Category Archives: Supply Chain & Finance

Counting the Cost of Liquidity in the Euro Zone

Finance and Supply Chain execs need to collaborate on ways to release cash locked into supply chains

Alejandro Serrano – Feb 6, 2012 – CFO.com | US

The liquidity crisis in Europe has cast a spotlight on the need to bridge the divide between finance and supply chain management (SCM). More than ever, executives in these two key disciplines need to collaborate on ways to release some of the cash that is locked into supply chains.

Reducing inventory is probably the most obvious strategy for liberating these financial resources, particularly for companies that maintain high stock levels. In addition to tying up large sums of money in the products stored, inventory adds cost in others forms, such as insurance premiums, investments in storage facilities and related transportation budgets, and obsolescence costs.

Large companies in Europe have become very concerned about this cash-equivalent mountain, as it has become more difficult to meet their working capital requirements (WCR). But addressing the problem requires a concerted effort to understand the financial implications of SCM decisions.

When firms resolve to outsource production to low-cost manufacturing centers in countries such as China, for example, the move may enhance their profit and loss (P&L) statements. But the overall impact on the balance sheet could be much less favorable. The longer pipeline and corresponding increase in uncertainty require higher inventory volumes, which eats up precious cash reserves.

Transferring production to remote suppliers also is likely to involve larger lot sizes. These vendors often need to sell big batches of product to make the business profitable. Again, this consumes the buyer’s WCR when it purchases 1,000 units even though the enterprise only needs, say, 30 units. Sourcing domestically might be a better option because it is easier to work with local producers to reduce lot sizes.

Stock-keeping unit (SKU) proliferation is another supply chain issue that can have far-reaching financial implications, and a number of multinational companies are striving to rationalize their product assortments. In positive economic times, the inventory holding and ordering costs associated with multiple SKUs tend to be underestimated.

In April 2012, sports apparel company Adidas announced plans to cut its 46,897 SKUs by 25%. Other successful companies have followed a similar path. Apple’s iPhone offers only 10 SKUs worldwide for the product’s color and memory variants, for example. Compare this to Nokia, which sells 37 different models in Germany alone. Spanish supermarket chain Mercadona boasted a net profit of more than 19% at its 1,500 supermarkets in 2011. The retailer has about 4,000 SKUs per store compared to a typical U.S. supermarket, which sells around 40,000 SKUs.

Assorted Products
The product-assortment issue is a good illustration of how the lack of a holistic view of the supply chain can rob a company of working capital. Often, the marketing department believes that introducing more SKUs delivers more buying opportunities and hence boosts sales. But the marketers may fail to consider how the wider product selection both decentralizes and increases inventory, and has an adverse effect on the company’s balance sheet. Many senior executives also suffer from this myopic view of operations.

Extending payment periods or shifting inventory to suppliers are tactics that many financial departments adopt in a tight economy. Again, understanding how such actions ripple through the supply chain – working capital is more expensive for small suppliers so their performance declines, for instance – may not be a high priority.

SCM leaders are just as culpable. They might take an outsourcing decision without giving much thought to how such a move constrains WCR. Basic financial concepts, such as “WCR equals cash plus receivables plus inventories minus payables,” need to be an integral part of the SCM decision-making process. Supply chain professionals should appreciate that inventory levels directly affect financial risk.

Firms that understand the impact of SCM decisions on their financial statements can capture huge competitive advantage. That holds true in any commercial environment, but especially in one where there is a scarcity of working capital.

Alejandro Serrano (aserrano@zlc.edu.es) is a professor of supply chain management at the Zaragoza Logistics Center, Zaragoza, Spain. He teaches “Finance for Supply Chain Management” as part of ZLC’s masters and executive education programs. This article will be published in the MIT Supply Chain and Logistics Excellence Network newsletter, “Supply Chain Frontiers.”
www.zlc.edu.es

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Conocimiento y experiencias logísticas innovadoras

Sesión organizada por el IAF y las Cámaras de comercio en Zaragoza

Alejandro Serrano – Mar 2012 | España

“Conocimiento y Experiencias logísticas innovadoras”

El 19 de marzo participo en esta sesión para hablar de la “Supply Chain and Finance Initiative“, puesta en marcha desde el Zaragoza Logistics Center. Haré una breve introducción de qué es ZLC y en qué consiste esta iniciativa. Después ilustraré con un ejemplo cómo cambia el comportamiento de un comprador cuando tiene que preocuparse por el impacto de sus decisiones no sólo en la cuenta de resultados, sino también en el balance de la empresa.

Más información e inscripciones en este enlace.


