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

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

3 3 The Competition

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

5 5 Profitability 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

6 6 Capital Utilization 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

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

8 8 Capital Charge 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?

9 9 Capital Utilization

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

11 Example

12 Dell

13 The Cash Operating Cycle Days Receivables Outstanding Days in Inventory Days Purchases Outstanding 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.

14 We must Finance the Cash Operating Cycle 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