f101 – optimizing supplier alliances - software selection
TRANSCRIPT
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F101 – Optimizing Supplier AlliancesBest practices in formulating, formalizing, and leveraging strategic suppliers are cutting edge and understood by only a few distributors.
This session will explore how best practiceThis session will explore how best practice supplier relationships create more effective supply chains, capture more market share, and optimize profitability. The best practices will be supported p y p ppwith case study results from Texas A&M’s many research projects with best practice firms.
F. Barry Lawrence, Ph.D., Texas A&M University3/12/2010, 9:30 a.m.
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Session Objectives
• Develop business process framework
• Develop financial framework
• Link business processes and shareholder value• Link business processes and shareholder value
• Implement best practices
• Quantify impact of best practices on profitability
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Return on Investment Opportunity
• Quantify impact of best practices on profitability
• Prioritize improvement opportunities
• Increased EBITDA and RONA• Increased EBITDA and RONA
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Additional Resources
• “Optimizing Distributor Profitability” available from the NAW.– http://www.naw.org/optimizdistprof
• Educational Programs from the Thomas and Joan Read Center for Distribution Research and Education at– http://readcenter.tamu.edu
• Pricing Optimization• Optimizing Distributor Profitability• Optimizing Distributor Profitability• Certificate in Distribution Management• Custom Programs
• Research from the Supply Chain Systems Laboratory– http://supplychain tamu edu/http://supplychain.tamu.edu/
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The ROI Equation
Financial Statements
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Business Process Framework
Key Performance Indicators (KPIs)y ( )
Supplier Customer
Supply Chain Planning
Supp e Custo eSource Stock Store Sell Ship
• Information ManagementInformation Management• Human Resource Management• Finance Managemnet
Support Services
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Financial Drivers
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Step 1 – Identify Gap – Sample Assessment Report
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Step 2: Map Shareholder Value – Distributor Profitability Framework
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Supplier Performance and ROI
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Step 3: Assess Profitability
SupplierLead TimeVariability
Safety Stock
Average Inventory GMROII % RONA
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SOURCE Process Group – Suppliers
Key Performance Indicators (KPIs)y ( )
Supplier Customer
Supply Chain Planning
Supp e Custo eSource Stock Store Sell Ship
• Information ManagementInformation Management• Human Resource Management• Finance Managemnet
Support Services
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Source Processes
Distribution
Source
Supplier
Stock Store Sell Ship Support Services
Supplier Management
Supplier SelectionSelection
Supplier Performance
Supplier Stratification
Supplier Relationship
Right #
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Right # Suppliers
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Supplier Stratification
Best P ti
Good
Practices
ance • Loyalty, Profitability,
Services, Performance• Risk/Exposure – supply
Practices
erfo
rma
Common Practices
• Segmentation based on COGS by supplier
• Pareto framework
p pp yavailability, technical requirements, financial factors, technological factors and environmental issues
Pe
• Purchase price varianced d
• Pareto framework (80%-20%)
issues• Landed Cost (TCO)• Combination Methodology
• Landed cost• Lacks segmentation
framework
14Time
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Supplier Stratification – Relationships
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Supplier Management
Best Practices
Good Practices
man
ce • On time delivery• Lead time• Quality & Delivery
completeness
Practices
Perf
orm
Common Practices
• On time delivery• Lead time• Quality &
Delivery completeness
• Lead time variability• Combination methodology
- Supplier Performance Index (SPI)
P
• No supplier performance measurement
• On time delivery
completeness
On time delivery (Reactive measurement only)
• Quality
16Time
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Supplier Performance – Ranking Criteria
Sample ranking criteria for supplier performance factors
Factors A B C D
Lead Time Average < 2 weeks 2 to 4 weeks 4 to 8 weeks > 8 weeks
Lead Time Variability (COV) <= 0.25 0.26 – 0.50 0.51 – 0.75 > 0.75
On-Time Index >= 0.76 0.51 – 0.75 0.26 – 0.50 <= 0.25
Completeness Index >= 0.76 0.51 – 0.75 0.26 – 0.50 <= 0.25
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Supplier Performance – Final Rank
“Weighting” approach to combine individual ranks
S li20% 30% 25% 25%
Fi lSupplierList
Final RankLead Time
AverageLead Time Variability
On-TimeIndex
Completeness Index
S li 1 A A B A ASupplier 1 A A B A A
Supplier 2 A A B D A
Supplier 3 A D C A CSupplier 3 A D C A C
Supplier 4 B A B C A
Supplier 5 B C C A Bpp: : : : : :
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Lead Time Variability – Schematic
Basic Input P t
Additional RParameters Revenue
EBITDA
P&L and
Lead Time LT Var.