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Nueva “Supply Chain & Finance Initiative”

Entrevista en El Vigía Feb 2012

Alejandro Serrano – El Vigía | España

ZLC lanza la “Supply Chain & Finance Initiative” con el objetivo de liderar la nueva disciplina en Europa: Acceder a la noticia

Para saber más sobre cadena de suministro www.zlc.edu.es

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Supply Chain & Finance Initiative (SFI)

Entrevista para El Vigía Feb 2012

Alejandro Serrano – El Vigía | España

Nace la Supply Chain & Finance Initiative de la mano del Zaragoza Logistics Center, ¿cuál es la misión de esta iniciativa?

La razón de ser de la SFI es poder ayudar a las empresas a tomar mejores decisiones, mirando la realidad desde una óptica más amplia, que trascienda los puntos de vista de los directivos de un solo departamento, en concreto de cadena de suministro y de finanzas. Hay mucho que ganar ampliando el punto de vista, las empresas tienen que darse cuenta.

En general, ¿existe en las empresas españolas una relación fluida entre los departamentos de logística y de finanzas o se ha de trabajar mucho en este terreno? 

 Esta es una asignatura pendiente, no sólo en España. Hay que conseguir que los directores de logística (y de operaciones en general) y de finanzas hablen, se entiendan y tomen mejores decisiones conjuntas. Por ejemplo, un comprador debe tomar sus decisiones incorporando a éstas la situación de liquidez de la empresa; un financiero debe definir los objetivos de reducción de inventario (o en general de las NOF, necesidades operativas de fondos) teniendo en cuenta el impacto que esta decisión va a tener en el nivel de servicio al cliente.

Uno de los objetivos de la nueva iniciativa es proporcionar herramientas a los profesionales para gestionar la liquidez, el riesgo y la rentabilidad, ¿necesita las empresas españolas una gran mejora en estos ámbitos?

 Los gestores en el ámbito de operaciones se han conformado tradicionalmente con valorar el impacto de sus decisiones en la cuenta de resultados. Pero hay que ir mucho más allá: es preciso valorar también el impacto de sus decisiones en el balance y en el perfil de riesgo de sus empresas. Estos dos factores pueden tener un gran impacto en el valor para el accionista.

¿Qué relevancia adquieren estas herramientas en este tiempo de crisis?

En tiempo de crisis, tomar decisiones conjuntas que tengan en cuenta los riesgos, tanto operativo como financiero,  es de suma importancia. Hay que ponderar muy bien las decisiones de forma conjunta, pues no hay mucho margen de maniobra y un error puede llevar a la empresa a suspender pagos.

Además de formación para ejecutivos, la SFI dispone de un centro de investigación. ¿En qué estudios se centran actualmente?

 Creamos modelos matemáticos para medir el impacto de las decisiones del ámbito de la cadena de suministro en el riesgo y el valor para el accionista. Por ejemplo, reducir el nivel de inventario pasándolo al proveedor o pagar más tarde hacen el balance del comprador mucho más atractivo, pero tiene consecuencias en el riesgo de la empresa y de toda la cadena de suministro que hay que ponderar antes de tomar este tipo de decisiones.

Por otro lado, estamos organizando un congreso al que van a acudir varios de los expertos mundiales en esta materia desde cuatro continentes. Dada su relevancia para la industria, las empresas necesitan respuestas que les ayuden a mejorar en sus decisiones y la comunidad investigadora no puede ser ajena a ello. El congreso se celebrará en Mayo en el Zaragoza Logistics Center.

El mercado español tiende a la exportación para salvar los números, pero ¿está realmente preparada la cadena de suministro española para salir al exterior?

Si algo bueno podemos encontrar en la crisis es que las empresas españolas están mirando al exterior para sobrevivir; esto nos hará más competitivos a medio plazo. En este proceso, observo dos carencias principales, una es idiosincrática del sector, la otra general para muchas empresas españolas. La primera es la falta de rigor en el análisis, habitualmente por desconocimiento de las herramientas del mundo de cadena de suministro. El profesional logístico bien formado es un bien escaso en España. La segunda es la falta de profesionales que hablen un nivel suficiente de inglés, lo que dificulta enormemente la comunicación y por tanto el éxito de las empresas en el exterior.

¿Por qué cree que no existen grandes operadores logísticos españoles como sucede en otros países?

 Pienso que son dos los factores. Uno son las carencias explicadas en la pregunta anterior y otro es el hecho de que la España continental esté en un istmo geográfico, lo que condiciona sustancialmente el crecimiento.

 ¿Cómo pueden ayudar a los profesionales españoles los partners internacionales de la Supply Chain & Finance Initiative?

 Acabamos de terminar una experiencia muy interesante en este ámbito con un selecto grupo de empresas europeas que facturan del orden de 50.000 millones de euros cada una. En una serie de jornadas de trabajo separadas en el tiempo, las empresas exponían sus “mejores prácticas” y aprendían de las de los demás en asuntos como cómo financiar las operaciones o cómo liberar caja para mejorar la posición de liquidez. Aprender de los mejores es un ejercicio muy inteligente que requiere dedicación, capacidad de escucha y cierta humildad para reconocer que los demás pueden hacerlo mejor que nosotros. Este tipo de actividades, claro está, puede repetirse con empresas españolas, y estaremos atentos a lo que éstas nos demanden.

