Connecting the Dots: Sell More by Helping Your Clients Make the Financial-Supply Chain Management Connection

By: Dr. Stephen Timme, President & Founder, FinListics Solutions

Supply chain management solution providers are looking for ways to add more value to conversations with their client executives and to move away from a cost/commodity discussion. Thinking about and quantifying how your firms solutions impact your clients top line will make you a more strategic partner to your client. In this article, Dr. Stephen Timme, President and Founder of FinListics Solutions, explains how helping your client improve supply chain management can help them grow their top line.

STARTING AT THE TOP Ask any executive or board member in almost any industry what their top financial goal for their company is this year and you are likely to hear grow revenue as the answer. If you follow up and ask how they
plan to do it, youre less likely to hear them mention supply chain management (SCM) as a key focus area. Unfortunately, many companies still think the primary impact of SCM is taking out costs like transportation and warehousing which, in turn, improves profitability. This is a pretty incomplete view of the power of SCM. Companies that have a more holistic view of the true impact of better supply chain management and understand its ability to drive revenue growth, possess a distinct competitive advantage. Lets begin exploring the connection between top line growth and SCM using the retail industry as an example. Research by FinListics shows that for retail department stores in North America, the average revenue growth is around 4% per year- with the top performers growing closer to 7%. In dollars, a retailer with $1 billion in revenue (think Jos A Bank, Overstock.com, or Vitamin Shoppe) growing at 7% vs. 4% adds $30 million to the top line and close to $10 million in gross profit. To most companies, thats significant enough to get their attention and thats per $1 billion in revenue. Just imagine what that number would be for WalMart or CVS. While some of the difference in growth rates is due to unique company factors like the number of new store openings, at least some of the difference reflects how well the business processes underlying growth are managed, including supply chain management. In this article, well use stockouts, new product speed-to-market, and asset utilization as examples. Stockouts Stockouts have an obvious impact on revenue if you dont have an item to sell to a customer, or a key component required to assemble your item and make it available for sale, your customer will buy the item from another store or not buy the item at all, resulting in lost revenue for you either way. SCM has a significant impact on stockouts. Stockouts average about 2% of revenue in retail while the better performers are closer to 1%. Some sources have the average number for retailers as high as 4% of sales. For that same $1 billion company, improved SCM practices that move stockouts to 1% from 2% add as much as $10 million to revenue, which would deliver over $3 million in gross profit. New Product Speed-to-Market New product speed-to-market is another key driver of top line growth for retailers and is also an area where SCM adds value. The average time to market in retail is 240 days, with better performers being about twice as fast at 126 days. Every day a product

Copyright 2013, FinListics Solutions

isnt in the market is a day of revenue lost. Is better supply chain management going to close this entire gap? Not likely. But what if better coordination between a companys buyers, suppliers, SCM, and store operations closed just 10% of the gap? According to FinListics research, if were still talking about that same $1 billion retailer, the value of that 10% improvement is close to $20 million in revenue, and would mean a $7 million increase in gross profit. If your client is a $10 billion retailer, thats $200 million in incremental revenue and $70 million more profit. And if theyre only $500 million its still $10 million more to the top line. The numbers scale, but for any size are meaningful enough to get someones attention, and although different in different industries, improvement at some level is possible for nearly all companies in all industries.

reduced profitability (from things like lowering prices, entering emerging markets, or including more services), which reduces ROA. But better supply chain management can help your clients grow the top line with lower margin products while still earning a good ROA. The secret is using better supply chain management to use fewer assets to generate revenue. Key operating assets include working capital inventory and accounts receivable; and fixed assets warehouses, fleets, manufacturing, and stores. Better SCM practices can help improve the utilization of all these assets and, in turn, help a client grow the top line with lower margin products. Inventory The impact of better supply chain management on inventory has been well documented. Research by FinListics reveals that for North American department store retailers, each 1-day reduction in inventory generates almost $2 million in cash flow. But how does a reduction in inventory help grow the top line? The obvious answer is that the freed-up cash from the inventory reduction provides funding for growth through things like market expansion, new stores, expanded product offering, etc. Theres an answer, though, thats more strategicbut very real. Gross margin return on investment (GMROI) is a commonly used metric that provides insights into revenue and inventory management. Its measured as gross profit expressed as a percentage of inventory investment. The average GMROI for retailers in North America is 175% - $350 million in gross profit as a percentage of a $200 million investment in inventory for each $1 billion in revenue. GMROI is also often expressed as gross profit margin multiplied by inventory turnover. Our example industry has a gross profit margin of 35% ($350 / $1,000) multiplied by inventory turnover of 5 times ($1,000 / $200), so we magically have the same GMROI of 175% (35% x 5).

THINKING OUTSIDE THE BOX

In the case of stockouts and speed-to-market, the connection between SCM and revenue is direct. There are a number of opportunities within companies, however, where the connection is less direct, but no less significant. In this next section, well review a few of these key financial metrics, or whats also referred to as key performance indicators (KPIs), that are affected by SCM and ultimately drive revenue growth. Asset Utilization One such example is return on assets (ROA), which measures how effectively a company is using its investment in assets to generate profits; its calculated by dividing net income by the companys total assets. Most business executives, particularly in asset-intensive industries like telecommunications or retail, are under constant pressure to not only grow the top line, but also to show a strong return on assets. Doing both is tough because often incremental top line growth comes at the expense of

Copyright 2013, FinListics Solutions

Lets say SCM initiatives reduce inventory by 10% to $180 million while maintaining the same service levels. GMROI is now almost 195% (35% x 5.55) holding all else the same. But what if the GMROI of 175% is already acceptable? In this case the improved inventory turns would allow the same GMROI to be achieved on a lower profit margin31.5% vs. 35.0% to be exact. How could this help increase revenue? For one, merchandise could be sold at a lower price. New merchandise could be offered that had a lower gross profit margin than the average. Or, prices could stay the same and more money put into promotions, loyalty programs, and other value added services. Figure 1 shows various combinations of Gross Profit Margin and Inventory Turnover that result in a 175% GMROI. For example, increasing inventory turns 30% from the base of 5.0 results in a breakeven gross profit margin of around 27% compared to a breakeven of 35% with turns of 5.0. Think of the greater flexibility this provides your client in growing the top line and managing ROA. Better managing SCM has the potential to improve many areas of financial performance besides traditional areas of transportation, warehousing, and inventory management. These are important but the

the financial-SCM connection. If youre talking to the VP of Transportation, its a very simple conversation reduce costs, reduce costs, reduce costs. But the conversation with a CFO or CEO is much different and to have these conversations, you must understand the clients financial performance both strengths and weaknesses. You must understand their industry and their key goals. And you must be able to show value from your solutions and services in achieving their goals. Showing them how your solutions help grow the top line and by how much will give you a definite competitive advantage. For more information, or to find out how to learn more about the impact of SCM improvement on your clients business, visit our website at www.finlistics.com or contact our Vice President of Sales, Melody Astley, at mastley@finlistics.com.

Figure 1 The Need for Speed

40% Gross Profit Margin 35% 30% 25% 20% 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 Inventory Turnover impact to revenue often can be even more important. As a seller of supply chain management services, its critical that you help your clients make 35.0% 31.8% 29.2% 26.9% 25.0%

23.3%

Copyright 2013, FinListics Solutions