Expected Turns
Bal. Sheet
% of re-RONA
Safety investment RONA
GMROIITurns
Stock
YES
Average Inventory
Re-invest ?NO
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Financial Statements – Typical Distributor
Income Statement Fixed VariableNet Sales 148,265,879$ 100%Cost of Goods Sold 110,902,877$ 74.8% 0% 100%Gross Margin 37,363,002$ 25.2%Employee Compensation - Outside S 9,059,045$ 6.11% 25% 75%Employee Compensation - Others 9,385,230$ 6.3% 90% 10%Warehouse Expenses 4,477,630$ 3.0% 50% 50%Delivery Expenses 4,536,936$ 3.1% 20% 80%Other Operating Expenses (G&A) 2,194,335$ 1.5% 25% 75%Total Operating Expenses 29 653 176$ 20 0%Total Operating Expenses 29,653,176$ 20.0%Operating Margin 7,709,826$ 5.2%Other Income -$ 0.0%Other Expenses -$ 0.0%EBITDA 7,709,826$ 5.2%
B l Sh tBalance SheetAssets By Total AssetsInventory 17,470,663$ 37.6%Accounts Receivables 18,829,767$ 40.6%Cash & Marketable Securities 1,990,029$ 4.3%Other Currrent Assets 1,978,468$ 4.3%Other Currrent Assets 1,978,468$ 4.3%Total Current Assets 40,268,926$ 86.7%Fixed & Non-current Assets 6,153,034$ 13.3%Total Assets 46,421,960$ 100.0%Liabilities & Net Worth By Total Liabilities & Net WorthAccounts Payables 9,884,392$ 21.3%Notes Payable (Short-term Debt) 1,427,456$ 3.1%Other Current Liabilities 2,404,335$ 5.2%Total Current Liabilities 13,716,183$ 29.5%Long-term Liabilities 4,991,618$ 10.8%Net Worth Or Owner's Equity 27,714,159$ 59.7%Total Liabilities & Net Worth 46 421 960$ 100 0%
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Total Liabilities & Net Worth 46,421,960$ 100.0%
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Financial KPIs – Typical Distributor
Financial KPIs CurrentCASH FLOWDSO 46.4DPO 32.5DOI 57.50Cash Conversion Cycle 71.3Working Capital as a % of rev 17.9%
PROFITABILITYGross Margin % 25.2%EBITDA Margin % 5.2%P l P d ti it R ti (PPR) 0 49Personnel Productivity Ratio (PPR) 0.49GMROI % 214%% change in EBITDA $
GROWTHGROWTHRevenue Growth % 5.3%
ASSET EFFICIENCYAsset Turnover 3 19Asset Turnover 3.19Receivables Turnover 7.9Inventory Turnover 6.35
RONA (EBITDA/Net Assets) 23.57%
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( )
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Critical Information
• Current inventory = $ 17,470,663
• 6 critical suppliers account for 77% inventory
• Inventory considered = $ 13 452 410 (77%)• Inventory considered = $ 13,452,410 (77%)
• Number of SKUs considered = 5,237
• Objective is to reduce lead time variability by 10%
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Input Parameters – For a top selling item
Average Lead Time 28 DaysSupplier Parameters
Average Lead Time 28 DaysLead Time Variability (Expressed as standard deviation) 7 DaysUnit Cost $201.25
Monthly Demand 12,050 UnitsDistributor Parameters
y ,Cycle Service Level (CSL) 85%Forecast Accuracy 80%Order Quantity (OQ) 2 400 unitsOrder Quantity (OQ) 2,400 units
CalculationCycle Inventory (Half of OQ) 1,200 UnitsSafety Inventory 4,416 UnitsAverage Inventory (Cycle + Safety) 5,616 Units
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e age e to y (Cyc e Sa ety) 5,616 Units
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Impact of LT Variability on Inventory