El sector inmobiliario logístico español vive su particular burbuja económica. ¿Cuál cree que ha sido el mal de este mercado?

Los costes del suelo logístico llegaron a crecer descontroladamente por encima de 500 euros por metro cuadrado. Lo que ha ocurrido en el sector logístico inmobiliario ha sido un reflejo de la burbuja inmobiliaria del sector de la construcción en general.

En cuanto a la promoción de este tipo de espacios, el macroproyecto de Aragón, Plaza, afronta una deuda de 20,6 millones. Tratándose de un buen espacio con una buena ubicación, ¿cree que la mega plataforma podrá comercializar los espacios vacíos? 

No tengo dudas de que así será. Nuestros estudios indican que, desde el punto de vista del coste, Zaragoza es una plaza óptima para distribuir en España, por encima de otras ciudades, como Madrid. El menor coste del suelo y de la mano de obra compensan sobradamente la ligeramente mayor distancia al centro de gravedad del PIB español. El entorno de Zaragoza en general y el parque logístico de Plaza en particular son  por tanto emplazamientos ideales para instalar un centro de distribución.

Expertos del sector apuntan nuevas estrategias para salvar la comercialización de estos espacios. Ofrecer rentabilidades de hasta un 8% a los inversores que apuesten por suelo logístico, ¿cree que este tipo de acciones pueden ayudar?

 Mi opinión es que hay que asumir las posibles pérdidas de estos espacios para sanear los balances cuanto antes. No hacerlo pensando en que los precios subirán en el corto plazo es engañarse.

 La volatilidad de los mercados es una de las mayores preocupaciones para los logistas pero a la vez que amenaza, ¿puede suponer también una oportunidad?

 Siempre que hay riesgo hay oportunidad. Saber cuantificar y gestionar correctamente el impacto de la volatilidad crea valor para el accionista, sea buscando mayores rentabilidades o mitigando el riesgo operativa o financieramente.

¿Cómo cree que va a evolucionar en general el sector logístico durante el presente año? ¿Veremos una ligera recuperación?

La evolución del sector logístico no va a ser muy distinta de lo que haga la economía en general. Lo bueno del sector es que, a diferencia de los sectores productivos, éste no se puede trasladar a otros países. Además, la logística se beneficia del proceso de deslocalización, ya que éste implica trabajar con más inventarios (debido a la mayor incertidumbre de la demanda) y más distancia recorrida. Si unimos a esto la explosión incipiente del comercio electrónico en España, convendremos en que éste es un buen sector para apostar.

Para saber más sobre cadena de suministro www.zlc.edu.es

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Moveable Barriers

Alejandro Serrano MIT / SC Frontiers. #42 | US

Supply Chain and Finance are usually seen as separate and conflicting disciplines. In a retailing or manufacturing company, key performance indicators (KPIs) are typically set by the COO to maintain high customer service levels by keeping inventories high. At the same time, the CFO pushes supply chain management to reduce inventory as much as possible to avoid the financial burden imposed by working capital requirements. As a result, supply chain and financial incentives become misaligned, and efforts to arrive at a compromise can be extremely frustrating for both disciplines. However, as a recent consulting engagement at a well-known multinational company underlines, it is possible to bridge this divide.

There are many examples of how supply chain and financial interests can diverge in companies. In turbulent times, for instance, finance may have stronger reasons and incentives to free up cash by reducing inventories. But in prosperous times, supply chain may advocate the need for on-time deliveries even though such a strategy elevates inventory volumes.

In recent years many companies have tried to become more efficient on a global rather than a local level by developing a more holistic view of their operations. However, even if a consensus is reached on what the efficiency goals should be, some crucial questions often remain, such as: What is the best method for assessing the appropriateness of an investment? Issues like these bring supply chain and finance into conflict again. Finance may firmly believe that supply chain’s evaluations of investments are incomplete because they miss a portion of the picture.

A specific example of this source of disagreement is the economic order quantity (EOQ) formula, which is commonly used in business to calculate order quantities. Any analyst in a financial department will tell you that the EOQ formula is really a surrogate for the right approach to determining order quantities. Finance specialists argue that the formula minimizes cost functions, whereas the correct approach is to maximize shareholder value by, for example, discounting expected cash flows at the appropriate cost of capital. This approach tends to overwhelm supply chain people, allowing finance to take a leadership position in such projects. Moreover, it is likely that the CEO will support the more involved methodology favored by the finance department.

Still, finance and supply chain can find common ground even in situations such as the one described above. Here is an example drawn from a recent consulting project at a multinational company of how the two sides can come together.

