Using Supply Chain Levers to Impact Profits

Sandra Jessop, CPIM, MBA

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Sandra Jessop: Who Am I?

Professional Career

Vice President, Operations – RV Products

Corporate Material Management Leader –

Airxcel, Inc

16 years Supply Chain Experience

Small Business Owner

B.S. Aerospace Engineer, Embry Riddle

Aeronautical University

MBA, Wichita State UniversityProfessional Membership /

Volunteerism

President, APICS Wichita

CPIM & Black Belt Textron Six Sigma

Sustainer Advisor, Junior League of

Wichita Fund Development

Family

Youngest of 6, Wife of 17 Years

Mother of 3 Girls (16, 13, 8)

1 Dog: Pixie

Socially

Workout, Volleyball, Boating

Spending Time with Friends and

Family

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Why This Topic

• Raise Your Hand if You Know This Information For Your Company:

• How big is the company in Sales?

• How much is the purchasing spend?

• How much is the Freight spend?

• What is the Inventory Valuation each month by group: Raw Material, WIP, Finished Goods?

• What is the Cost of Goods Sold %?

• What is the biggest supply chain issue you face with regards to these expenses?

How Can You Make a Difference If You Don’t Understand The

Business?

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Functional Area Paradigm

Watch This Video and Follow the Instructions

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Functional Area Paradigm

Did You See The Gorilla?

It’s Easy to Focus Only On Your Area And Miss The Bigger Picture.

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Two Major Measures of Performance

1. Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA)

2. Net Working Capital (NWC)

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Why Are These Metrics Important?

Earnings Before Interest, Taxes, Depreciation, & Amortization (EBITDA)

Net Working Capital (NWC)

They Answer Two Critical Questions!

Are We Making Any Money?

What Do We Have Tied Up In Cash That We Cannot Use To Invest Somewhere

Else?

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Overview

Practical Application

Of 6 Supply Chain

Levers To Positively

Impact the Bottom

Line Through EBITDA

And NWC Metrics.

Raw Material Pricing

Payment Terms

On Hand Inventory

Supplier Partnerships

& Supply Chain

Flexibility

Ownership of In-Transit

Inventory

Transportation and

Logistics

6 Supply

Chain

Levers

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Supply Chain Management Value Proposition

EBITDA

Raw Material Pricing & Mix

Transportation

Overall Costs

Production EfficienciesNWC

On Hand Inventory

Payment Terms

Raw Material Pricing

Supplier Partnerships & Flexibility

Inventory In-Transit

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NWC

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NWC Calculation

Current Assets

Accounts Receivable

+ Inventory

+ Prepaid Expenses

Current Liabilities

Accounts Payable

+ Accruals (Warranty, Payroll,

Rebates, etc)

+ Other Liabilities

NWC = Current Assets – Current Liabilities

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How Can Supply Chain Impact NWC?

Discount or Extended Payment

Terms

Raw Material Pricing

Ownership of

Inventory

Current Liabilities: Accounts Payable

Accounts Receivables:

Customer Payments

& Supplier Rebates

Inventory:

Valuation

Ownership

Consigned / VMI

Understanding Inventory Balances: Raw, WIP, Finished

Current Assets

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Net Working Capital Levers and Improvements

• Inventory

• Accounts Receivable

• Accounts Payable

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Inventory

Inventory Type

• Raw Material

• WIP (Work in Process)

• Finished Goods

Inventory Mix

• Business/Manufacturing Strategy (Make To

Stock/Make to Order/etc.)

• Inventory Management Strategies

Inventory Valuation

• Supplier Negotiated Contracts

• Cost of Finished Goods

NWC Levers and Improvements

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Accounts Receivable / Accounts Payable

Accounts Receivable

• Questions To Ask:

• What Are The Customer Payment Terms?

• Does the Customer Have Discounts?

• How Can I Offset Any Customer Discounts

with Corresponding Supplier Payments?

• Customer Contracts: Rebates/Payment

Terms

• Supplier Contracts: Negotiated Rebates

Accounts Payable

• Questions To Ask:

• When Do You Own It?

• How Much Do You Owe?

• How Can You minimize How Much You

Owe?

• When Do You Need To Pay For It?

• Supplier Contracts: Payment Terms,

Pricing, Rebates, Ownership

NWC Levers and Improvements

The Goal Is To Minimize The Time Between The Payment To The Supplier and

The Payment From the Customer.

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EBITDA

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How Can Supply Chain Impact EBITDA?

• Many Of The Overall Costs Are Generated

From The Supply Chain.

