Supplier Relationship Management LAB: Economic and Financial Impact of Procurement

Supplier Relationship Management LAB
Economic and Financial

Impact of Procurement
Agostino Bonzani
Agenda
The pervasive impact of Procurement
The economic and financial impact of procurement

Economic and financial impact
1. Economic impact: costs

– Purchasing/Sales ratio
– Leverage Effect
2. Financial impact: Cash Flows

• Cash-to-Cash Cycle


– Leverage Effect


Purchasing/Sales Ratio
100%
Added value
90%
80% 82%
70% 71%
60%
50%
40%
Procurement
30%
20%
10%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EBIT 5% 6% 7% 7% 6% 6% 6% 6% 7% 7% 7% 7% 6% 6% 6% 5% 4% 4% 4% 5% 5% 5% 5%
Depreciation 5% 5% 5% 4% 3% 4% 5% 5% 4% 3% 2% 2% 2% 4% 2% 1% 2% 2% 2% 2% 2% 2% 2%
Labor Cost 18% 17% 16% 15% 13% 13% 13% 13% 12% 11% 11% 10% 10% 11% 11% 10% 10% 10% 11% 11% 11% 11% 11%
Services 20% 20% 22% 22% 22% 24% 25% 25% 25% 23% 23% 22% 22% 24% 23% 22% 22% 23% 23% 24% 24% 23% 22%
Goods 51% 52% 51% 52% 56% 53% 52% 51% 52% 55% 57% 58% 60% 55% 57% 61% 61% 60% 60% 58% 57% 59% 60%
Elaboration of Mediobanca Data on Italian Companies

The relevance of Procurement:
Managing it strategically drives benefits to the business
Aerospace Chemical Engineering and Financial Industrial

Petroleum Utilities Others
and Defence Manufacturing construction services Manufacturing
Total spend as a percentage

59.9% 61.1% 74.2% 25.4% 72.5% 44.5% 49.5% 60.3%
of revenues
Percentage of spend directly

controlled by Procurement 93.8% 78.1% 86.8% 76.2% 89.2% 92.2% 74.9% 86.3%
Department
Percentage of Procurement
25.5% 51.0% 7.9% 48.8% 37.4% 36.9% 31.0% 39.5%
employees that are strategic
Percentage of Procurement
employees that are 74.5% 49.0% 92.1% 51.2% 62.6% 63.1% 69.0% 60.5%
operational
Average Procurement Return
319% 423% na 1398% 411% 483% 425% 507%
On Investment
Source: CAPS Industry benchmark report (2015)
Supply management ROI in this Dashboard is calculated by dividing cost savings (reduction plus avoidance) by supply
management operating expenses

Economic impact: leverage effect
Starting point 5% reduction in 12% increase of

Procurement Sales
Sales 5.000 Sales 5.000 Sales 5.600
Income Purchases 3.500 Purchases 3.325 Purchases 3.920
?
statement Other costs 1.100 1 Other costs 1.100 Other costs 1.100
(.000€) EBIT 400 EBIT 575 EBIT 580
Inventories 500 Inventories 475 Inventories 560

Other liquid 600 Other liquid Other liquid
Balance sheet 600 600
assets 2 assets assets
(.000€) Fixed assets 2.900 Fixed assets 2.900 Fixed assets 2.900
Total assets 4.000 Total assets 3.975 Total assets 4.060
ROS 8% 1 ROS 12% ROS 10%

Profitability
TAR 1.25 2 TAR 1.26 TAR 1.38
ROA 10% ROA 14% ROA 14%

Economic impact: leverage effect
5% reduction in How much is the

Procurement
leverage effect?
Sales 5.000
Income Purchases 3.325 5% reduction of purchasing cost
statement 1 Other costs 1.100
(.000€) EBIT 575
Inventories 475 ROA changes from 10% to 14%

Other liquid
Balance sheet 600
2 assets
(.000€) Fixed assets 2.900 ROA has increased of 40%!
Total assets 3.975 (14%/10%) = 1,4
1 ROS 12%
Profitability
2 TAR 1.26 The leverage is 8 = (40%/5%) =
ROA 14% (% ROA Increase /% reduction of purch cost)

