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- Oct. 17, 2014 -

 
       
   

Supply Chain Graphic of the Week: More Supply Chain Finance 101 - a Review of the Dupont Model

 

Invented Almost 100 Years Ago, the Model Remains Just as Relevant Today, with Supply Chain Linkages from Beginning to End

 
       
   

By SCDigest Editorial Staff

 
   

 

We've always had great response when we do some review and explanation of "supply chain finance" topics, so we're going back to that well again here with a presentation of the Dupont financial model.

 

That model basically explains how a firm produces profits and shareholder value, and though it was first developed all the way back in the 1920s, it is still commonly used to this day. In fact, many readers have probably been exposed to the model in some corporate education class of one kind or another.

 

But many others may not have seen it,  and even if you have, a quick review may be worth the time.

 

A quick web search shows many different ways of illustrating the model, but we kind of like the version below:

 


Source: www.12manage.com

 

As can be seen, there are three "streams" that impact a company's return on assets (ROA), which is closely connected to return on equity (ROE) and ultimately shareholder value. Those three streams are: (1) net income; (2) how a company manages it current assets (inventory, accounts receivables, etc.), and (3) the level of long terms assets.

 

Supply chain obviously has a key impact on all three value drivers, and though we could argue that should have been obvious even back in the 1920s (it would have been called operations or something back then), in reality all the key connections to supply chain have actually been a more recent epiphany.

 

We'll note one final point: you can see the attractiveness of outsourcing here: if a company reduces its assets (distribution centers, factories) in a way that doesn't reduce net income, or causes it to fall very modestly, the return on assets number could spike because the denominator of that equation is now reduced.

 

If you can manage to outsource supply chain functions and thus shed assets while actuallly reducing operating costs and thus increase profits, it is a real home run.


Any Feedback on our Supply Chain Graphic of the Week? Let us know your thoughts at the Feedback section below.

 
   
 
   
 

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