptable)• Step 1: Formal project statement, summary of the
data and rough estimates of the potential impacts of various alternatives.
• Step 2: Analyze and optimize the top alternatives and develop detail assessments of their cost and service impacts
• Step 3: Present your assessment and recommendations to management, including an evaluation of more qualitative risks and opportunities associated with each strategy.
99
Deliverables
• Each team will make a presentation to the class during the last couple weeks of the semester
• Each team will present to the client (probably via phone or internet)
• An organized CD or T-Square files that facilitate the transfer of your project.
• I will set up Team Project Forums on T-Square and invite your sponsor to join
1010
Project Grade
• Presentations: Content, Clarity and Quality of your presentations
• Project management – Coordinating, attending, managing meetings– Clarifying project scope and direction– Managing information, meeting minutes, data– Staying ahead
• Initiative• Integrity
1111
My Role
• As much help as you want• Eager to meet with you and hear about your
progress and questions at your request• Strongly recommend you share your presentations
with me well in advance for advice. • Will attend initial conference calls to establish the
project, but will step back after that
1212
First Steps
• I will share brief project overviews
• You will organize your project team (may be the same as Class Presentation Team) and send me preferences
• I will assign projects and organize initial conference call with sponsor
• You will take it from there.
1313
Conference Calls• Usually in 226 (arranged via Meka Wimberly
[email protected])• Not necessary that everyone be there, but it’s
better. • Someone from you team should take
careful notes and post them as meeting minutes on your Project Forum
• You are responsible for organizing conference calls after the first one or two.
1414
Potential Projects
• Halstead/Vertex
• Acumen Fund ZHL Ziqitza
• Tiffany’s
• VW/Audi
• Projects you organize
1515
Course Organization• Two Exams• Mid-term: Thursday, March 1st • Final: Tuesday, May 1st from 2:50 to 5:40• Grading:
– Project 30%– Mid-term: 30%– Final: 30%– Team Presentations: 10%
• Warning: People struggle with my exams• Academic Honesty
1616
Text• No text book. • I’ve listed some good resources on the class web
page (see T-Square)• I will provide selected readings and links to
additional information• Radical Tools (an Excel Add-in) in the Labs• MapPoint available in the labs. May also be
available for free from http://msdn08.e-academy.com/gatech_isye
Also available for free as a 60 day trial on the internet.
1717
Questions?• Feel free to send questions via e-mail• Or drop by my office: 222 of old ISyE bldg• Feel free to schedule a meeting via e-mail• Anonymous feedback on each lecture via T-
Square (under Tests & Quizzes – I used “Anonymous grading only” so I don’t see your identity).
1818
Travel• I have to be out of the country from February 20th
through March 2nd • Guest lectures during that period
– HDT Case on Cash Flow
– Air Freight 101 & Over-the-Road 101 with Greg Andrews EMIL-SCS Managing Dir.