5% reduction in purchasing? How…
• Savings on big and small contracts

• Purchases centralization and consolidation
• Supply Chain Collaboration upstream and downstream
• Development programs with suppliers (Purchasing Driven
Innovation)
• Better requirements and needs definition (Design to cost)
Demand Management
• Process efficiency: driving further savings (e.g. eProcurement)

The impact of Purchasing on company activities
How to evaluate purchasing relevance on company performance?
Let’s consider one real company…

The impact of Purchasing on company activities – Esselunga

The impact of Purchasing on company activities – Economic Impact
Now, it’s time to work in group!
Try to evaluate the impact of purchasing decisions on company

performance, by answering following questions:
• Which is incidence of Purchasing Cost on company activities? Has it

been stable along the years?
• How would company benefit of 5% of purchasing reduction?
• How much sales should be increased to obtain the same level of
performance?
You have 30 minutes to answer these questions, and prepare a small

PPT presentation, after which we will discuss the results.

Economic Impact:
discussion

Esselunga – economic impact
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0% 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019
Operating P/L [=EBIT] 4% 4% 4% 5% 4% 5% 5% 5%
Other operating items 3% 2% 1% 1% 1% 1% 1% 1%
Depreciation & Amortization 2% 2% 2% 2% 2% 3% 3% 4%
Costs of employees 10% 10% 10% 10% 10% 12% 12% 12%
Use of assets owned by other 2% 2% 2% 2% 2% 2% 2% 0%
Services 7% 7% 7% 7% 7% 9% 9% 9%
Material costs 73% 73% 73% 73% 72% 69% 69% 69%

100%
90%
80%
Services 70%
60%
Material
50%
cost
40%
30%
20%
10%
0% 31/12/2012 31/12/2013 31/12/2014 31/12/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019
Operating P/L [=EBIT] 4% 4% 4% 5% 4% 5% 5% 5%
Other operating items 3% 2% 1% 1% 1% 1% 1% 1%
Depreciation & Amortization 2% 2% 2% 2% 2% 3% 3% 4%
Costs of employees 10% 10% 10% 10% 10% 12% 12% 12%
Use of assets owned by other 2% 2% 2% 2% 2% 2% 2% 0%
Services 7% 7% 7% 7% 7% 9% 9% 9%
Material costs 73% 73% 73% 73% 72% 69% 69% 69%

AS IS SITUATION
2018 2019
TURNOVER 100% 100%
Material costs 69,18% 68,68%
Services 8,75% 9,37%
Use of assets owned by other 1,76% 0,38%
Costs of employees 12,11% 12,16%
Depreciation & Amortization 3,04% 4,15%
Other operating items 0,50% 0,61%
OPERATING PROFIT/L [EBIT] 4,66% 4,66%
Inventories 409,9 k€ 403,4 k€
TOTAL ASSETS 6390 k€ 8141 m€
ROA 5,62% 4,57%

TO BE (2019)
AS IS 5% reduction in purchasing X% increase of sales
TURNOVER 7975 k€
Material costs 5477 k€
Services 747 k€
Use of assets owned by other 30 k€
Costs of employees 969 k€
Depreciation & Amortization 331 k€
Other operating items 48 k€
OPERATING PROFIT/L [EBIT] 372 k€ ?
Inventories 403,4 k€
TOTAL ASSETS 8141 k€ ?
ROA 4,57% ?

