Supply Chain Financial Performance

This is a series on Supply Chain Basics looking at the discipline from the Society of Operations Management perspective. Supply chain is also essential to project management as PMs are typically trained in world class contracting. For example, my Masters program had several courses involving contracting and the Defense Acquisition Workforce Improvement Act, DAWIA, certification highlights the combination of project management and supply chain. In this post, we will explore supply chain financial performance adding some additional support as well.

Supply Chain Financial Performance

The supply chain is a long cost center that spans beyond the organizational boundaries. Efforts at managing cost focused wholly on removal or reduction of costs, waste, time, movement, and defects in order to improve financial performance of the chain including logistics and warehousing. Spend management controlled the outflow of funds in order to purchase goods and services in support of outsourcing, procurement, e-procurement, and supply chain. Saving money never goes out of fashion but the equation includes revenue too as profit is the difference between money spent and money earned. Supply chain financial management is becoming more complex in the contribution to the bottom line. The two documents used are the balance sheet and income statement.

The Balance Sheet

The Balance Sheet is a snapshot of the owner's share of the company at any point in time out of the resources owned and debt owed. The notion is that assets must be in balance with liabilities and equities. Inventory valuations in the supply chain must be accounted for on the balance sheet until the inventory is sold then converts to revenue. The age of the inventory must also be accounted for since the value changes over time. Supply chain operating costs are also accounted for in the balance. In the end, any retained earnings are rolled over into the next balance sheet cycle. Supply chain managers are seeking to reduce liabilities such as inventory carrying costs and losses due to age and obsolescence while increasing assets which include cash and converting goods and services into revenue quickly.

The Income Statement

The income statement shows the net income over a period of time and may be referred to as a profit and loss statement. This document reports profitability several ways to include gross profit, net income, operating income, etc... Business ratios are common to the income statement. However, the bottom line is net income which reflects all liabilities including taxes paid and all expenses. The net income is shown on the balance sheet and contributes to retained earnings. However, depending on the business organization, retained earnings may be rolled over or in some cases zeroed out and dispersed as owner's income. 

Taxes!

Nobody likes taxes. In the old days, a common colloquialism was to never let taxes influence decision making because they are always there and always got to be paid. As globalization set, countries, cultures, and political ideologies became accentuated increasing tax complexity. Nonetheless, taxes in the supply chain involve two aspects; taxes paid and taxes saved. With proper supply chain planning, global supply chains achieve huge tax savings when aligned with supply chain efficiencies in many circumstances. This applies to multi-national companies as they relocate assets and operations to low tax countries.

Another strategy is to consolidate and locate procurement and sourcing offices in low tax countries magnifying the savings of consolidation and low taxes. Taxes are levied against streams of corporate income. If that income occurs where the office is resident then the consolidated streams enjoy lower taxes. Central procurement offices can also take advantage of lower tariffs, value-added taxes, and other port of entry taxes.

Reviewing logistical networks and ports in use regularly or on cycle can also achieve efficiencies in tax savings. Taxes in some regions increase, particularly as populations increase and political motivations change. Moving facilities out of high tax regions and changing ports of entry can contribute to tax savings.

Conclusion

Supply chain financials involve careful design of the supply chain as there are tradeoffs between machines, manpower, materials, methods, and money. The tradeoffs affect taxes paid or saved but also affect other performance attributes such as customer focus. Established supply chains should undergo reviews in order to find cost savings. Negotiated tax terms with host nations, cities or other governmental agencies will also result in savings. When it comes to taxes, everything must be on the table.

Reference:

(2011). APICS Certified Supply Chain Professional Learning System. (2011 ed.). Version 2.2.