Financial Analysis
& Supply Chain
Management
Leijoy P. Cabanilla | Reynald E. Tomas
Table of Contents
Financial Analysis
Supply Chain Management
Time Value of Money
1a
2a
Overview of SCM
Operational Financial Decisions
1b
2b
Components of SCM
Project Investment Decisions
1c
2c
SCM in a Service Industry
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Management
01
FINANCIAL
ANALYSIS
TIME VALUE OF MONEY
Albert Einstein
Compound interest is the eighth
wonder of the world. He who
understands it, earns it; he who
doesn’t, pays it.
Benjamin Franklin
Money makes money. And the
money that money makes,
makes money.
Cost of Money
Explicit
Cost of borrowing.
Implicit
Cost of not investing.
I borrowed Php 1M from a bank at 8% interest p.a. to set up a
business that I expect to give me a return of 20% per year.
However, after receiving the loan proceeds, I was tempted to
buy a car, hence, the business did not materialize. During that
time, the average inflation rate is 5%.
Explicit CostThe 8% interest on the loan
Implicit CostThe forgone return of 20% plus the inflation rate
of 5%
Compounding Interest
“Interest on Interest”
Compounding is the process in which an asset's earnings
are reinvested to generate additional earnings over time.
This growth, calculated using exponential
functions, occurs because the investment will generate
earnings from both its initial principal and the accumulated
earnings from preceding periods.
VALUE
Period
Principal
Interest
Book Value
1 1,000,000 200,000
2
200,000
3
200,000
4
200,000
5
200,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
Accumu.
Growth
20%
40%
60%
80%
100%
Thousands
Linear Growth
2,500
100%
2,000
Period
Principal
1
2
3
4
5
1,000,000
Interest
200,000
240,000
288,000
345,600
414,720
Book Value
1,200,000
1,440,000
1,728,000
2,073,600
2,488,320
40%
20%
20%
0
0%
1
Thousands
Accum.
Growth
20%
44%
73%
107%
149%
60%
40%
2
Book Value
Compounding Growth
80%
60%
1,000
500
100%
80%
1,500
3
4
5
Accumulated Growth
149%
3,000
160%
140%
2,500
107%
120%
2,000
100%
73%
1,500
80%
44%
1,000
500
120%
60%
40%
20%
20%
0
0%
1
2
Book Value
3
4
Accumulated Growth
5
Linear Growth
Period
Payment
Interest
Book Value
1
2
3
4
5
1,000
1,000
1,000
1,000
1,000
200
400
600
800
1,000
1,200
2,600
4,200
6,000
8,000
Total
Interest
20%
30%
40%
50%
60%
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
8,000
40%
4,200
30%
2,600
20%
1,200
10%
0%
1
2
3
4
8,930
8,000
Period
Payment
Interest
Book Value
1
2
3
4
5
1,000
1,000
1,000
1,000
1,000
200
440
728
1,074
1,488
1,200
2,640
4,368
6,442
8,930
6,442
6,000
4,368
4,000
2,000
5
Total Interest
10,000
Total
Interest
20%
32%
46%
61%
79%
50%
6,000
Book Value
Compounding Growth
60%
2,640
1,200
0
1
2
Book Value
3
4
Total Interest
5
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Present and Future Values
Future Value (FV)
FV
Where:
P- principal or periodic payment
r- rate per period
n- number of periods
FVOA
FVAD
Illustration
Future Value
If you deposit Php1,000 in a bank with 10% interest p.a, how much is
the value of the deposit after 5 years?
FV = P * (1 + r) n
FV = Php 1,000 * (1 + 10%) 5
FV = Php 1,000 * 1.61051
FV = Php 1,610.51
Practical Illustration
Business
You are setting up a small online business with initial capital of P10,000. You expect your monthly
income to be 10% per month and you intend to use the income from the business at least for the next
2 years (24 months) before gradually withdrawing for your personal needs. How much is the expected
value of your business after 24 months assuming consistent results per month?
