Module 6: Supply Chain Finance

Our objective with this particular module is to help supply chain practitioner, make a link between all the things that we do in the supply chain. For instance, make products, store, move products with trucks and make a link between that and the financial statements. This is critical because while we live in this world, senior executives live more often than not in this particular world, where they understand financial terms. Now, supply chain managers have an enormous amount of control over the assets of the firm. In particular, we’ll talk about working capital. And that’s one of the critical things, which we in the supply chain manage a big portion of. And the challenge that we have is that we have to be able to explain and understand how are the decisions that we make in the supply chain. We’re going to provide you with the basic understanding of how transactions– could be the purchase of raw material, could be the sale of a product, could be the transfer of a title– how those transactions find their way to both the income statement and the balance sheet, and what that means to the firm’s financial performance. If we are able to do that, then we’re actually able to take what we do in the supply chain and articulate the value in financial terms that we’re adding to the firm. Now, we’ve tried this in past years. All of us in the supply chain, we’ve tried to explain what it is that we do in terms of inventory turns and cycle times. Try to explain that to an executive, their eyes glaze over. You talk about impact on revenue, you talk about impact on working capital, their eyes are going to light up. And this is where we make the connection between, again, what we do in the supply chain world and what is reported in the financial reports. Now, there’s two particular lessons. The first lesson is really going to be focusing on two very critical financial reports– the income statement and then the balance sheet. The income statement, of course, where we report the revenues of the firm, the money we bring in– the recognize that we show the costs and then the net profit. The assets report at a snapshot in time, one point in time, though all the obligations that the firm has to pay out and the liabilities in shareholders’ equity, but also all the things that the firm owns that are all value. And so that’s the first particular lesson. The second lesson we’re going to be focusing on understanding cost systems and how costs are reported. And then we’ll talk about working capital. This is the capital we use to run and operate the business. And then that will lead us to understand and at least talk about the cash conversion cycle, where there are three components– the days of inventory outstanding, the days of sales outstanding, and the days of payables outstanding. Three really important measures that add up, tell us how long it is that we have to invest one unit of currency to get some currency back in the supply chain. That’s the cash conversion cycle.

So let’s get started.

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