Impact of Costs and Finance on Supply Chains (3, 1)

Question 1

What different cost management strategies can be implemented throughout the supply chain?

Answer 1

• Protect continuity of supply
• Maintain (or improve) quality standards
• Drive down costs

Question 2

What are common financial objectives of organisations?

Answer 2

• Cost Management
• Revenue Generation
• Profitability
• Shareholder Value

Question 3

What are the key areas considered when making financial decisions?

Answer 3

• Liquidity
• Investments
• Finance
• Reward

Question 4

What are the different categories of a suppliers cost?

Answer 4

• Fixed Costs (Unaffected by sales)
• Variable Costs (Vary in line with sales)
• Semi-Variable Costs (Fixed + Variable elements e.g. utility bills)
Or
• Direct Costs (Linked to end product)
• Indirect Costs (Not linked to end product)

Question 5

What are the different categories of an organisations expenditure?

Answer 5

• Captial Expenditure (Spend on fixed assets)

* Operating Expenditure (Spend on routine running of organisation)

Question 6

Money that is used for day to day operations is known as working capital. How can this be calculated from the organisations balance sheet?

Answer 6

Working capital can be calculated by comparing the current assets and current liabilities.

Question 7

What can a company do to improve its working capital position?

Answer 7

Inventory – reduce stock or turn over stock more quickly
Payables – negotiate longer payment terms and ensure full credit period is taken
Receivables – tighten credit management of invoices, offer prompt payment discounts, offer shorter payment terms to new clients

Question 8

What methods are there an organisation can take to get “receivables-based finance”?

Answer 8

• Invoice Discounting – allows an organisation to borrow against invoices it has issued but haven’t been paid
• Factoring – similar to invoice discounting but the provider also managed the invoicing process

Question 9

Financing options for longer term are different to working capital. What do they include?

Answer 9

• Debt – borrowing with an obligation to make regular payments to the lender
• Equity – capital which is regarded as permanent

Question 10

There are various sources of debt finance available. What key issues should an organisation consider before selecting one?

Answer 10

• Availability
• Term
• Purpose
• Affordability
• Interest
• Security

Question 11

What is gearing? What might a bank do before giving a medium to longer term loan?

Answer 11

Gearing is the debt to equity ratio. The higher the ratio, the more highly geared the company is. Lenders will seek an upfront contribution payment to demonstrate the gearing is at a manageable level.

Question 12

What other options are there to avoid the debt associated with buying long term CAPex?

Answer 12

Leasing and Hiring.