FV = P * (1 + r) n
FV = Php 10,000 * (1 + 10%) 24
FV = Php 10,000 * 9.8497
FV = Php 98,497.33
Compound/
Compounding
Illustration
FV of Ordinary Annuity and Annuity Due
If you deposit Php1,000 in a bank every end of year with 12% interest p.a, how much is the
value of the deposit after 5 years? How about if deposit is made every beginning of the year?
If made every END of month:
FVOA = P * {[(1 + r) n – 1] / r}
FVOA= Php 1,000 * {[(1 + 12%) 5 – 1] / 12%}
FVOA= Php 1,000 * (0.762342/12%)
FVOA= Php 1,000 * 6.352847
FVOA= Php 6,352.85
If made every BEGINNING of month:
FVAD = FVOA * (1 + r)
FVAD= Php 6,352.85 * (1.12)
FVAD= Php 7,115.19
Practical Illustration
Retirement
You are 30 yrs. old and would want to retire at age 50 (after 20 yrs). If you want to have at least 20M
upon retirement to live a somewhat comfortable life afterwards, how much would you need to invest
monthly for the next 20yrs if your investment is consistently earning 24% per year?
FVOA = Php 20,000,000
Php20,000,000 = Pmt * {[(1 + r) n]-1] / r}
Php20,000,000 = Pmt * {[(1 + 24%/12) 20*12 -1] / (24%/12)}
Php20,000,000 = Pmt * {[(1 + 2%) 240 -1] / 2%}
Php20,000,000 = Pmt * (114.88873/2%)
Php20,000,000 = Pmt * 5,744.43676
Pmt = Php20,000,000 / 5,744.43676
Pmt = Php 3,481.63
Takeaways:
•
Because of compounding, the Php
3,481.63 per month for 240 months
(or a total investment of Php835k)
becomes 20M.
•
If without earnings and the power of
compounding, monthly investment
should be Php83,333 to reach 20M in
20 years.
Present Value
PV
Where:
FV- future value
Pmt- periodic payment
r- rate per period
n- number of periods
PVOA
PVAD
Illustration
Present Value
If you want to have exactly Php100,000 after 5 years, how much do you need to have
now invested in a business which you foresee to earn 10% p.a. compounded per year?
PV = FV * (1 + r) –n
PV = Php 100,000 * (1 + 10%) -5
PV = Php 100,000 * 0.62092
PV = Php 62,092.10
Practical Illustration
Present Value of Future Cash Inflows
If you expect your business to generate at least P2,000 worth of cash inflows every month
for the next 5 years, how much is the equivalent value of such inflows assuming 12%
interest per annum?
PVOA = Pmt * {[1- (1 + r) -n] / r}
PVOA = 2,000 * {[1- (1 + 12%/12) -5*12] / (12%/12)}
PVOA = 2,000 * {[1- (1 + 1%) -60] / 1%}
PVOA = 2,000 * (0.44955/1%)
PVOA = 2,000 * 44.955
Pmt = Php 89,910
The total cash flows is 120,000 (2,000 x 5 x 12) but its equivalent value at present is 89,910 due to
compounding.
Operational Financial Decisions
Break Even Point
Sales level where net profit is 0.
Sales = Total VC + Total FxC
Differential Costing
Difference between the cost of 2 or more
alternatives (make or buy, sell or process
further, etc.)
Sensitivity Analysis
Asking “what if?”
Project Investment Decisions
●
Expansion projects
●
Replacement projects
●
Mandatory (compliance projects)
●
Other long term projects (R&D allocations,
patents, etc.)
Evaluating Project Investments
Uniform Annual Cost
Net Present Value (NPV)
Evaluating projects where cost is the most relevant
factor and whether the equal service-period
requirement is met or not.
the difference between the present value of cash
inflows and the present value of cash outflow to
analyze the profitability of a project.
