Primarius Increasing Business Value
 
 

"The impact of the savings
in increasing cash flow
and business value are enormous, almost doubling
the business value and
adding close to $3 million back into the business."

Increasing Business Value

Increasing Business Value

For public companies, increasing inventory stock turns and reducing the value of inventory capital can directly lead to improved share prices and company value. For smaller, privately owned enterprises, the benefit of improved cash flows directly leads to increased business valuation via the Discounted Cash Flow method.

The huge impact that reducing supply chain costs is that every dollar saved increases pre-tax profit by a dollar. If a company had a 5% profit margin, it would have to generate $20 in additional sales to bring about the same improvement to the bottom line as the dollar saved in the supply chain. If a $100,000 opportunity exists to cut costs, this has the same impact as increasing sales by an additional $2 million! The other significant question that needs to be asked – which is more capable of being achieved? Generating $2 million in additional sales or improving inventory management to reduce costs by $100,000? Using Primarius’ OMS Inventory Optimisation solution, the savings in the supply chain can be found and achieved.


Quantifying the Financial Benefits of Incremental Improvement

A typical view of business owners was that improving inventory stock turns and inventory management in general had minor impact on the profitability of their business. Due to this belief, business did not put much focus on improvement strategies nor invest in technologies, skills or people to improve inventory management.

A large part of this view was in misunderstanding the impact these improvements have of the financial position of the business.

As discussed in this website, improving inventory management and increasing stock turns has significant impact by –

1. Providing the business with the ability to increase sales revenues by recapturing lost sales,     decreasing the amount and value of lost sales due to stock outs and improving customer     service by increasing product availability rates;

2. Decreasing the Cost of Goods Sold by enabling collaboration with suppliers, reducing product     costs and logistics costs;

3. Decreasing Operating Costs - by having less inventory in stock, reducing space, labour,     material handling, obsolescence and financing costs; by having the ‘right’ products in stock,     the cost to pick, pack and distribute orders reduces; and

4. Increased stock turns meant there is a decreased amount of working capital tied up in     inventory and this leads to a large increase in free cash flows.


An example of the financial impact of these improvements follows.

As an example, a business with the following financial criteria embarks on an improvement programme.

Normally financial advice is limited to increasing Days Payables and reducing Days Receivables. Any actions to improve inventory levels are encouraged but, not being understood, no actions are tabled.

With the detailed expertise that Primarius’ OMS solution brings to the business, a new strategy is put in place. Endemic stock-outs are targeted and action taken to reduce out of stocks. Improved management techniques are put in place to increase order fill rates. Forecasts are produced for all products and the company puts focus on getting these forecasts as accurate as possible.

OMS uses these forecasts to improve inventory stock turns. Minimum order quantities and expedited freight decrease, reducing logistics costs. Suppliers are collaborated with and product and shipping costs improve. Collaboration reduces supply lead-times which means safety stock levels can be reduced. Slow moving stock is targeted and cleared, stock levels reduce further and the operating costs involved in the business also decrease.

The business decides that this strategy can produce these benefits –

Step 1. Days Payables – Increase from 29 days to 45 days,

Step 2. Days Receivables – Decrease from 76 days to 60 days,

Step 3. Reduce the days of inventory from 224 days to 120 days,

Step 4. Increase Sales Revenues by 5%,

Step 5. Reduce the Cost of Goods Sold by 5%, and

Step 6. Reduce Operating Costs by 5%.

The financial benefits brought to the business by achieving these targets are significant –
  Impact of Small Changes
The impact of the savings in increasing cash flow and business value are enormous, almost doubling the business value and adding close to $3 million in cash back to the business.
 
The effort is worth it!

The attached financial document details the improvement in financial terms brought about by these changes.