Using Supply Chain Levers to Impact Profits

1. Using Supply Chain Levers to Impact Profits Sandra Jessop, CPIM, MBA

2. Sandra Jessop: Who Am I? Socially Workout, Volleyball, Boating Spending Time with Friends and Family Professional Career Vice President, Operations – RV Products Corporate Material Management Leader – Airxcel, Inc 16 years Supply Chain Experience Small Business Owner B.S. Aerospace Engineer, Embry Riddle Aeronautical University MBA, Wichita State University Professional Membership / Volunteerism President, APICS Wichita CPIM & Black Belt Textron Six Sigma Sustainer Advisor, Junior League of Wichita Fund Development Family Youngest of 6, Wife of 17 Years Mother of 3 Girls (16, 13, 8) 1 Dog: Pixie

3. APICS 2017 Session Evaluation Visit www.apics.org/Tuesday or download the APICS2017 app

4. Why This Topic Raise Your Hand if You Know This Information For Your Company: • How big is the company in Sales? • How much is the purchasing spend? • How much is the Freight spend? • What is the Inventory Valuation each month by group: Raw Material, WIP, Finished Goods? • What is the Cost of Goods Sold %? • What is the biggest supply chain issue you face with regards to these expenses? How Can You Make a Difference If You Don’t Understand The Business?

5. Functional Area Paradigm Watch This Video and Follow the Instructions

7. Functional Area Paradigm Did You See The Gorilla? It’s Easy to Focus Only On Your Area And Miss The Bigger Picture.

8. Two Major Measures of Performance Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA) Net Working Capital (NWC)

9. Why Are These Metrics Important? Earnings Before Interest, Taxes, Depreciation, & Amortization (EBITDA) Net Working Capital (NWC) Are We Making Any Money? What Do We Have Tied Up In Cash That We Cannot Use To Invest Somewhere Else? They Answer Two Critical Questions!

10. Overview Practical Application Of 6 Supply Chain Levers To Positively Impact the Bottom Line Through EBITDA And NWC Metrics. 6 Supply Chain Levers

11. Supply Chain Management Value Proposition

12. NWC Calculation Current Assets Accounts Receivable + Inventory + Prepaid Expenses Current Liabilities Accounts Payable + Accruals (Warranty, Payroll, Rebates, etc) + Other Liabilities NWC = Current Assets – Current Liabilities

13. How Can Supply Chain Impact NWC? Current Assets Current Liabilities: Accounts Payable

14. Net Working Capital Levers and Improvements Inventory Accounts Receivable Accounts Payable

15. NWC Levers and Improvements Inventory Inventory Type Raw Material WIP (Work in Process) Finished Goods Inventory Mix Business/Manufacturing Strategy (Make To Stock/Make to Order/etc.) Inventory Management Strategies Inventory Valuation Supplier Negotiated Contracts Cost of Finished Goods

16. NWC Levers and Improvements Accounts Receivable / Accounts Payable Accounts Receivable Questions To Ask: • What Are The Customer Payment Terms? • Does the Customer Have Discounts? • How Can I Offset Any Customer Discounts with Corresponding Supplier Payments? Customer Contracts: Rebates/Payment Terms Supplier Contracts: Negotiated Rebates Accounts Payable Questions To Ask: • When Do You Own It? • How Much Do You Owe? • How Can You minimize How Much You Owe? • When Do You Need To Pay For It? Supplier Contracts: Payment Terms, Pricing, Rebates, Ownership The Goal Is To Minimize The Time Between The Payment To The Supplier and The Payment From the Customer.

17. EBITDA

18. How Can Supply Chain Impact EBITDA? Many Of The Overall Costs Are Generated From The Supply Chain. Cost Control • Transportation Rates / Efficiencies / Backorders • Raw Material Negotiations, Commodity Pricing, Flexibility, and Mix • Factory Variance – Direct Labor Costs / Purchase Price Variance / Efficiencies • Quality Control / Reworks • Indirectly: On Hand Inventory Balances

19. Income Statement Refresher 2017 Budget 2017 Actuals 2017 Actuals YTD 2016 Same Time Period 2017 Budget YTD Learn How To Read The Tea Leaves. Understand what makes up each cost by asking questions Look For Line Items That are Over Or Under Budget.

20. Examples of What To Look For With EBITDA Higher Cost of Goods Sold % Due To Mix Or Commodity Price Increases On Raw Material. Factory Variance Due To Purchase Price Variance Within The Month, Overtime, Productivity / Efficiency Drop/ Scrap / Inventory Accuracy / Increases in In-bound freight. Transportation Increases Due To Increased Expedites, Backorders, Increases in LTL And Small Package Shipments, Warranty, Lower Weights Shipped Per Truckload, Oil / Gas Price Increases, Driver Shortages. Warranty Higher Due To Supplier Quality And Manufacturing Quality Issues Or Poor Warranty Process. Factory Fixed Expenses are Higher. • Increases In Headcount. • Design Expenses Higher Due To New Product Development. • Tooling Costs Increasing Due To Purchase Of New Tools. • Administrative Expense Due To Overhead Increases In Headcount / Supplies • Distributing Impacts Due To Increased Sales Driving More Contract Services, Propane, Pallets, Supplies, and Wages / Overtime in Distribution. • Production Supply Impacts Due To Increased Sales.

21. Supply Chain Management Value Proposition - Recall Inventory! Cost Control!

22. Simulation

23. Company: Jessop Enterprises Background Company that provides a product that is needed year round, however, has higher demand/usage (seasonality) from March – September. Product: Widgets Typical Finished Goods Inventory is between 25%-30% of sales. 60% of Raw Material is purchased Internationally, with 6-10 week lead times. Industry Information: Industry is predicting a 4% increase over the previous year. This is already budgeted. EBITDA and NWC targets as well as Income Statement will be provided per group. Each Group Will Have One Income Statement To Evaluate.

24. Important Information Provided Income Statement. Inventory Dollars. • December Inventory $ is the on hand inventory dollars for the beginning of January, etc. Inventory Dollars For Each Month By Type (Raw Material/WIP/Finished Goods). Number and % of On Hand Finished Goods Coming Into a Month. Summary of state of the market for that month.

25. Simulation / Case Study Divide into Groups Evenly. Designate a scribe and a speaker for your team. Compare the budget to the actual and explain what could have happened within the supply chain to drive the costs/within the month. Identify: Areas for Improvement based off comparison with Budget / Previous Year. What may have happened? What can you do to correct or mitigate the risk of this expense for the next month? Share Your Results with the Broader Group.

26. Summary To Determine The Health Of A Business Ask These Questions: • Are We Making Any Money? EBITDA • What Do We Have Tied Up In Cash That We Cannot Use To Invest Somewhere Else? NWC All Areas Of The Supply Chain Must Work Together– No Silos! It Is Important To Understand The Overall Business In Order To Add Value And Make An Impact.

27. APICS 2017 Session Evaluation Visit www.apics.org/Tuesday or download the APICS2017 app

30. Back up charts

31. Fixed Vs. Variable Expenses: Impact On EBITDA Fixed Expenses Are Things Like: Utilities, Rent, and Supervisor Wages Design (New Product Development) Tooling Salesman Salaries Administrative Expenses (OH) Distributing Costs • Warehouse costs & headcount Variable Expenses Are Things Like: Material Cost Direct Labor Purchase Price Variance driven by Material Cost and Inbound Transportation Production Supplies Distributing Expenses: Shipping Supplies Transportation Warranty Commissions, Advertising, & Travel Look At The Income Statement Example