First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  Aug. 2, 2012  

Supply Chain Finance 101 - The Movie


Gilmore Says:

Look at the resulting impact on cash flow, a critical metric for both supply chain performance and how investors value a stock: it rose an incredible 25% over the same period, more than four times the level of sales growth.

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Last June, I wrote one of my most popular First Thoughts columns of all time, which I called "A Little Supply Chain Finance 101."

The idea for that column was a series of conversations I had recently had at the time with different supply chain professionals that indicated to me a lot of us just aren't that comfortable with how supply chain connects with a company's financial performance overall, and especially it impacts three key financial statements: the income statement, the balance, sheet, and the cash flow statement.


This is especially tricky when it comes to inventory reduction.


Just how does lowering inventories impact those three core financial statements? That's what I explained in the column last year.


At the time of the column, I promised a video version within weeks. Many of you wrote in to offer some nice words about the column itself, and to say you were looking forward to the video.


Well I am glad to say that a bit more than a year later, it is finally done.


You can watch the video at the link below. I think it came out pretty well, if I do say so myself. It packs a lot of insight into about 9 minutes. I am confident you will find it information and even interesting, at least as interesting as supply chain finance can be.






It was fun to put together. But the efforts was such I am going to let the video do most of the work this week. I encourage you to take a look, and suggest it may be good to show at a supply chain lunch meeting or something.


I will add a couple of more thoughts here though.


In the mid-2000s, mighty Walmart's supply chain found it was actually letting inventories grow too fast, much faster versus sales growth than had historically been the case.


As shown in the graphic below, inventory growth reached more than 90% of sales growth in 2004, and just under 90% in 2005, versus say 70% in 2001.





As Walmart acknowledged this problem, it said it wanted to get that metric down to just 50% of sales growth, and launched the ReMix program, lowered SKU and vendor counts, and took other measures to get inventories under control.


Why do I bring this up? Because Walmart's subsequent success in reducing those inventories illustrates in part how supply chain does intersect with the financials, as we explain in the video.


In 2007, as shown in the chart below, Walmart grew US store sales 5.8%. But this time, inventories rose just .7%, a small fraction of sales growth number.





But more importantly, look at the resulting impact on cash flow, a critical metric for both supply chain performance and how investors value a stock: it rose an incredible 25% over the same period, more than four times the level of sales growth.


This is part of the power of supply chain on company financial performance.


We explain all that and more in the video. Hope you enjoy it. If you have any ideas on other tutorials you might like to see, just let me know.

Did you view our Supply Chain Finance 101 video? Any comments? Any other tutorials you would like to see? Let us know your thoughts at the Feedback button below.


Recent Feedback

 Thanks for this nice short video which captures the effects of inventory reduction on financial statements.

Aug, 09 2012

Ditto on the "movie" and the need for the supply chain community to better understand this very important topic.  I teach a course on this very topic at UNCG called "Strategic Cost, Design, Procurement, and Contracts."  Many people do not realize how the CFO and the Treasurer have to partner with the supply chain for the effective management of a firm's working capital.  The cash to cash cycle is clearly a topic supply people must grasp because the formulation and execution of supply chain operational decisions directly affects how cash flows in and out of a firm, which directly impacts working capital and operational cash flow.

While operational cash flow is very important, the impact on the return on assets and return on equity and the increase in the stock price is where the supply chain creates shareholder value.  In order for a firm's stock price to go up, the supply chain must generate operational cash flows "over and above" the cash flows expected via the the firm's WACC (weighted average cost of capital) or hurdle rate and must cover a firm's tax obligations.  The power of the supply chain can then show whether it is increasing or destroying shareholder value.  Any earnings over and above expected returns and tax liability are then accretive to the firm, and the supply chain will impact the firm through increased return on assets, return on equity, and ultimately on the firm's stock price.

Nemiah E. Bryant
University of North Carolina at Greensboro
Aug, 10 2012

The illustration, explanation, VDO and graph help by making it easier to the understanding and get to the point quickly. All of them support each other to prove that this concept idea is true.

Sushanya L.
Country Operations Director
Nike Thailand
Sep, 10 2012