Finance and Logistics

1
Finance and Logistics

• John H. Vande Vate
• Spring, 2001

2
The Real Contest

• Logistics only really matters to top management
  if it improves financial performance

• Financing (Money) is the fuel of business
• Everyone competes in the financial markets

3
The Competition
4
What Drives Share Price

• Revenue Growth
• Profitability
• Capital Utilization
• Cash Flow

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
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
Economic Profit or EVA
Economic Profit measures whether a company is
creating, preserving or destroying value

• Revenue
• Operating Expenses
• Taxes
• NOPAT
• Capital Charge
• Economic Profit

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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?

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Capital Utilization
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Operating Aspects of Capital

• Inventory
• Accounts Receivable
• Accounts Payable
• ...

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Example
12
Dell
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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.
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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