Maximizing Financial Performance through Logistics Efficiency

1. Finance and Logistics John H. Vande Vate Spring, 2001 1

2. Financing (Money) is the fuel of business Everyone competes in the financial markets The Real Contest • Logistics only really matters to top management if it improves financial performance 2

3. The Competition 3

4. Revenue Growth Profitability Capital Utilization Cash Flow What Drives Share Price 4

5. Net Operating Profit after Taxes as a % of Revenues (NOPAT) Revenues - Raw Materials Wages and Salaries Logistics Costs Utilities Insurance Taxes NOPAT Profitability = NOPAT/Revenues Profitability 5

6. Revenues as a % of Capital Invested Cash & Cash Equivalents Accts Receivable Inventory Other Current Assets Fixed Assets (Property, Plants and Equipment) Capital Profitability = Revenues/Capital Capital Utilization 6

7. Revenue Operating Expenses Taxes NOPAT Capital Charge Economic Profit Economic Profit or EVA Economic Profit measures whether a company is creating, preserving or destroying value - - 7

8. Annualizing Capital Investments Cost of Capital Combination of Fair return to bond holders (creditors) Fair return to share holders (owners) Which return is higher? Why? Capital Charge 8

9. Capital Utilization 9

10. Inventory Accounts Receivable Accounts Payable ... Operating Aspects of Capital 10

11. Example 11

12. Dell 12

13. Days Receivables Outstanding Days in Inventory Days Purchases Outstanding Cash Operating Cycle The Cash Operating Cycle - Number of net days from the time a dollar is paid for raw materials to the time the finished goods are paid for. 13

14. Not just the inventory! How to reduce the Cash Operating Cycle? Payment terms Just-in-time Faster Production Reduced Inventory Faster Modes Closer to Vendors/Customers Credit terms We must Finance the Cash Operating Cycle 14