Rate of Return
Payback Period
annual rate of growth an investment is
expected to generate, can be ARR or IRR
the amount of time it takes to recover
the cost of an investment
Uniform Annual Cost Method- Equal Lives
UAC
=
Asset Price___
(1- (1+rate) -n)/rate
Machine A:
UAC =
P105,000
[(1-(1.05) -5]/0.05
+ P11,000
UAC = P35,252.35
Which is better? rate = 5%
Machine A
Machine B
Capital
P105,000
P175,000
Lifespan
5 yrs.
5 yrs.
Annual
Maintenance
P11,000
P8,500
Machine B:
UAC =
P175,000
[(1-(1.05) -5]/0.05
+ P8,500
UAC = P48,920.59
Machine A is better because it has the lower
discounted uniform annual cost of obtaining and
maintaining.
Uniform Annual Cost Method- Unequal Lives
UAC
=
Asset Price___
(1- (1+rate) -n)/rate
Machine A:
UAC =
P105,000
[(1-(1.05) -3]/0.05
+ P11,000
UAC = P49,556.90
Which is better? rate = 5%
Machine A
Machine B
Capital
P105,000
P175,000
Lifespan
3 yrs.
5 yrs.
Annual
Maintenance
P11,000
P8,500
Machine B:
UAC =
P175,000
[(1-(1.05) -5]/0.05
+ P8,500
UAC = P48,920.59
Machine B is better because it has the lower
discounted uniform annual cost of obtaining and
maintaining.
Net Present Value
NPV = PV of Cash Inflows – PV of Cash Outflows
PV of Cash Inflows
PV of Cash Outflows
Net Present Value
Project A
500,000
450,000
50,000
Project B
800,000
1,000,000
-200,000
Project C
950,000
800,000
150,000
If projects are mutually exclusive, which should be selected?
Project C since it yields the largest NPV.
If not mutually
exclusive, Accept?
NPV General Rules
•
•
•
If projects are independent, accept those
with positive NPV.
If projects are mutually exclusive, accept
the project with highest NPV
If NPV is zero, do not proceed with the
project unless required by regulation or for
compliance purposes.
Rate of Return
10%
25%
15%
50%
Total return is 25,000 from an investment
of 100,000. What is the ARR?
Investment must earn at least 10% to
break-even, what is the IRR?
Total inflows was 450,000 from an
outflow of 300,000, what is the rate
of return?
Total inflows is 100,000 and outflows is
100,000 at 15% rate of return, what is
the minimum IRR?
Payback Period
5 years
Investment- 100,000
Annual Cash Inflows- 20,000
4 years
Investment- 100,000
Annual Cash Inflows
Year 1 – 10,000
Year 2 – 20,000
Year 3 – 30,000
Year 4 – 40,000
Year 5 – 30,000
General rule:
The lower the payback period, the better
4.5 years
Investment- 100,000
Annual Cash Inflows
Year 1 – 10,000
Year 2 – 20,000
Year 3 – 30,000
Year 4 – 20,000
Year 5 – 40,000
Decision /
Decision Making
Funding Investment Projects
Personal Investment
Own cash or savings
Venture Capital
Giving up some ownership
or equity in your business
to an external party
Angel Investor & Love Money
Loaned by family or friends
either to be repaid as profits
increase
Bank Loans
Banks or financial companies
providing financing assistance
in exchange for regular
amortization
Loan Amortization – Nominal (Add-On) Interest
If you borrow Php100,000 from a bank with 1% monthly add-on interest and payable monthly for 5 years,
how much shall be the required monthly amortization and the total interest expense/cost of borrowing?
Monthly Amortization = [Principal + (Principal x Rate x Period)] / Period
= [ 100,000 + (100,000 x 1% x 60)] / 60
= (100,000 + 60,000) / 60
= 160,000 / 60
Monthly Amortization= 2,666.67
Total Interest = Total Payments – Total Loans
= 160,000 – 100,000
Total Interest= 60,000
Loan Amortization – Effective Interest
If you borrow Php100,000 from a bank at 12% effective interest per annum and payable monthly for 5
years, how much shall be the required monthly amortization and the total interest expense/cost of
borrowing?