Esselunga – economic and financial impact
TO BE (2019)
TURNOVER 7975 k€ 7975 k€
Material costs 5477 k€ 5203 k€
Services 747 k€ 710 k€
Use of assets owned by other 30 k€ 28 k€
Costs of employees 969 k€ 969 k€
Depreciation & Amortization 331 k€ 331 k€
Other operating items 48 k€ 48 k€
OPERATING PROFIT/L [EBIT] 372 k€ 684 k€
Inventories 403,4 k€ 383,2 k€
TOTAL ASSETS 8141 k€ 8120 k€
ROA 4,57% 8,43%

TO BE (2019)
AS IS 5% reduction in purchasing 18% increase in sales
TURNOVER 7975 k€ 7975 k€ 9450 k€
Material costs 5477 k€ 5203 k€ 6490 k€
Services 747 k€ 710 k€ 885 k€
Use of assets owned by other 30 k€ 28 k€ 35 k€
Costs of employees 969 k€ 969 k€ 969 k€
Depreciation & Amortization 331 k€ 331 k€ 331 k€
Other operating items 48 k€ 48 k€ 48 k€
OPERATING PROFIT/L [EBIT] 372 k€ 684 k€ 690 k€
Inventories 403,4 k€ 383,2 k€ 478,1 k€
TOTAL ASSETS 8141 k€ 8120 k€ 8215 k€
ROA 4,57% 8,43% 8,40%


– Leverage Effect


Financial impact: Cash to Cash
The Cash-to-Cash Cycle quantifies the number of days it takes a company to

convert cash outflows into cash inflows and, therefore, the number of days of
funding required to pay current obligations and stay in business.
Raw Goods sold Payment

material Payment to to the received by
purchased the supplier customer the client
Days Inventory Holding DIH

+
Days Sales Outstanding DSO
-
Days Payables Outstanding DPO
=
Cash-to-cash Cycle C2C

DSO + DIH – DPO = C2C
• Companies with a C2C > 0 have to find a way to finance their operations, with an
associated cost of capital
• Companies with a C2C < 0 mean that they get cash before paying their suppliers (but
with which consequences at supply chain level?)

Nace Rev. 2 Category DSO DIH DPO C2C

L - Real estate activities 66 341 131 276
F - Construction 157 132 191 98
A - Agriculture, forestry and fishing 85 77 112 50
C - Manufacturing 73 60 90 43
G - Wholesale and retail trade; repair of motor vehicles and motorcycles 58 42 64 36
M - Professional, scientific and technical activities 122 19 123 19
B - Mining and quarrying 99 36 144 -10
E - Water supply, sewerage, waste management and remediation 157 11 181 -12
O,P,Q,R,S,T,U - Other 98 4 117 -15
N - Administrative and support service activities 94 5 117 -18
D - Electricity, gas, steam and air-conditioning supply 73 5 102 -24
H - Transportation and storage 89 11 127 -27
I - accommodation and food service activities 43 14 99 -41
J – Information and Communication 103 9 162 -49

Economic and financial impact: overview
Revenue Growth CGS - Cost of Goods Sold
Impact on cost & profitability:

SGA - Selling, General, • OPEX (both direct and indirect –
EBIT
and Administrative costs 80% of budget)
• CAPEX
Depreciation and
Amortization
Financial
Performance
Days Inventory Holding
Impact on Cash flow:

Cash Conversion
Days Sales Outstanding • Opportunity Cost of
Cycle Capital
Financial Assets Days Payables

Capital utilization
utilization Outstanding
Fixed Assets
utilization
24
The impact of Purchasing on company activities – Financial Impact
Now, back to work! In this second part of the class, try to evaluate the financial
impacts of purchasing decisions on company performance, by answering the
following questions:
• What is the value of the Cash-to-Cash cycle (and its components) of Esselunga
• How much procurement decisions impact the Cash-to-Cash Cycle of Esselunga?
What happens if procurement cost decreases of 5%?
• Do you believe that Esselunga results are consistent with the industry it belong
to?
You have 30 minutes to answer these questions in the same PPT presentation of the
previous assignment, and to publish it in the dedicated folder on BeeP: “Homeworks
– A. Esselunga_Economic and Financial Impact” with the format: Group
n_Esselunga.ppt
To track who participated, please put in the initial slide the names of the group
members.