– Mid-Term Exam
• Be sure to ask questions by Thursday, Feb 16th • I will be available via e-mail, but expect delays
1919
Our Company
• Today: Introduce Our Company and evaluate its performance
• Coming Weeks: Develop a distribution strategy to improve Our Company’s financial performance
• These will be Team Presentation Assignments
2020
Overview
• Products:– Computers: CPU, Monitor– Televisions: TV and Console
• Stores– 100 across the US – Sell 10 TVs and 10 computers per day– 250 days/year
2121
Components
CPUs TV/Monitor ConsoleCost $300 $400 $100
Weight 5 lbs 10 lbs 30 lbs
From Green Bay Indianapolis Denver
We assume atruck holds 30,000 lbs
and travels 500 miles/day
2222
Current Operations
• All direct shipments in full truckloads
2323
Simplification • Shipments on the order of 1,000 miles
F
F
F
Green Bay
Indianapolis Denver
Use your head!Make an estimate.Refine it. Averages Green Bay: 969Indianapolis: 854Denver: 1,006
2424
CPUs TV/Monitor ConsoleCost $300 $400 $100
Weight 5 lbs 10 lbs 30 lbs
From Green Bay Indianapolis Denver
Our Company.xls
• Enable Macros– ArcCos
– Distance: Computes the distance in miles between two latlong coordinates
– Or you can use the Radical Tools add in available in the labs. (We won’t work with distance much initially)
• Components: Cost, weight, source
• Products: BOM, Selling price
• Locations: LatLongs of stores and plants, distances
• Financials: Income Statement, Balance Sheet, Metrics
2525
Our Company.xlsOur Company
Income Statement (all figures in 000's)% of Revenue
Revenue 450,000$ 100%COGS 301,410$ 67.0%
Raw Materials 300,000$ 66.7%Transportation 0.0%Labor 1,410$ 0.3%
Gross Margin 148,590$ 33.0%SG&A 26,200$ 5.8%Other Operating Expenses 500$ 0.1%Operating Income 121,890$ 27.1%Other Income -$ 0.0%Financial Expenses 6,500$ 1.4%Income before Taxes 115,390$ 25.6%Provision for Taxes 28,732$ 6.4%Consolidated Net Income 86,658$ 19.3%
NOPAT 93,158$ Invested Capital 257,220$ SPEED 1.75 ROIC 36%DSO 15 daysDII - daysDPO 30 daysCash-to-Cash Cycle (15) days
Compute transportation costs using data in the Parameters sheet
2626
Our Company.xlsOur Company
Balance Sheet (all figures in 000's)
AssetsCurrent Assets:
Cash and cash equivalents 5,000$ Trade accounts receivables 18,493$ Inventory -$
At Green BayAt IndianapolisAt DenverAt StoresPipeline
Other current assets 2,500$
Total Current Assets 25,993$ Property & Equipment, net 260,000$ Other Assets 1,000$
Total Assets 286,993$
Liabilities & Stockholders' EquityCurrent Liabilities:
Accounts Payable 24,773$ Short-term debt -$
Total Current Liabilities 24,773$ Long-term debt 130,000$ Other Liabilities 250
Total Liabilities 155,023$
Total Stockholder's Equity 131,970$
Total Liabilities and Stockholders' Equity 286,993$
Compute inventory values:
2727
Arrow Electronics Annual Report
• “Operating efficiency and working capital management remain a key focus of the company's business initiatives to grow sales faster than the market, grow profits faster than sales, and increase return on invested capital.”
Market Share
Profitability Return on invested capital
2828
SC & Finance“Corporation managers generally claim that
they have four broad responsibilities: to consumers, to employees, to stockholders, and to the general public … each group is on an equal footing: the function of management is to secure justice for all and unconditional maxima for none. Stockholders have no special priority; they are entitled to a fair return on their investment, but profits above a ‘fair’ level are an economic sin.”
Sutton et al. The American Business Creed 1956
2929
Financial Goals
Financial Performance
Profitability Revenue Growth Capital Utilization
Income Statement
Balance Sheet
3030
Revenue• SC helps drive revenue
– Superior service commands higher price and loyalty
– Product availability drives sales
– Integrated operations can become a barrier to changing suppliers
– Speed of product introduction can win market share
– …
• Our Company: Revenues = $450 Million
3232
Income Stmt: Profitability
Profitability
COGS SG&ADepreciation &
Amortization
3333
Profitability• COGS: Cost of Goods Sold
– Includes all costs of material, labor, and allocated overhead, purchase, conversion and other costs incurred in bringing the inventories to their present location and condition.
– Prices change. So there are various methods for reconciling:
• specific identification, • first-in first-out (FIFO)• average cost
– That’s accounting, we won’t worry to much about the accounting standards.
3434
COGSYou can read more about COGS athttp://en.wikipedia.org/wiki/Cost_of_goods_soldOr for a quick practical overview, http://learndirecthmmdemo.lmmattersonline.com/courses/hmm10/budgeting/documenting_revenue_forecasts.htmlOur Company COGS consists of
Raw Materials: $300 Million Labor: $1.41 Million Transportation: ?