Monthly Amort = Pmt using PVOA Function
PVOA = Php 100,000
Php100,000 = Pmt * {[1- (1 + r) -n] / r}
Php100,000 = Pmt * {[1- (1 + 12%/12) -5*12] / (12%/12)}
Php100,000 = Pmt * {[1- (1 + 1%) -60] / 1%}
Php100,000 = Pmt * (0.44955/1%)
Php100,000 = Pmt * 44.955
Pmt = Php100,000 / 44.955
Required Monthly Amort = Php 2,224.44
Total Interest = Total Payments – Total Loans
= (2,224.44 x 5 x 12) – 100,000
= 133,466 – 100,000
Total Interest= 33,466
Depreciation
Straight Line Method
Units of Production Method
Sum-of-Years Digit (SYD) Method
Double Declining Balance Method
Straight Line Method
Cost Asset = 300,000
Useful Life = 5 years
Residual Value = 10% of Cost
Monthly Depreciation = ?
Straight Line Monthly Depreciation = (Cost of Asset – Residual Value) / Useful Life
Straight Line Monthly Depreciation = [300,000 – 10% (300,000)] / 60
Straight Line Monthly Depreciation = 270,000 / 60
Straight Line Monthly Depreciation = 4,500
When to use straight line?
a. No particular pattern to the manner in which the asset is being used over time
b. The main reason for decrease in value is passage of time
Units of Production Method
Cost Asset = 300,000
Total Expected Production = 600,000 units
Residual Value = 10% of Cost
Total Expected Production = 600,000 units
Total Actual Production = Yr 1- 50,000, Yr 2- 100,000
Depreciation in Year 1 and 2 = ?
UPM Depreciation = (Cost of Asset – Residual Value) / Total Production x Actual Production
Yr 1 UPM Depreciation = [300,000 – 10% (300,000)] / 600,000 x 50,000
Yr 1 UPM Depreciation = 270,000 / 600,000 x 50,000
Yr 1 UPM Depreciation = 22,500
Yr 2 UPM Depreciation = [300,000 – 10% (300,000)] / 600,000 x 75,000
Yr 2 UPM Depreciation = 270,000 / 600,000 x 75,000
Yr 2 UPM Depreciation = 33,750
When to UPM?
Main reason for decrease in value is use due to production or extraction.
Sum-of-Years Digit (SYD) Method
Cost Asset = 300,000
Useful Life = 5 years
Residual Value = 10% of Cost
Annual Depreciation = ?
SYD = sum of all years , Annual Depreciation Rate = Highest Year Number for Year 1 (and so on) / SYD
SYD = 1 + 2 + 3 + 4 + 5 = 15
Year
Annual Depreciation Rate
Depreciable Amount
(300,000 x 90%)
Annual Depreciation
1
5/15
270,000
90,000
2
4/15
270,000
72,000
3
3/15
270,000
54,000
4
2/15
270,000
36,000
5
1/15
270,000
18,000
SYD Method allows for the likelihood of assets to decline over time, and also to require higher repair and
maintenance costs in later years than when first purchased
Double Declining Balance Method
Cost Asset = 300,000
Useful Life = 5 years
Residual Value = 10% of Cost
Annual Depreciation = ?
Double Declining Rate = 100% / Useful Life x 2
Annual Depreciation = Book Value x Double Declining Rate
Year
Double Declining Rate
Book Value
Annual Depreciation
1
40%
300,000
120,000
2
40%
180,000
72,000
3
40%
108,000
43,200
4
40%
64,800
25,920
5
40%
38,880
8,880
Notes:
a. Disregard residual value in the depreciation computation.
b. Last year’s depreciation is the remaining BV after deducting the residual value
c. Ideal for assets that quickly lose their values or inevitably become obsolete
02
Supply Chain
Management
Supply Chain Management
management of the flow of goods
and services and includes all
processes that transform raw
materials into final products
Objective of SCM
Procurement
Integration
Operations Management
Logistics and IT
creating value
through this
chain of key
processes and
activities
01
Improve Quality
Improve Efficiency
Minimization of waste either
materials, man hours, delivery
time, etc.