Financial Impact:
discussion

AS IS SITUATION
2018 2019
TURNOVER 100% 100%
Material costs 69,18% 68,68%
Services 8,75% 9,37%
Use of assets owned by other 1,76% 0,38%
Costs of employees 12,11% 12,16%
Depreciation & Amortization 3,04% 4,15%
Other operating items 0,50% 0,61%
OPERATING PROFIT/L [EBIT] 4,66% 4,66%
Days Sales Outstanding 20,1 21,6
Days Inventory Holding 21,2 20,4
Days Payable Outstanding 80,7 87,5
CASH-TO-CASH CYCLE -39,5 -45,5
Trade receivables 423,6 k€ 472,7 k€
Stock 409,9 k€ 403,4 k€
Accounts payable 1358 k€ 1499 k€
NET OPERATING WORKING CAPITAL -524,6 k€ -622,9 k€
TOTAL ASSETS 6390 k€ 8141 m€
ROA 5,62% 4,57%

TO BE (2019)
TURNOVER 7975 k€
Material costs 5477 k€
Services 747 k€
Use of assets owned by other 30 k€
Costs of employees 969 k€
Depreciation & Amortization 331 k€
Other operating items 48 k€
OPERATING PROFIT/L [EBIT] 372 k€ ?
Days Sales Outstanding 21,6
Days Inventory Holding 20,4
Days Payable Outstanding 87,5
CASH-TO-CASH CYCLE -45,5 ?
Trade receivables 472,7 k€
Stock 403,4 k€
Accounts payable 1499 k€
NET OPERATING WORKING CAPITAL -622,9 k€ ?
TOTAL ASSETS 8141 k€ ?
ROA 4,57% ?

TO BE (2019)
TURNOVER 7975 k€ 7975 k€
Material costs 5477 k€ 5203 k€
Services 747 k€ 710 k€
Use of assets owned by other 30 k€ 28 k€
Costs of employees 969 k€ 969 k€
Depreciation & Amortization 331 k€ 331 k€
Other operating items 48 k€ 48 k€
OPERATING PROFIT/L [EBIT] 372 k€ 684 k€
Days Sales Outstanding 21,6 21,6
Days Inventory Holding 20,4 20,2
Days Payable Outstanding 87,5 87,5
CASH-TO-CASH CYCLE -45,5 -45,7
Trade receivables 472,7 k€ 472,7 k€
Stock 403,4 k€ 383,2 k€
Accounts payable 1499 k€ 1424 k€
NET OPERATING WORKING CAPITAL -622,9 k€ -568,2 k€
TOTAL ASSETS 8141 k€ 8120 k€
ROA 4,57% 8,43%

TO BE (2019)
TURNOVER 7975 k€ 7975 k€ 9450 k€
Services 747 k€ 710 k€ 885 k€
Days Sales Outstanding 21,6 21,6 21,6
Days Inventory Holding 20,4 20,2 20,8
Days Payable Outstanding 87,5 87,5 87,5
CASH-TO-CASH CYCLE -45,5 -45,7 -45,1
Trade receivables 472,7 k€ 472,7 k€ 560,1 k€
Stock 403,4 k€ 383,2 k€ 478,1 k€
Accounts payable 1499 k€ 1424 k€ 1776 k€
NET OPERATING WORKING CAPITAL -622,9 k€ -568,2 k€ -738,1 k€
TOTAL ASSETS 8141 k€ 8120 k€ 8215 k€
ROA 4,57% 8,43% 8,40%

TO BE (2019)
TURNOVER 7975 k€ 7975 k€ 9450 k€
Services 747 k€ 710 k€ 885 k€
Days Sales Outstanding 21,6 21,6 21,6
Days Inventory Holding 20,4 20,2 20,8
Days Payable Outstanding 87,5 87,5 87,5
CASH-TO-CASH CYCLE -45,5 -45,7 -45,1
Trade receivables 472,7 k€ 472,7 k€ 560,1 k€
Stock 403,4 k€ 383,2 k€ 478,1 k€
Accounts payable 1499 k€ 1424 k€ 1776 k€
NET OPERATING WORKING CAPITAL -622,9 k€ -568,2 k€ -738,1 k€
TOTAL ASSETS 8141 k€ 8120 k€ 8215 k€
ROA 4,57% 8,43% 8,40%

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Supplier Relationship Management LAB

Economic and Financial

The pervasive impact of Procurement

The economic and financial impact of procurement