Not required
Not required
3535
Gross Margin
• Gross Margin = Revenue – COGS• Gross Margin as % of Sales =
Our Company: Low transportation costs ensure high Gross Margin
For more details seehttp://en.wikipedia.org/wiki/Gross_Margin
Revenue Revenue COGS
Not required
3636
SG&A
• SG&A: Selling, General & Administrative includes costs for research and development, product design, marketing, distribution, customer service, commissions, administration, and overhead.
• Our Company: SGA = $26.2 Million • For more discussion see, for example,
http://www.investopedia.com/terms/s/sga.aspNot
required
3737
Depreciation & Amortization
• Typically not a major SC consideration for us. Has to do with expensing large capital asset investments like plants and equipment
• Except for Depreciation, Profitability is driven by revenue and operating EXPENSES
38 38
Operating Income (EBIT)• Earnings Before Interest & Taxes• Gross Margin minus
– SG&A– Amortization & Depreciation– Impairments and other expenses+ Non-Operating Income
3939
Balance Sheet: Capital Utilization
Capital Utilization
Fixed Asset Utilization
Working Capital Utilization
4040
Why Capital Utilization?
• Might find “Capital Productivity: Why the US Leads and Why it Matters” interesting.
• McKinsey Quarterly, 1996 Issue 3• Available from eJournals at
www.library.gatech.edu• Focus on “Why it Matters”. Might be
interesting to reflect on the “Why US leads” aspects in light of financial crisis.
Not required
4141
Digression on US vs German Capital Utilization
• Differences in capital markets
• Differences in employment models
• Differences in political economies
• A broader perspective on “goldplating”
4242
Capital Utilization
• “Productivity” of capital
• How well capital investments are employed to deliver goods and services
• From an investor perspective, related to the return available from investment
• Note the INVESTMENT perspective.
• Capital Utilization driven by Revenue and INVESTMENT
4343
Productivity of Capital• Productivity of Capital (SPEED)
• Return on Invested Capital (ROIC)
• Our Company: Reducing Inventories improves SPEED and ROIC
• For more information see• http://news.morningstar.com/classroom2/course.asp?do
cId=145095&page=9&CN=COM
RevenueInvested CapitalSPEED
NIBCLs -Cash Excess - Assets TotalTaxes - Income Operating
Capital InvestedNOPATR OIC
Not required
4444
NOPAT & NIBCLs
• NOPAT: Net Operating Profit After Taxes
• NIBCLs: Non-interest bearing current liabilities, eg., accounts payable
4545
Two kinds of Capital
• Fixed Capital Assets– Plants and Equipment
• Working Capital– Inventories or raw materials and finished goods
– Accounts receivable
– Accounts payable
• For more on Working Capital see
http://en.wikipedia.org/wiki/Working_capitalNot
required
4646
Working Capital
• The cash required to finance operations
• The Cash-to-Cash cycle- Organization must have capital to fund raw
materials, etc. from the time it pays for them to the time it’s customers pay for the corresponding finished goods
4747
Working Capital
Working Capital
Accounts Receivable
InventoryAccounts Payable
What we finance for
our customers
What our suppliers
finance for us
4848
Working Capital: AR
• Typically most meaningful when expressed in terms of time
• Days Sales Outstanding
• Example: Our Company– Receivables: $18.493 Million
– Sales: $450 Million or about $1.233 million/day
– DSO: 15 days
dayper Sales Avg.sReceivable
SalessReceivable PeriodinDays*
4949
Working Capital: AP• Days Payables Outstanding
• Example: Our Company– Accounts Payable: $24.733 Million
– COGS: $301.4 million plus transportation or about $826 thousand/day + avg daily transportation
– DPO: 30 days (ignoring transportation)
dayper Purchases Avg.Payable Accounts
COGsPayable Accounts PeriodinDays*
5050
Working Capital: Inventory• Days in Inventory
• We will have to do some work to estimate Inventory
• Normally this would be an accounting process: How much inventory do we have?