Improve Stability
Maintaining strong relationships
making sure that the business
continues to run smoothly
02
04
Making sure that the product
and customer experience are as
positive and effective as they
can be
Risk Management
03
Taking steps to alleviate and
mitigate the negative impacts of
risks
Components of the Supply Chain
01
04
Planning
02
Sourcing
03
Logistics &
Distribution
Production
05
Return System
01
Planning
02
Sourcing
03
Production
04
Logistics and Distribution
05
Return
Planning
Developing an overall strategy for the supply chain
Demand Planning
Sales and Operations
Planning
Inventory Planning
Supply Planning
External Analysis
Plan Development
Synchronize forecast
and financial outlook
Develop sales and
operations plan
Portfolio Assessment
Conduct portfolio review
Internal Analysis
Implementation
Synchronize supply and
capacity
Conduct of Executive
S&Op Meeting
Procurement /
Purchasing /
Buying
01
Planning
02
Sourcing
03
Production
04
Logistics and Distribution
05
Return
Sourcing
Purchasing & Outsourcing
Partner & Vendor
Management
Sourcing a product or service
from an outside supplier rather
than producing it in house
SERVICES
Deepening
the buyer-supplier
relationships to achieve a
mutually beneficial goal and
establish trust
The ‘5 rights’ of Purchasing
Right Price
Right Quality
Buying Goods &
Services
Right Time
Right Place
Right Quantity
Low
Supply Risk
High
‘Kraljic’ Supply Matrix
Bottleneck Items
•
Monopolistic market
• Secure supply
•
Non-critical Items
• Large product variety
• Simplify and automate
Low
•
•
Strategic Items
Dependence on supplier
• Form partnerships
Leverage Items
Alternative sources of
supply available
Exploit purchasing power
and minimize cost
Profit Impact
High
Outsourcing
Possible loss of
competitive knowledge
Economies of scale
Reduced process and
quality control
Risk pooling
Reduced capital
investment
Focus on core
competency
Increased flexibility
Pros
Cons
Limits innovation
Possible conflict of
objectives
Privacy and
confidentiality issues
Make or Buy?
•
•
•
•
•
•
•
•
Make
Cost of making is cheaper
Desire to integrate plan
operations
Excess plant capacity
Desire to exert to direct control
over production and quality
Design secrecy
Unreliable suppliers
No suitable supplier quotation
Desire to maintain a stable
workforce
•
•
•
•
•
•
Cost of buying is cheaper
Suppliers research and
specialized know how
Small volume requirements
Limited production facilities
Desire to maintain multiple
source policy
Monopoly items on which the
buyer has no option
Buy
Make or Buy Decision
Illustration
You need 5,000 units of a part of the final product and the
cost of internal manufacturing per unit is as follows:
Solution:
Direct Materials
Direct Labor
Variable Overhead
Avoidable Fixed Overhead Unavoidable Fixed Overhead-
Relevant cost of making
= DM + DL + VoH + Avoidable FxOH
= 2.50 + 2.50 + 1.50 + 1.00
= 7.50
Relevant cost of buying = 7.75
2.50
2.50
1.50
1.00
1.00
8.50
If you can buy an unlimited quantities of the part from
outside supplier at 7.75 and disregarding qualitative
considerations, should you make or buy the part? How
much is the net benefit of the better option?
Decision: MAKE
Net Benefit to make = 7.75 – 7.50 = 0.25
= 0.25 x 5,000
= 1,250
Vendor Management
Sourcing Continuum
Basic Provider
Model
Approved
Provider
Model
Preferred
Provider
Model
Performance
Based/
Managed
Services
Vested
Business
Model
Shared
Services
Model
Equity
Partnerships
Approaches to Vendor Management
01
Reactive
Managing the supplier
relationships is handled in
response to when negative
situation occurs
02
Strategic
Supplier relationship
management is planned and
starts even before an agreement
with supplier is signed.