Three people from different departments in the company proposed distinct approaches to solving a manufacturing problem: defining the production batch size. The supply chain folks proposed using the EOQ formula. Project management wanted to calculate the batch size so as to maximize the net present value (NPV) of the resulting incremental cash flows. Finance offered a third approach: choosing the batch size that maximized the discounted economic value added (EVA), as was customarily done in the company. These approaches led to three different solutions, and it was impossible for the three departments to reach a consensus on which batch size to choose.

The consultant was asked to find the right method to use and to outline what assumptions, if any, would invalidate the other approaches. The initial assumption was that the EOQ formula could not give the right solution to maximize value, because it does not discount cash flows; it just minimizes some cost function. However, working through the calculations produced a surprising result: all three approaches yielded exactly the same solution. How can this be possible given the differences between minimizing cost and maximizing value already outlined? This is mainly due to the fact that the EOQ formula does indeed discount cash flows. The technical details are too complex to detail in this article. But in broad terms, the EOQ formula contains the inventory holding cost, a part of which is a financial cost, which coincides with the discount rate in any NPV approach.

The result immediately removed the misalignment between supply chain and finance. Although this is just one example, it sheds light on how barriers between departments can be removed by delving into the reasons for these divisions. The project should encourage managers to take a holistic view of their firms when making decisions and encourage researchers to keep working on ways to align the interests of finance and supply chain.

See the original article here

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How CFOs, COOs Can Bury the Hatchet

Discovering the ways their metrics match up can help finance chiefs and supply-chain executives align their companies’ spending choices.

Alejandro Serrano – CFO.com | US

Supply chain and finance are usually seen as separate and conflicting disciplines.

In a retailing or manufacturing company, key performance indicators are typically set by the chief operating officer to maintain high customer-service levels by keeping inventories high. At the same time, the CFO pushes the company’s supply-chain management to reduce inventory as much as possible to avoid the financial burden imposed by high working capital requirements. As a result, supply-chain and financial incentives become misaligned, and efforts to arrive at a compromise can be extremely frustrating for both disciplines. However, it is possible to bridge this divide.

There are many examples of how the interests of supply chain and finance can diverge in companies. In turbulent times, for instance, finance may have stronger reasons and incentives to free up cash by reducing inventories. But in prosperous times, supply chain may advocate the need for on-time deliveries even though such a strategy elevates inventory volumes.

In recent years, many companies have tried to become more efficient by operating on a global rather than a local level and developing a more-holistic view of their operations. But even if a consensus is reached on what the efficiency goals should be, a crucial question often remains: What’s the best method for assessing the appropriateness of an investment?

That question brings supply chain and finance into conflict again. Finance, for instance, may firmly believe that supply chain’s evaluations of investments are incomplete because they miss a portion of the picture. Supply chain may feel equally that finance’s analysis is missing an essential piece of the puzzle.

Still, finance and supply chain can find common ground even here. During a recent consulting project at a multinational company, for example, I learned how the two sides can come together.

Three people from different departments in the company proposed distinct approaches to solving a manufacturing problem: defining the production batch size. The finance people offered the approach of choosing the batch size that maximized the discounted economic value added (EVA), as was customarily done in the company. (EVA is the economic profit earned by a company minus its cost of capital.)

For their part, the supply-chain folks proposed using the economic order quantity (EOQ) formula, commonly used in business to calculate order quantities at the best possible cost. (Companies use EOQ to find out the correct number of units to order to minimize the total cost of buying, delivering, and storing the product.) At the same time, project management wanted to calculate the batch size so as to maximize the net present value (NPV) of the resulting incremental cash flows.

These approaches led to three different solutions, and it was impossible for the three departments to reach a consensus on which batch size to choose. I was asked to find the right method to use and to outline what assumptions, if any, would invalidate the other approaches.

Our first assumption was that the EOQ formula could not give the right solution to maximize value, because it does not discount cash flows; instead, it merely minimizes a cost function. However, working through the calculations produced a surprising result: all three approaches yielded exactly the same solution.

How could this be possible, given the differences between minimizing cost and maximizing value in the different approaches? It stems from the fact that the EOQ formula does, indeed, discount cash flows. In broad terms, the formula contains the inventory holding cost, a part of which is a financial cost, which coincides with the discount rate in any NPV approach.

The result immediately removed the misalignment between supply chain and finance. Although this is just one example, it sheds light on how barriers between departments can be removed by delving into the reasons for these divisions. The project should encourage managers to take a holistic view of their firm when making decisions and encourage researchers to keep working on ways to align the interests of finance and supply chain.

Alejandro Serrano (aserrano@zlc.edu.es) is professor of supply chain management at the Zaragoza International Logistics Program of the Massachusetts Institute of Technology, Zaragoza, Spain.  www.zlc.edu.es

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