Supply Chain

The Financial Implications of Global Supply Chain Management: The Relationship Between Tactical Execution, Profitability & Cash Flow

Whether one speaks of the supply chain costs tied to Personal Protective Equipment, consumer electronics, or home décor, the mantra of most companies in 2020 has been: “Just get it done”.

Dan Gardner

December 2, 2020

Whether one speaks of the supply chain costs tied to Personal Protective Equipment, consumer electronics or home décor, the mantra of most companies in 2020 has been that of, “Just get it done”. While manufacturers, distributors and resellers are always watching their expenses, the reality is that many organizations have had to subordinate financial considerations in the name of getting goods to consumers as quickly as possible.

An admirable objective from a customer service perspective, the fact remains that both importers and exporters have to create a balance between goods availability and making a profit. With product, customs and transportation costs on the rise long before the outbreak of COVID-19, it is very likely that the work of managing global supply chains will become even more expensive in the future.

In the spirit of “never letting a good crisis go to waste”, it is the premise of this blog that international companies have to recommit to striking a balance between meeting customer expectations and earning a fair return. To do that, organizations must get back to financial basics by focusing on the causal relationships between operational execution and what appears on a firm’s balance sheet, income statement and most importantly, its cash flow statement.

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The Tri-Partite of Supply Chain Financial Analysis

To truly measure the dynamics between tactical execution, profitability and cash generation, it is essential that executives mine information from the three aforementioned reports. By doing so, they’ll not only be able to drill down on the drivers of sales, landed costs, gross profit and EBITDA, but also gauge how well they manage inventories and their cash-to-cash cycle. The below provides a summary of (some) key areas of focus:

Income Statement: One point that is often-times lost on the income statement is the role that landed costs play in determining Cost of Goods Sold. Especially relevant for importers, landed cost is made up of the unit price of a given product, plus inbound transportation and customs duties. Absent the ability to isolate these costs at an item level, sellers of imported goods will never be able to exercise control over their gross margins.

Once goods are properly positioned for sale, omni-channel distribution networks have created a scenario where outbound shipping costs consume nearly as much margin as its inbound counterpart. Even in scenarios where customers are required to pay for shipping, sellers can still incur hefty costs that drive down their profits. As such, shippers should be able to dissect outbound shipping expenses at the same level of detail as inbound transportation.    

Of equal importance in the Age of E-Commerce is the expense of product returns. With reverse logistics sucking up profits at an alarming rate, it is particularly important for e-commerce sellers to manage those costs down to the penny.

The first step in controlling all of the above expenses is to understand how they are accounted for on an income statement. Based on that knowledge, supply chain analysts can then work on pro-rating costs at an item level, thus putting themselves in a position to make supply chain and logistics decisions based on the details of what they uncover.

Balance Sheet: The analysis of the balance sheet is important for a number of reasons, but from a supply chain perspective, emphasis must be placed on inventory values, carrying costs and product turns. Considered by many to be the most difficult of all supply chain endeavours, strategic inventory management requires SKU-level knowledge of quantities, locations, values and obsolescence at every point in the supply chain.

The obvious trouble with inventories lies in either investing too much, or not enough in product quantities. In the former scenario, bloated inventories drive down working capital and hobble liquidity. In the case of the latter, not having enough product results in lost revenue and annoyed customers that might not come back for a second try.

To avoid either of the above situations, executives must use the balance sheet as a platform to conduct deep dives into the strategic, sales and operational mechanisms that drive inventory values. Armed with the proper level of item-specific granularity, companies can then engage in Sales & Operations Planning activities to achieve the proper balance between sales and inventory investments.

Cash Flow Statement: Without question, the ultimate test of financial supply chain performance is found in the cash flow statement. Made up of a combination of results from the income statement and balance sheet, this report zeroes in on both sources and uses of cash. During a one year operating period, its goal is to align the declaration of a profit (or loss) with product inventory that is not only sold, but converted to cash.

When used properly, the cash flow statement can reveal any number of areas for supply chain improvement. For example, whereas sales might be brisk for a company, an analyst might discover that the amount of inventory carried in order to achieve those sales is too high. On the other hand, strong profits and cash flow can be an indicator of how aggressively a firm manages landed costs, as well as how much emphasis is put on collecting accounts receivable.

As noted above, the relevance of the cash flow statement to global operations lies in its ability to uncover both sources and uses of cash. When used to its full potential, this report symbolizes the very essence of supply chain management because it exposes the balance (or lack thereof) between sales, profitability, inventory investments, accounts receivable and accounts payable.

The Importance of Access to Timely & Accurate Data

For every company that consistently uses financial statements as a baseline for operational improvement, there is another that is unable to so because of absent, bogus or untimely data. In other words, every company has to generate its financial results, but there are considerably fewer that can achieve the granularity they need to uncover the cause and effect supply chain interactions that drive those financial outcomes.

To get the most out of this quantitative approach to supply chain management, companies first need accurate information on fundamentals like Product Master Files, Bills of Material and item-level landed costs. From there, they need to be able to monitor how they procure product, as well as trace expenses related to generating sales. Without these multiple capabilities, importers and exporters will continue to operate at a disadvantage.

How GTM Software Unlocks Supply Chain Data and Improves Financial Outcomes

One way to augment a company’s internal supply chain efforts is to invest in Global Trade Management software. When integrated with existing digital capabilities, importers and exporters can use GTM tools to gain a broader perspective on their own operations, as well as those of their supply chain partners. From sales forecasts to receipt of goods, GTM-enabled operations not only create visibility, but offer a level of control not previously available.

As a natural bi-product of digitization, the data that is mined from GTM software gives executives the item-level detail they need to make well informed decisions. Whether one is aligning product sales figures with replenishment orders, or allocating inventory while goods is still in transit, it is GTM software that enables those exercises. Without it, decision makers are left to deal with the blind spots, delays and stale data that are inherent to analog supply chains.

In the end, supply chain executives need to use income statements, balance sheets and cash flow statements as a baseline for improving both operational and financial performance. To do that, they need accurate, timely and detailed data on every item that passes through their supply chain. In the post-COVID world there is no doubt that it will be GTM software that opens the door to that item-level detail.