Technological University Dublin ARROW@TU Dublin

Practitioner Journals National Institute for Transport and Logistics

2004-07-01

The Financial Dimension of Supply Chain Management

Edward Sweeney Technological University Dublin, [email protected]

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Part of the Business Administration, Management, and Operations Commons

Recommended Citation Sweeney, E.:The Financial Dimension of Supply Chain Management.Logistics Solutions, the Journal of the National Institute for Transport and Logistics, Vol. 7, No. 2, pp. 13-15, July 2004.

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This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 4.0 License by by management chain supply of dimension financial the 2. Integrated management of financial flows (along with material and information flows) is part of NITL’sof part of is fundamental flows)second information and material with (along flows financial of management Integrated 2. Solut Logistics E., NITL’sof (Sweeney, SCM of part investmentfundamental is and first cost chain supply total of Optimisation 1. ot n investment and chain cost supply total optimise to is SCM of objectives overall the of one Firstly, to be considered from two perspectives. needs (SCM) management chain supply te lns n h can (typically and processors chain distributors, the retailers, in the links through back other chain, supply a in money is “real” of source only who the usually consumer, final the from flow funds financial below, Figure1 in shown As chain. supply a across flows financial of management the with concerned is SCM Secondly, company. a in employed the optimisationofreturn onthecapital to contributes investment chain supply of overall optimisation Similarly, to profitability. significantly) very often (and directly contributes therefore, cost, chain supply total of optimisation The of base sectors. industry different in companies cost total the of proportion significant but varying a represent costs INTRODUCTION the financial dimension financial the The financial and economic aspect of aspect economic and financial The oitc ouin,2000) Solutions, Logistics Figure1 DADSENY ietro erig NITL Learning, of Director EDWARDSWEENEY, Source – Funds flow (along with material and information flows) in the supply chain supply the in flows) information and material with (along Fundsflow – Material Flow Suppliers 1 upy chain Supply . Information Flow Processors F F l l o o w w itiuosConsumer Distributors rvdr o sae aia (i.e. capital and dividends share expect shareholders) of provider. the Providers of part the and on power expectations with comes Each reserves. and debt) interest (or capital loan capital, share – sources are main three there that recognised generally use offunds). ensured be must resources these of deployment effective the Secondly, f hs lw s ky C activity SCM key a is flow this of management integrated The suppliers). e eue fo oe r oe f a of more sources of number or one from secured be must resources financial Firstly, two things. with concerned fundamentally chain. the in companies of position flow the cash on impact direct a has which one FINANCIAL MANAGEMENTFINANCIAL In relation to the raising of funds it is it funds of raising the to relation In iaca mngmn is management Financial Retailers Funds (the raising offunds) 2 and , (the , company which carried out much of its of much out carried which company A the majordeterminant ofthisbalance. was decision make-versus-buy classical the companies manufacturing-based model in Traditionally company. a chain by adopted supply the on largely depends capital working and assets products. on expenditure is this - materials) raw is (e.g. capital working in invested be may this perspective in investment chain supply a From equipment. land, and plant as buildings, such be assets may fixed it in Firstly, invested ways. two of either derived finance. of be source a as reserves of use often the through can cost advantage capital been Nonetheless, effectively foregone). has return of rate investing of this capital to generate a “safe” opportunity the an (i.e. capital of however, this form with associated is, cost There opportunity interest. or of the part provider in terms of dividend the business with on no the expectation within retained trading previous profits from are Reserves security loan). the as against company the by up put expect assets (i.e. collateral from derives banks) power often Their interest. (e.g. with repayment capital their loan from of Providers company. the most of ownership derives of in power the shareholders case, issue any In companies. strategic critical a is the levels re-investment and dividend into between balance the back Striking business. generated profits of re-investment the on dependent is short-term pay to value on share in growth while profitability company depends a dividends of ability the Generally value. share in growth capital Finance raised by acompany isusedin h blne ewe fixed between balance The processes. os 2000) ions, C Seny E., (Sweeney, SCM

