Supply Chain Finance: Fundamentals for Supply Chain Professionals

1. Supply Chain Finance:Fundamentals for Supply Chain Professionals Samuel C. Weaver, PhD Swartley Professor of Finance Lehigh University

2. Financial Statements as a Business Tool Financial Statement Analysis Managing your business Reviewing competitors Evaluating customers Analyzing suppliers Overview of Supply Chain Finance Evaluating Investments Agenda

3. Samuel C. Weaver Swartley Professor of Finance Lehigh University Rauch Business Center 621 Taylor Street Bethlehem, PA 18015 610-758-5282 scw0@lehigh.edu

4. Financial Statements as a Business Tool

5. Primary Financial Statements • Income Statement • Business performance and income generation over a period of time. • Sales less Expenses = Income • Balance Sheet • What you own (assets) and what you owe (liabilities) at any point in time. • Assets = Liabilities + Equity • Current vs. Long-Term: Assets and Liabilities • Cash Flow Statement • Where does your cash come from and where does it go? • Operations, Investing, and Financing

6. Financial Statements

8. Financial Statements:Distinction Between Cash and Other Accounts • Cash Accounting vs. Accrual-Based Accounting • Not all Expenditures are Expenses • Expenses: Benefits consumed in one-year. • Wages and salaries, supplies, etc. • Capital Expenditures: Benefits consumed over a number of years. • Equipment, buildings, land, etc. • Not all Expenses are Expenditures • Non-Cash Expenses • Depreciation, warranty, etc.

9. Financial Statement Focus • Corporate Level • Divisional Level • Economic Business Unit or Manufacturing Unit • Cost Center or Project Level • Product or Customer Profitability

10. Internal Company Income Statements • Comparison • Actual vs. Plan • Actual vs. Prior Year • Full Year Focus • Plan • Forecast (Outlook) • Prior Year • Period of Time • Current Month • Or Shorter • Partial or Full Financials • Year-to-Date • Full Year

12. Income Statement(P&L Statement)

13. Income Statement($ millions, except earnings per share)

14. Detailed Income Statement($ millions)

15. The most important general management financial statement. Companies present details differently, even call the same item different names (profit, income, earnings) and sometimes represent the same value with either a “+” or “–” sign. Some expenses are “extraordinary” or non-recurring: impairment, restructuring, etc. Many different measures of income: gross, operating (EBIT), pre-tax, net income, etc. Income Statement Take Aways

16. Necessary and key to running a business as well as evaluating suppliers and customers. As a non-finance professional, don’t be overwhelmed. Not necessary to know the last detail until you establish a foundation. Regardless of labels, details, even signs, an income statement is simply: Income Statement Summary

17. Balance Sheet

18. Balance Sheet Comparison

19. Goodwill (Intangibles Resulting from Business Acquisition) • When you acquire a business: • Say, you pay $100mm for a business • Get assets valued at $60mm and liabilities of $15mm or in total “net assets of $45mm”. • Paid $100mm so the remaining $55mm is Goodwill • Amortization or “expensing” • Old approach: Amortized the Goodwill over 40 years (straight-line) • New approach: • Revalue the business every year • If no change in “fair” value no expense. • If the “fair” value falls below $100mm to say $80mm, then $20mm of “asset impairment” must be expensed.

20. Detailed Balance Sheet Comparison: Assets

21. Detailed Balance Sheet Comparison: Liabilities & Equity

22. The most ignored general management financial statement…unless you have specific responsibilities for a line item. Companies present details differently, even call the same item different names. Current means in the next cycle. Current assets will be converted to cash in the next year. Current liabilities will be paid in cash next year. Long-term means lasting more than 1 cycle. Balance Sheet Take Aways

23. Necessary and key to running a business as well as evaluating suppliers and customers. As a non-finance professional, don’t be overwhelmed. Not necessary to know the last detail until you establish a foundation. Regardless of labels and details, a balance sheet is simply: Balance Sheet Summary

24. Financial Statement Analysis

25. Financial Performance Metrics • Formerly, “Financial Ratios” • Relative Basis for Comparison • Thousands of Potential Metrics • One Number Divided by Another Number • Multiple Permutations and Combinations • Six Major Categories • Profitability  Activity • Liquidity  Growth • Leverage Market • Applicable to Historical Information as well as Plan and Outlook Projections

26. Metric Categories • Profitability Metrics measure management’s overall effectiveness in generating “profits.” • Liquidity Metrics measure the firm’s abilities to meet its maturing short-term obligations. • Leverage Metrics measure the extent to which the firm has been financed by debt. • Activity Metrics measure how effectively the firm is using its resources. • Growth measures the firm’s ability to maintain its economic position in the growth of the economy and industry. • Market Metrics measure the firms’ relationship to the broader Stock Market.

27. Financial Performance Metrics

28. 2008 Orthopedic Industry Sales & Income Comparison

30. Industry Profitability Analysis

31. Profitability

32. Liquidity

33. Leverage

34. Activity

36. DuPont Ratio AnalysisA systematic ordering of metrics for comprehensive company analysis.

37. 2008 Orthopedic IndustryDuPont Ratio Analysis

40. Application of Company Specific Financial Statement Analysis for Suppliers and Customers

41. Gather appropriate financial information Annual and quarterly reports 10-Ks and 8-Ks Prepare an analytical page Evaluate directional changes – trend analysis This is only the first step! This begins the analysis from a finance person’s perspective. Required Analytical Steps

42. Data Gathering – Stryker Illustration($ millions)

43. Data Analysis – Stryker Illustration Also compare to competitors over time.

44. Supply Chain Finance

45. In total, Current Assets less Current Liabilities Operationally Inventories Accounts Receivable Accounts Payable Financial Goal is to Minimize Working Capital Investment without Impacting Operations Driven by Operations for Strategic Purpose Working Capital Policy