• We will estimate inventory. Why?
dayper Purchases Avg.Inventory
COGsInventory PeriodinDays*
5151
Cash-to-Cash Cycle
• Days Sales Outstanding: 15 days
• Days in Inventory: + ? days
• Days Payables Outstanding:30 days
• Cash-to-Cash Cycle: ? days
• Our Company: Net net, our suppliers fund 15 days of operations. Depending on inventories, we must fund the rest.
5252
Dell’s Cash-to-Cash Cycle
Dell’s suppliers finance a month + of Dell’s operations
Dell 2011Accounts Receivable $ 6.493 BillionInventory $ 1.301 BillionAccounts Payable $11.293 BillionSales $61.494 BillionCOGS $50.089 Billion
DSO 38.54 DaysDII 9.48 DaysDPO 82.29 DaysC2C (34.27) Days
That’s about $4.7 billion
5353
Discussion
• SC can influence DSO by providing perfect order delivery, prompt accurate billing, etc, integrating with customer accounting systems, …
• SC can influence DSO and DPO by negotiating terms of sale, e.g., when title transfers, mode of delivery, etc.
• We will mainly focus on Inventory. How can SC influence Inventory?
5454
Fixed Asset Utilization
• Utilization of Capital Equipment• Sometimes at the expense of working capital
– See “The Goal” • Recent story: Intel SC Transformation• http://www.supplychainbrain.com/content/h
eadline-news/single-article/article/through-its-complete-cultural-shift-intel-takes-top-spot-in-supply-chain-innovation-awards/
Not required
Required
5555
Inventory
• Inventory is an INVESTMENT, not an expense
• Can speak of inventory in terms of – Units– $– DaysThe latter are more common except when
dealing with very specific operational details
5656
Apples & Oranges
• How to balance inventory INVESTMENT against operating EXPENSES?
• Should I INVEST more in a hybrid to reduce my weekly fuel EXPENSES?
• Can’t compare the difference in weekly or annual operating expenses with the difference in the investment!
• Associate an operating EXPENSE with the INVESTMENT
5757
Inventory Carrying Cost
• Usually expressed as a % of the value (at COGS)
• Many companies don’t have a good handle on this.
• Two components– “Average Cost of Capital”– Operational Expenses associated with
Inventory
5858
Average Cost of Capital
• Sources of Capital– Shareholders – Equity– Bond holders and Creditors – Debt
• Question: – Which gets a higher return?– Why?
5959
Average Cost of Capital
• % of Equity * Cost of Equity, • +% of Debt * Cost of Debt (1-Tax Rate)• Example: Our Company
– From the Balance sheet
• Total Assets: 287 million (ignoring inv.)• NIBCLs: 25 million• 262 million• Long Term Debt $130 million at 5%• Short Term Debt 0 million at 5.5%• Equity $132 million at Cost of Equity?
6060
Average Cost of Capital• % of Equity * Cost of Equity, • +% of Debt * Cost of Debt (1-Tax Rate)• Example: Our Company• Debt 50% Cost of Debt 5%(1-24.9%)• Equity is 50% Cost of Equity 9%• Average Cost of Capital 6.39%• This will change when we include inventory in our
capital and financing for inventory in our liabilities• Don’t worry about its changing.
6161
Cost of Inventory• Non-Capital Charges as % of Inventory
– Warehousing– Obsolescence– Price Erosion: LCD TV prices fall 24%/year– Pilferage– Damage– Insurance & Taxes– Other
• Does this depend on the SKU?• Typical charge is ~10% • These are PRE-TAX costs• Capital charge was AFTER TAX
6262
Total Cost of Carrying Inventory• Total (Pre-Tax) Cost of Carrying Inventory
Non-Capital Charge (e.g., 10%)Capital Charge/(1-Tax Rate)
• Our CompanyNon-Capital Charge (we will guess 10%) 10%Capital Charge 6.39%/(1-24.9%) ~8.5%Total Cost of Carrying Inventory 18.5%
• What does this mean? – For every $100 million in inventory we carry– The annual cost of carrying that inventory is ~$18.5 millionWe can compare THAT with annual operating expenses
Let’s be careful to distinguish. Shout if you’re confused!