lentvl,it Alternatively, LOGISTICS SOLUTIONS ‘ ‘ ISSUE 2 2004 /13 LOGISTICS SOLUTIONS ‘ ‘ ISSUE 2 2004 /14 okn cptl eurmns As requirements. higher capital its proportionately working but fixed of assets, levels of lower have to tended suppliers external much to manufacturing had which subcontracted companies hand, other the On equipment. and plant factories, in investment significant for need the of result a as assets fixed of levels high relatively had in-house manufacturing Greater CustomerGreater Greater Product Greater Intere Availability Revenue Service Processes (and Processes FIXED ASSETS FIXED Depreciation SHARE Figure2 Profitability LOAN Tax SOURCES OF FUNDS OF SOURCES USES OF FUNDS OF USES – The integrated financial model financial – integratedThe distribution costs) distribution (transportation, lowerCostsof warehousing, Figure3 Goods sold Goods Dividend eaig o h riig f iac i the is finance of raising the to relating issue capital strategic key the asset/working Finally, balance. fixed the in shift associated an with configurations, virtual more to architectures integrated has vertically from away move This a in resulted outsourced. are processes and activities “non-core” core, being as regarded processes and activities chain companies concentrate onthosesupply Costs – Impact of SCM on shareholder value shareholder on SCM of Impact – Cost of Goods Sold Goods Costof Shareholder Value WORKING CAPITALWORKING Profit (or loss) (or Profit RESERVE Products (and Products Earnings Sale Retained WorkingCapital re-ocs’cycles order-to-cash’ lowerrawmaterials and finished goods finished and invertory Shorter’ InvestedCapital financial commitments are met. are commitments financial whilst simultaneously ensuringthatday to day available, are investment for funds need to ensure thatthenecessary value, as measured in the form of profit of form the in measured as shareholder value, on SCM impact good can how practice indicates below 3 Figure business. a of profitability overall the to directly contributes investment and cost chain supply total optimising in practice, account. loss and profit the particular accounting of systems standard the of basis the This forms model model. the reserves), integrating thereby to to adding (thus dividends the business within in retained or out shareholders paid are either earnings These in them. incurred achieving costs the and revenues these on based out carried is tax) of and interest after Calculation and (before profitability revenue. and sales to leads capital to Working leading depreciation. time over value in often reduce assets Fixed capital. working or assets fixed either on spent are funds of sources main three The below. 2 Figure the to rise in shown as gives model, financial integrated – funds of use the and raising the - management financial MODEL FINANCIAL INTEGRATED THE h oeal C ojcie of objective SCM overall The of aspects two the Combining FixedCapital the financial dimension financial the Fewerphysical warehouses) eg trucks, (e.g. assets ovre it wr i pors and progress in subsequently work into are converted which materials raw supply creditors) (i.e. suppliers that in shown above).Figure4 (as cycle a capital working within the used as to referred often is This business. is capital working THE CAPITALWORKING CYCLE assets. fixed in required investment of amount the reduces warehouses.This and trucks make to more efficient use of fixed assets such as aims SCM Finally, the business. in elsewhere productively used be to it allows and inventory in up tied order-to-cash releases cycle times.This working capital improve can SCM practice good Furthermore, stock). (raw goods levels finished and progress in work inventory materials, lower from results requirements capital working in saving potential major and The assets. fixed capital working both to relation the potential to improve performance in a has practice SCM good to capital, invested relation from In without perspective. value customer adding processes necessarily chain to cost supply add NVAs the value-adding (NVAs). non activities through of minimisation costs) distribution and warehousing transport, example improved (for chain supply the across costs lower through reduced are Costs streams. revenue sales greater in results availability, product greater the of in form example for service, customer Improved service. customer improve to aims foremost, and first practice, SCM generated for euroevery invested.Good the financial dimension financial the h wrig aia cce indicates cycle capital working The waythe is interestSCM in particular Of Finished etrCreditor Debtor Figure4 Work????? in Cas? – The working capital cycle capital – working The ubr f C ise wih relate cycle. this to directly which a issues are SCM There of number suppliers. pay to is used cash whose (debtors) customers to sold are products These goods. finished atr” srgl t me ter cash their meet to “channel struggle or masters”) customers powerful to suppliers (often companiesmany that is ofthis corollary be paidto suppliers.The to needs cash that before) time long a cash from customers before (often quite generate to ability the have multiples retail food large the and model) direct ❑ ❑ ❑ ❑ opne sc a Dl (hog the (through Dell as such Companies a sples n ie s an is time, liquidity.of element important on suppliers pay timely to available in cash that so a manner, in pay customers that days Creditor/debtor velocity” circulation the maximise cycle capital “working increase the speed of the cycle or to Speed Liquidity provides some insights into this. into insights some provides cycle debts.The short-term meet to ability its on dependent is business measure this in financial terms. financial in this measure to Value-based attempt methods accounting into product. converted finished are materials Value Figure5 piu upyChain Supply Optimum ot&Investment & Cost Vle s de a raw as added is Value - A e ojcie s to is objective key A - - The very existence of any of existence very - The – Improved financial performance measures the success of SCM of success the measures performance Improvedfinancial – Raw ????? Raw . Ensuring - Fi rvds faeok for framework a article implications. these understanding this in provides outlined The approach implications. financial has chain supply a in taken decision operational SCM. of success financial the measures improved performance in below, shown 5 as way, Figure similar chain a In supply design. for specification the an that said sets service customer often of understanding is It flows. these of analysis the for framework financial The useful a provides chain. cycle capital working supply the across flows financial of management the integrated on focus its through companies of position flow cash and liquidity the to contributes SCM and value. profitability shareholder overall on SCM of financial a framework provides for the analysis of the impact which model, This gives rise to the integrated financial finance. of use the and raising the with concerned is management Financial to investment. and contributes cost chain supply total SCM throughprofitability theoptimisation of liquid. profitable and both be to aim companies CONCLUDINGCOMMENT h spl can s n SCM an enhanced.be can is performance achieved, cycle capital be working can chain this If fundamental. supply integrated the effective across flows financial of management the out pointed As earlier, speed. and value on the focus on its through cycle way capital working positive a in impact to intrinsically the even business. of out companies profitable has put this to potential scenario, case worst the of In customers. result by payment direct delayed a as commitments upyCanManagement Chain Supply n ocuin vr srtgc and strategic every conclusion, In perspective, financial a From od C patc hs h potential the has practice SCM Good nan cial

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