• Cost Control

• Transportation Rates / Efficiencies /

Backorders

• Raw Material Negotiations, Commodity

Pricing, Flexibility, and Mix

• Factory Variance – Direct Labor Costs /

Purchase Price Variance / Efficiencies

• Quality Control / Reworks

• Indirectly: On Hand Inventory Balances

EBITDA

Raw Material Pricing & Mix

Transportation

Overall Costs

Production Efficiencies

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CURRENT MONTH YEAR-TO-DATE

2017 2017 2016 2017 2017 2016

Budget Actual Actual Budget Actual Actual

$19,875,904 $21,899,057 $17,555,999 Sales - US $19,875,904 $21,899,057 $17,555,999

$3,425,987 $4,199,000 $2,500,000 Sales - Canada 3,425,987 $4,199,000 $2,500,000

$430,826 $506,789 $692,654 Sales - International 430,826 $506,789 $692,654

999,999 896,789 300,987 Sales - Associated / Super Widget 999,999 $896,789 $300,987

24,732,716 100.0% 27,501,635 100.0% 21,049,640 100.0% Total gross sales 24,732,716 100.0% $27,501,635 100.0% $21,049,640 100%

Variable expenses:

18,549,537 75.0% 20,626,226 75.0% 16,208,223 77.0% Cost of goods sold 18,549,537 75.0% $20,626,226 75.0% 16,208,223 77.0%

74,198 0.3% 82,505 0.3% 63,149 0.3% Factory variance 74,198 0.3% $82,505 0.3% 63,149 0.3%

49,465 0.2% 0 0.2% 42,099 0.2% Cash discount 49,465 0.2% $0 0.2% 42,099 0.2%

890,378 3.6% 1,127,567 4.1% 757,787 3.6% Transportation 890,378 3.6% $1,127,567 4.1% 757,787 3.6%

519,387 2.1% 577,534 2.1% 442,042 2.1% Warranty 519,387 2.1% $577,534 2.1% 442,042 2.1%

24,733 0.1% 27,502 0.1% 21,050 0.1% Selling expense 24,733 0.1% $27,502 0.1% 21,050 0.1%

20,107,698 81.3% 22,441,334 81.6% 17,534,350 83.3% Total variable expense 20,107,698 81.3% 22,441,334 81.8% 17,534,350 83.3%

4,625,018 18.7% 5,060,301 18.4% 3,515,290 16.7% Marginal income 4,625,018 18.7% 5,060,301 18.4% 3,515,290 16.7%

Fixed expenses:

494,654 2.0% 550,033 2.0% 420,993 2.0% Factory fixed 494,654 2.0% 550,033 2.0% 420,993 2.0%

0 0.0% 0 0.0% 0 0.0% Cost adjustments 0 0.0% 0 0.0% 0 0.0%

123,664 0.5% 137,508 0.5% 105,248 0.5% Design 123,664 0.5% 137,508 0.5% 105,248 0.5%

173,129 0.7% 192,511 0.7% 147,347 0.7% Tooling 173,129 0.7% 192,511 0.9% 147,347 0.7%

247,327 1.0% 275,016 1.0% 210,496 1.0% Selling expense 247,327 1.0% 275,016 1.0% 210,496 1.0%

469,922 1.9% 522,531 1.9% 399,943 1.9% Administrative expense 469,922 1.9% 522,531 1.9% 399,943 1.9%

321,525 1.3% 357,521 1.3% 273,645 1.3% Distributing 321,525 1.3% 357,521 1.3% 273,645 1.3%

173,129 0.7% 192,511 0.7% 147,347 0.7% Other expense / (income) 173,129 0.7% 192,511 0.7% 147,347 0.7%

2,003,350 8.1% 2,227,632 8.1% 1,705,021 8.1% Total fixed expenses 2,003,350 8.1% 2,227,632 8.33% 1,705,021 8.1%

2,621,668 10.6% 2,832,668 10.3% 1,810,269 8.6% Operating income 2,621,668 10.6% 2,832,668 10.3% 1,810,269 8.6%

804,308 4.0% 1,100,065 4.0% 841,986 4.0% Interest expense 804,308 4.0% 1,100,065 4.0% 841,986 4.0%

0 0.0% 0 0.0% 0 0.0% Other (income) / expense 0 0.0% 0 0.0% 0 0.0%

0 0.0% 0 0.0% 0 0.0% Loan cost amortization 0 0.0% 0 0.0% 0 0.0%

764,093 3.8% 783,797 3.8% 615,912 3.8% Amortization expense 764,093 3.8% 783,797 3.8% 615,912 3.8%

