The Impact of Supply Chain Strategy on Shareholder Value

Daniel Dumke — Tue, 19 Oct 2010 08:39:00 +0000

I had this article marked for some time now and I finally got to read it. It describes the connection between Shareholder Value and the concept of Value Based Management (VBM) and Supply Chain Strategy.

Shareholder Value

The emergence of the Shareholder Value demands lead to the Value Based Management approach to operationalize the concept. The goal of both is to enable companies to generate real value, with a clear focus on the shareholders of the company in focus. Real value is created when a company can not only compensate investors for the total costs involved in the investment, but also provide a premium which compensates for the additional risk (in comparison to a risk free investment) incurred.

Shareholder Value can be seen and measured from an internal and external view point. Internally usually the Economic Value Added (EVA®) is used. It is calculated using the Operating Profit and the true cost of capital. Alternatively, if measured from outside a measure based on the market capitalization is used.

Driver of Shareholder Value

Revenue growth, operating cost reduction, working capital efficiency, and fixed capital efficiency are the drivers of Shareholder Value.

It is obvious that Supply Chain strategy directly or indirectly affects all these drivers.

A very important notion of VBM for the Supply Chain strategy is the focus on discounted cash flows (DCF) as the basis for the profits of multi-period models.

To increase discounted cash flows one has two options: increase / decrease revenues / cost or accelerate revenues / decelerate cost.

Supply Chain Strategies

The following strategies therefore can improve the Shareholder Value:

Decrease end to end pipeline times (especially focus on the cash to cash cycle)
Partner with the suppliers to reduce the lead times of all (!) incoming products
Slash internal lead times, by integrating and optimizing processes
Improve information flow from the demand side
Reduce risks to decrease capital costs associated with the company

Conclusion

Current research focusses very much on working capital as a driver for better Shareholder Value. Supply Chain Management can be the key in achieving the necessary reductions in receiveables, debt and inventory. You can find related links in the section below.

Reference:

Christopher, M., & Ryals, L. (1999). Supply Chain Strategy: Its Impact on Shareholder Value The International Journal of Logistics Management, 10 (1), 1-10 DOI: 10.1108/09574099910805897

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Working Capital Management at Kraft

Daniel Dumke — Sun, 28 Mar 2010 13:59:00 +0000

The CSCMP’s Supply Chain Quarterly just published their first issue for 2010. One of the articles deals with the rising interest in reducing working capital using the example of Kraft Foods.
As well as other companies Kraft already had prior cash flow initiatives, where they analyzed their WC positions: payables, receivables, inventory, and capital expenditures.
Kraft realized that especially high inventories tie huge amounts of cash flow, therefore Supply Chain Management had to be included.

Project outline

Longterm, to make the changes sustainable
Decentralized, due to the heterogeneous nature of the company

each business unit has their own supply chain
in some product categories Kraft also owns the inventory at the store shelfs

Incentives, for managers at the business units to improve working capital
Experts advise, internal consultants were employed to support the business units
Three geographical phases, USA, Europe, World

Best practice

Reduction of SKUs, especially low-revenue / high volatility
Repetitive flexible manufacturing, producing a single product more frequently and lowering the produced quantity for each lot
Evaluating the reduction of customer service levels to reduce inventory
Software support, to forecast the best location for inventories

Conclusion

For companies without huge growth potential cash flow is one of the most important performance indicators available.
But reducing inventories nearly always also implies risks for the consumer service level and hence the revenues. As a result, the level of inventories and its dependent variables have to be tightly monitored and controlled.

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