6363
Summary
• Income Statement focus on Profitability– Usually think of increasing revenues or reducing
expenses
• Balance Sheet focus on Capital Utilization– Usually think of reducing working capital
• Inventory Carrying Cost– Allows us to balance the two approaches
– No one writes a check for Inventory Carrying Cost
6464
Questions?
6565
Next Step
• Estimate Inventory • Depends on how we operate• Today we
– Minimize transportation costs by running full truckload direct (lowest rate and shortest distance)
– Maximizes Gross Margin• What’s the effect on inventories? • How well are we balancing our competing
metrics of financial performance?
6666
Types Of Inventory
• Pipeline Inventory: Goods in transit• Cycle Stock: Goods accumulating or depleting
from batch operations, e.g., accumulating or selling off a truckload quantity
• Safety Stock: Goods held as a buffer against variability in demand and in replenishment
• Anticipation Stock: Accumulated because of limited capacity
6767
Cycle Stock
• Example: Accumulated at a shipping dock awaiting full truckload
• Typically assume constant (long run average) rate of production
6868
Cycle Stock
Inve
ntor
y
Time
Truck Load
Average Inventory? (Units or Value)
Average Inventory? (Days)
6969
Cycle StockIn
vent
ory
Time
Truck Load
Average Inventory? (Units or Value)
Average Inventory? (Days)
7070
Cycle Stock
• Units: Half the size of the batch
• Value: Half the value of the batch
• Time: Half the time to accumulate the batch.
• Simple.
• We will see modifications of this simple model.
7171
Pipeline Inventory
• Little’s Law• L = WNumber of items in the system (L) = Rate the items arrive (Time each item spends in the system (W)It doesn’t matter how they arrive
– One at a time– In parcels– In truck loads– …
Where have we seen this before?
7272
Pipeline Inventory• L, the items or value in the system• the long run average rate at which items
or value arrive (e.g., are shipped)• W, how long (in consistent units) they stay in
the system (e.g., the transit time)• Example: Wal*Mart ships 60%¹ (by value) of
all it sells from Asia to the US on container ships taking 15¹ days
• COGs for 2010: $305 billion• What’s the pipeline inventory (value)
¹ Guesses
7373
Pipeline Inventory
• the long run average rate at which items or value arrive (e.g., are shipped)
60% * $315 billion = $189 billion
$189 billion/365 = $517 million/day• W, how long (in consistent units) they stay in
the system (e.g., the transit time)
15 days
L = W = $517 million/day* 15 days
= $7.767 billion
7474
Pipeline Inventory
• That’s a $7.767 billion INVESTMENT
• It is always there floating on the water
• Sometimes more, sometimes less
• $7.767 billion on average
• That’s the revenues of the 330th largest company in the Fortune 500
• Eg. Eastman Chemicals, Dillards, Yahoo
7575
Questions
7676
Challenge 1
• In your groups, complete the financial statements for Our Company under current operating practices
• Transportation costs– As indicated on Parameters page
• Inventory Costs
* We assume weight, not cube, floor space or maximum value determines the capacity of the vehicle.
7777
Deliverables• Completed Financial Statements• Brief presentation outlining your calculations• As VP of SC, what initiatives would you
propose? • We will be building on this example. Organize
and keep your work.• Avoid using values (e.g., Inventory carrying
cost, truck load capacity, …) in formulas. Reference them so you can change them easily later
• Due: Tuesday, January 17th • I will call on 1 or 2 teams to present in class
7878
Discussion
• Questions?
• Next week:– Team presentations on Challenge 1– Begin to explore strategies for balancing
operating expenses (e.g., transportation) and working capital (e.g, inventory)