1,568,400 7.80% 1,883,862 7.8% 1,457,898 7.8% Total nonoperating expenses 1,568,400 7.8% 1,883,862 7.8% 1,457,898 7.8%

1,053,267 4.3% 948,806 3.4% 352,371 1.7% Profit before tax 1,053,267 4.3% 948,806 3.4% 352,371 1.7%

0 0.0% 0 0.0% 0 0.0% Income tax 0 0.0% 0 0.0% 0 0.0%

$1,053,267 4.3% $948,806 3.4% $352,371 1.7% Net income 1,053,267 4.3% 948,806 3.4% 352,371 1.7%

119,210 119,210 76,619 Depreciation 119,210 119,210 76,619

2,500 2,500 7,500 Non-recurring Expense 2,500 2,500 7,500

2,743,378 11.1% 2,954,378 10.7% 1,894,388 9.0% EBITDA 2,743,378 11.1% 2,954,378 10.7% 1,894,388 9.0%

Jessop Enterprises

Widget Builders

OPERATING INCOME STATEMENTS FOR January 2017

Income Statement Refresher2017

Budget

2017

Actuals

2016 Same

Time Period

2017 Budget

YTD

2017 Actuals

YTD

Learn How

To Read

The Tea

Leaves.

Look For Line Items That are Over Or Under Budget.

Understand what

makes up each cost

by asking questions

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Examples of What To Look For With EBITDA

• Higher Cost of Goods Sold % Due To Mix Or

Commodity Price Increases On Raw Material.

• Factory Variance Due To Purchase Price Variance

Within The Month, Overtime, Productivity /

Efficiency Drop/ Scrap / Inventory Accuracy /

Increases in In-bound freight.

• Transportation Increases Due To Increased

Expedites, Backorders, Increases in LTL And

Small Package Shipments, Warranty, Lower

Weights Shipped Per Truckload, Oil / Gas Price

Increases, Driver Shortages.

• Warranty Higher Due To Supplier Quality And

Manufacturing Quality Issues Or Poor Warranty

Process.

• Factory Fixed Expenses are Higher.

▪ Increases In Headcount.

▪ Design Expenses Higher Due To New Product

Development.

▪ Tooling Costs Increasing Due To Purchase Of

New Tools.

▪ Administrative Expense Due To Overhead

Increases In Headcount / Supplies

▪ Distributing Impacts Due To Increased Sales

Driving More Contract Services, Propane,

Pallets, Supplies, and Wages / Overtime in

Distribution.

▪ Production Supply Impacts Due To Increased

Sales.

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Supply Chain Management Value Proposition - Recall

EBITDA

Raw Material Pricing & Mix

Transportation

Overall Costs

Production EfficienciesNWC

On Hand Inventory

Payment Terms

Raw Material Pricing

Supplier Partnerships & Flexibility

Inventory In-Transit

Inventory! Cost Control!

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Simulation

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Company: Jessop Enterprises

Background

Company that provides a product that is needed year round, however, has higher

demand/usage (seasonality) from March – September.

Product: Widgets

Typical Finished Goods Inventory is between 25%-30% of sales. 60% of Raw Material

is purchased Internationally, with 6-10 week lead times.

Industry Information:

Industry is predicting a 4% increase over the previous year. This is already budgeted.

Each Group Will Have One Income Statement To Evaluate.

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Important Information Provided

• Income Statement.

• Inventory Dollars.

• December Inventory $ is the on hand inventory dollars for the beginning of January, etc.

• Inventory Dollars For Each Month By Type (Raw Material/WIP/Finished Goods).

• Number and % of On Hand Finished Goods Coming Into a Month.

• Summary of state of the market for that month.

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Simulation / Case Study

Divide into Groups Evenly. Designate a speaker for your team.

Compare the budget to the actual and explain what could have happened within the

supply chain to drive the costs/within the month.

• Focus on the %, Not the Actual $

Identify:

• Areas for Improvement based off comparison with Budget / Previous Year.

• What may have happened?

• What can you do to correct or mitigate the risk of this expense for the next month?

Share Your Results with the Broader Group.

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Summary

• To Determine The Health Of A Business Ask These Questions:

• Are We Making Any Money? EBITDA

• What Do We Have Tied Up In Cash That We Cannot Use To Invest Somewhere Else? NWC

• All Areas Of The Supply Chain Must Work Together– No Silos!

• It Is Important To Understand The Overall Business In Order To Add Value And

Make An Impact.

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APICS 2017 Session Evaluation

Visit www.apics.org/Tuesdayor

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THANK YOU