01
Planning
02
Sourcing
03
Production
04
Logistics and Distribution
05
Return
Production Process
Customization
Considering customer preferences or
introducing differentiated feature
Production & Assembly
Conversion of the materials
into desired output
Quality Control
Checking if final output passes
the minimum standards
Packing & Labeling
Preparing the product for selling
distribution
‘Just in Time’ (JIT) System
Materials arrive exactly as they are needed for each stage in the production process. Nothing is
produced until it is needed. Demand triggers every step and ‘pulls’ a product through production.
Organized in manufacturing
work cells
Multiskilled workers
Reduced set up and
manufacturing lead times
Reliable supplier
‘Just in Time’ (JIT) System
01
02
Lower cost of handling and
carrying, lower risk of
obsolescence and shrinkage
01
Inventory
02
Supplier
03
Supply Chain
Space
Lower investment in space
03
Limitations
Inventory
Revenues
Higher revenues resulting from a
quicker response time to
customers
Benefits
No buffer inventory and potential
stockouts
High reliance on suppliers to maintain
adequate stock to meet unpredictable
demands
Highly dependent on supply
chain
Use of ‘Kanban’ in JIT
Kanban is a Japanese term that describes a visual record or card oftenly used in JIT systems. It signals
the need of specified quantity of materials or parts to move from one work cell operation to another, in
sequence.
Benchmarking
Internal Benchmarking
identifying best practice within a group and
sharing it resulting in cross-functional
and/or cross-site teams
Competitor Benchmarking
comparisons with competitors and their
best practices
Functional Benchmarking
compare specific functions (e.g.,
logistics); the comparison is with the best
in class or best in the industry
Planning
01
Identifying benchmark outputs, best competitors
and data collection method
02
Analysis
Determining current competitive gap and project
future performance levels
Integration
05
Benchmarking
Process
04
03
Establishing functional goals and developing
functional plans
Action
Implementing specific actions and monitoring
results
Maturity
Recalibrating benchmarks
Benchmarking /
Benchmark
01
Planning
02
Sourcing
03
Production
04
Logistics and Distribution
05
Return
Logistics
01
Sourcing and
Procurement
Creating strategic alliances
with suppliers
04
Distribution
Facilitating business
transactions between trading
partners or to end-customers.
02
Transport
connecting one side of the supply
chain to another by carrying vital
resources to the entire supply
chain
03
Warehousing &
Materials Handling
moving, storing, protecting,
sequencing, and picking the right
material in the right condition at the
right time and at the right place
Transport
Considerations for Transportation
Regulations
LTO, LTFRB and DOTr rules and regulations
Carrier Management Activities
Carrier selection, scheduling, dispatching,
staffing, delivery arrangements, tracking,
handling, safety, etc
Intermodalism as Transport
Management Strategy
Transportation of cargo or passengers using
multiple modes (truck, rail, air, ship) under a
single freight bill
1
2
3
Warehousing & Materials Handling Activities
Pre-packaging
Receiving
Cross docking
Put-away
Unitizing
Warehouse Layout
Static Shelving
Mobile Shelving
Pallet Racking
Warehouse Layout
Multi Tier Racking
Mezzanine Flooring
Wire Partitions
Distribution Intermediaries
1
2
Own Stores/Branches
4
3rd party logistics
providers (3PLs)
3
Agents
5
Wholesalers
6
Retailers
Brokers
Just in Time
01
Planning
02
Sourcing
03
Production
04
Logistics and Distribution
05
Return
The Return System
Post-delivery customer support process that is associated with all kinds of returned products. Aims to
minimize potential deterioration of relationships with customers.
SCM in Manufacturing Industry
Supplier
Storage
Production
Distribution
Retailer
Customer
SCM in Service Industry
02
01
Supplier
04
03
Storage
Service
Customer
Thanks
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