Interrelating Operational and Financial Performance Measurements in Inventory Control

Financial supply chain management and working capital management are increasingly receiving attention as important avenues to increase profitability in supply chains. By actively managing payment terms and working capital requirements, managers can influence financial performance and achieve significant cost savings. However, measures to improve financial performance implicitly restrict and influence operational performance. In our research we elaborate on the benefits of equally considering both operational and financial aspects in decision-making for the physical and financial supply chain. We develop a mathematical model that determines the optimal purchasing order quantity under working capital restrictions and payment delays. We analyze the trade-offs between the most commonly used financial and operational measurements, such as service level, return on investment, profit margin and inventory level. Our results demonstrate the significance of payment delays: Increases/decreases in the upstream/downstream payment delays favor the system's operations by decreasing operational costs. Moreover increases in the working capital employed in the system decrease the total operational cost, increase the total financial cost and lower the return on working capital investment. (C) 2009 Elsevier B.V. All rights reserved.

Interrelating Operational and Financial Performance Measurements

Margarita Protopappa, Ralf Seifert

Elsevier2010

Interrelating operational and financial performance measurements in inventory control

Margarita Protopappa, Ralf Seifert

2010

Interrelating operational and financial performance measurements in inventory theory

Margarita Protopappa

Financial flows are often treated in a fragmented and disconnected way from the physical product flow. Managers take decisions from an operational point of view concerning inventory, service level or capacity needs. The implementation of such decisions influences financial performance in terms of profit margin, working capital requirements and return on investment. However, the interdependency of operational and financial objectives is rarely well understood. Such practice has serious implications on the profitability of a company and its responsiveness to market needs. Therefore, companies increasingly acknowledge the importance of financial supply chain management as an effective approach to optimize working capital levels and to direct cash flows. Efficient working capital allocation and visibility of accounts payables and receivables can achieve significant cost savings, enhance cash flow predictability and boost company performance. In this dissertation, we weave together financial and operational decisions. We analyze the impact of working capital targets on the optimal ordering policy and the relationship between product flows and cash flows. We also investigate the impact of trade-credit on the operational and financial performance of a supply chain. In the first part of our dissertation, we develop and analyze a model that interrelates operational and financial aspects. We analyze how the optimal solution depends on the financial characteristics of the supply chain. We elaborate on the interrelation between operational and financial performance measurements, such as inventory level, service level, return on investment, cash flows and working capital requirements. Our results demonstrate the significance of payment delays on profit margin. We motivate a joint consideration of financial and operational objectives because a higher working capital employed in the system decreases the operational cost but increases the financial cost. In the second part of this dissertation, we extend our modeling framework to accommodate multi-product settings. We focus on the interrelation of working capital and stocking decisions for functional, innovative and heterogeneous product portfolios. We analyze the effect of demand correlation, lead time, payment delays, portfolio size and service level constraints for symmetric and asymmetric product portfolios of various sizes. Our results attest the importance of upstream and downstream payment delays on the profitability of the supply chain. Our analysis demonstrates significant risk-pooling benefits for functional and innovative portfolios under specific demand correlation scenarios. In the third part of this dissertation, we extend our modeling framework and investigate the impact of working capital allocation in a multi-echelon supply chain. We consider a joint working capital allocation, where all the members of the supply chain share a working capital pool and face working capital restrictions jointly. We compare our findings with a dedicated working capital allocation, where the members of the supply chain each have a separate working capital and face individual working capital restrictions. Our research demonstrates significant cost savings when the members of the supply chain share a joint pool of working capital. We investigate the impact of interest rate, payment delays and lead time on the profitability of the supply chain. We show that extending the payment delays to your supplier increases the cost in the supply chain. We finalize this dissertation with a conclusion and a discussion of potential avenues for future research.

EPFL2009

Interrelating operational and financial performance measurements in inventory theory

Margarita Protopappa

EPFL2009