Lead Time Varibility (Days) Safety Stock (Qty) Average Inventory (Qty) % of Current Inventory7 4,416 5,616 100%
6.3 4,201 5,401 96.2%5.6 3,998 5,198 92.6%4.9 3,811 5,011 89.2%4.2 3,641 4,841 86.2%3.5 3,491 4,691 83.5%2 8 3 363 4 563 81 3%2.8 3,363 4,563 81.3%2.1 3,260 4,460 79.4%1.4 3,184 4,384 78.1%0 7 3 138 4 338 77 2%
• This implies a reduction in inventory for this SKU by 3.8%
0.7 3,138 4,338 77.2%0 3,122 4,322 77.0%
p y y %• Let’s extend this savings to the remaining SKU’s• Inventory reduction = 3.8% X $ 13,452,410 = $ 514,978
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Inventory reduction 3.8% X $ 13,452,410 $ 514,978
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Lead Time Variability - Schematic
Basic Input Parameters
Additional Revenue
= $ 514,978 X 6 / (1-25.2%) = $ 4,130,839
EBITDA
P&L andBal Sheet
Lead Time LT Var.
Expected Turns
6 turns
Bal. Sheet
% of re-investment RONA
Safety Stock
100%investmentGMROIITurns
A
Stock
YES
Average Inventory
Re-invest ?NO
$ 514 978
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$ 514,978
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Impact on Income Statement
Income Statement Current Scenario By Sales % Fixed Variable To-Be Scenario FormulaeColumn A B C D ENet Sales 148,265,879$ 100% 152,396,718$ New Net Sales
Profitability Analysis - Income Statement
Net Sales 148,265,879$ 100% 152,396,718$ New Net SalesCost of Goods Sold (COGS) 110,902,877$ 74.8% 0% 100% 113,992,745$ (A * C) + (New Net Sales * B * D)Gross Margin 37,363,002$ 25.2% 38,403,973$ (New Net Sales - COGS)Employee Compensation - Outside Sales 9,059,045$ 6.11% 25% 75% 9,248,341$ (A * C) + (New Net Sales * B * D)
Employee Compensation - Others 9,385,230$ 6.3% 90% 10% 9,411,378$ (A * C) + (New Net Sales * B * D)Warehouse Expenses 4,477,630$ 3.0% 50% 50% 4,540,005$ (A * C) + (New Net Sales * B * D)Delivery Expenses 4,536,936$ 3.1% 20% 80% 4,638,059$ (A * C) + (New Net Sales * B * D)Other Operating Expenses (G&A) 2,194,335$ 1.5% 25% 75% 2,240,187$ (A * C) + (New Net Sales * B * D)Total Operating Expenses 29,653,176$ 20.0% 30,077,971$ Operating Margin 7 709 826$ 5 2% 8 326 002$ Gross Margin Total Operating ExpensesOperating Margin 7,709,826$ 5.2% 8,326,002$ Gross Margin - Total Operating ExpensesOther Income -$ 0.0% -$
Other Expenses -$ 0.0% 62,954$ Interest expense for additional accounts receivables @ 12%
EBITDA 7,709,826$ 5.2% 8,263,048$
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Impact on Balance Sheet
Balance Sheet Current Scenario To-Be Scenario FormulaeAssets By Total Assets
Profitability Analysis - Balance Sheet
yInventory 17,470,663$ 37.6% 17,470,663$ No change in inventory since re-allocated
Accounts Receivables 18,829,767$ 40.6% 19,354,383$ Days Sales Outstanding * (New Net Sales / 365)
Cash & Marketable Securities 1,990,029$ 4.3% 1,990,029$ Other Currrent Assets 1,978,468$ 4.3% 1,978,468$
$ $Total Current Assets 40,268,926$ 86.7% 40,793,543$ Fixed & Non-current Assets 6,153,034$ 13.3% 6,153,034$ Total Assets 46,421,960$ 100.0% 46,946,577$ Liabilities & Net Worth By Total Liabilities & Net Worth
Accounts Payables 9,884,392$ 21.3% 10,159,781$ Days Payable Outstanding * (New COGS / 365)(New COGS / 365)
