Cost of Goods Sold: Being able to b

Cost of Goods Sold: Being able to buy materials or services at a better price and transform them more efficiently into services or products will improve a firm’s cost of goods sold measure and ultimately its net income. These improvements will also have an effect on contribution margin, which is the difference between price and the variable costs to produce a service or good. Reducing production, material, transportation, and poor quality costs increases the contribution margin, allowing for greater profits. Contribution margins are often used as inputs to decisions regarding the portfolio of services or products the firm offers.Operating Expenses: Selling expenses, fixed expenses, and depreciation are considered operating expenses. Designing a supply chain with minimal capital investment can reduce depreciation charges. Changes to the supply chain infrastructure can have an effect on overhead, which is considered a fixed expense.Cash Flow :The supply chain design can improve positive net cash flows by focusing on reducing lead times and backlogs of orders. The Internet brings another financial measure related to cash flows to the forefront: Cash-to-cash is the time lag between paying for the services and materials needed to produce a service or product and receiving payment for it. The shorter the time lag, the better the cash flow position of the firm because it needs less working capital. The firm can then use the freed-up funds for other projects or investments. Redesigning the order placement process, so that payment for the service or product by the customer is made at the time the order is placed, can reduce the time lag. By contrast, billing the customer after the service is performed or the order is shipped increases the need for working capital. The goal is to have a negative cash-to-cash situation, which is possible when the customer paysfor the service or product before the firm has to pay for the resources and materials needed to produce it. In such a case, the firm must have supplier inventories on consignment, which allows it to pay for materials as it uses them.Working Capital: Weeks of inventory and inventory turns are reflected in another financial measure, working capital, which is money used to finance ongoing operations. Decreasing weeks of supply or increasing inventory turns reduces the working capital needed to finance inventories. Reductions in working capital can be accomplished by improving the customer relationship, order fulfillment, or supplier relationship processes. For example, reducing supplier lead times has the effect of reducing weeks of supply and increasing inventory turns. Matching the input and output flows of materials is easier because shorter-range, more reliable forecasts of demand can be used.Return on Assets: Designing and managing the supply chain so as to reduce the aggregate inventory investment or fixed investments such as warehouses will reduce the total assets portion of the firm’s balance sheet. An important financial measure is return on assets (ROA), which is net income divided by total assets. Consequently, reducing aggregate inventory investment and fixed investments, or increasing net income by better cost management, will increase ROA. Techniques for reducing inventory, transportation, and operating costs related to resource usage and scheduling are discussed in the chapters to follow.We now turn to a discussion of several strategic options for supply chain design and their implications for a firm’s performance.