Notes Payable (Short-term Debt) 1,427,456$ 3.1% 1,427,456$ Other Current Liabilities 2,404,335$ 5.2% 2,404,335$ Total Current Liabilities 13,716,183$ 29.5% 13,991,572$ Long-term Liabilities 4,991,618$ 10.8% 4,991,618$ Net Worth Or Owner's Equity 27,714,159$ 59.7% 27,963,387$ q y , ,$ , ,$Total Liabilities & Net Worth 46,421,960$ 100.0% 46,946,577$
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Impact on Financial Metrics
Key Metrics Current PotentialInventory Turns (Asset Efficiency) 6.4 6.5RONA (Asset Efficiency) 23.6% 25.1%Cash Conversion Cycle (Cash Flow) 71.3 Days 69.8 DaysGMROII (Profitability) 214% 220%EBITDA (Profitability) 5 2% 5 4%EBITDA (Profitability) 5.2% 5.4%
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Potential Profitability - Typical Distributor
Potential Profitability Curve ‐ SOURCERONA % ‐MINIMUM RONA % ‐MAXIMUM RONA % ‐ Typical Distributor
36.73%
40%
yp
31 54% 31.79%31.54% 31.79%
29.03%28.22% 28.50%
30%
25.08%25.55%
24.53%
26.00%26.28%
23.57%
25.72%
20%
Base Case Lead Time Lead Time Variability Completeness Index Payment Terms
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Potential Profitability - Typical Distributor
Impact of SOURCE best practices on
EBITDA % ‐ Typical Distributor
5.2%5.8% 5.8%
5.5%6.0%
Base Case Lead Time Lead Time Variability Completeness Index Payment Terms
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Potential Profitability (RONA)
Impact of SOURCE, STOCK, SELL, STORE & SHIP bestImpact of SOURCE, STOCK, SELL, STORE & SHIP best practices on RONA ‐ Typical Distributor
75.2%61.2% 67.7%
85.0%
23.6%33.4%
Base Case Source & Stock
Store & Ship Sell Combined Best Practices
‐MIN
Combined Best Practices
‐MAX
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Potential Profitability (EBITDA)
Impact of SOURCE, STOCK, SELL, STORE & SHIP best practices on EBITDA % ‐ Typical Distributor
9.32%7.17%
11.41%10.29%
11.52%
5.20%
Base Case Source & Stock Store & Ship Sell Combined Best Practices ‐MIN
Combined Best Practices ‐MAX
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Action Plan
• Step 1: Properly segment suppliers.
• Step 2: Measure supplier performance.
• Step 3: Develop scorecard and share results with suppliers• Step 3: Develop scorecard and share results with suppliers.
• Step 4: Demonstrate impact of supplier performance on shareholder value
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Summary
• POTENTIAL for improving profitability exists
• Process and financial performance can be MEASURED to assess potential
• A ONE-to-ONE connection can always be established for processes and• A ONE-to-ONE connection can always be established for processes and shareholder value
• This connection can be QUANTIFIED and PRIORITIZED
• Best practices can be ACHIEVEDBest practices can be ACHIEVED
• Education will ENABLE distributors to realize POTENTIAL profitability
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Thank You For Attending
• F101 – Optimizing Supplier Alliances
• F. Barry Lawrence, Ph.D.
• Please submit the Session Feedback Form• Please submit the Session Feedback Form– To receive NASBA credits, please be sure to complete the Session Feedback
Form and sign the class roster in the back of the room
“Total Solutions For Industrial Distributors and Manufacturers”
Thank You!
35For more info please visit:
http://supplychain.tamu.edu