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Supply Chain Finance Fundamentals
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Working Capital
Working Capital is the funds required to run a company and is calculated as current assets minus current liabilities. In supply chain, efficient management of working capital ensures that the company can fund its day-to-day operations and invest in its supply chain processes.
Cash-to-Cash Cycle Time
Cash-to-Cash Cycle Time is the duration between when a company pays for its supply purchases and when it receives payment for its product sales. It's crucial for supply chain efficiency as reducing this cycle can improve liquidity.
Inventory Turnover
Inventory Turnover is a ratio that measures how many times a company's inventory is sold and replaced over a period. High turnover may indicate efficient management in the supply chain, which is essential for reducing holding costs.
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ) is the ideal order quantity a company should purchase to minimize its inventory costs, including holding, ordering, and shortage costs. It's relevant to supply chain as it helps in optimizing inventory management.
Just-in-Time (JIT)
Just-in-Time (JIT) is an inventory management strategy where materials are only ordered and received as they are needed in the production process. JIT minimizes inventory costs and is pivotal for supply chain efficiency.
Supply Chain Financing
Supply Chain Financing is a set of solutions that optimize cash flow by allowing businesses to lengthen their payment terms to suppliers while providing the option for their suppliers to get paid early. This intermediation by financial institutions helps maintain a healthy supply chain ecosystem.
Bullwhip Effect
Bullwhip Effect refers to increasing swings in inventory in response to shifts in consumer demand as one moves further up the supply chain. Financially, it can lead to increased costs and inefficiencies.
Days Sales of Inventory (DSI)
Days Sales of Inventory (DSI) is the average number of days it takes for a company's inventory to turn into sales. It's relevant to the supply chain as it affects the cash-to-cash cycle and inventory management.
Days Payables Outstanding (DPO)
Days Payables Outstanding (DPO) is the average number of days it takes a company to pay its bills and invoices. In supply chain finance, a higher DPO can improve working capital by delaying outflows of cash.
Days Sales Outstanding (DSO)
Days Sales Outstanding (DSO) is the average number of days it takes for a company to collect payment after a sale has been made. A lower DSO improves cash flow, beneficial for the supply chain.
Total Cost of Ownership (TCO)
Total Cost of Ownership (TCO) is the cumulative sum of costs associated with a product over its lifecycle, from procurement to disposal. Understanding TCO is crucial for supply chain financial decisions, as it helps in comparing long-term costs.
Lean Manufacturing
Lean Manufacturing is a production methodology aimed at reducing waste and improving efficiency in the production process. Financially, this translates to lower costs and increased profit margins, thus impacting the supply chain positively.
Demand Forecasting
Demand Forecasting is the process of estimating future customer demand using historical data and analytics. This has major financial implications in the supply chain, affecting inventory levels, production planning, and revenue projections.
Vendor Managed Inventory (VMI)
Vendor Managed Inventory (VMI) is a supply chain initiative where the supplier is responsible for maintaining the inventory levels. Financially, it can result in reduced inventory carrying costs for the buyer.
Reorder Point (ROP)
Reorder Point (ROP) is the inventory level at which a new order should be placed to replenish stock before it runs out. Calculating ROP effectively ensures optimal inventory levels, preventing stockouts and overstocks, which have financial repercussions.
Lead Time
Lead Time is the time it takes from placing an order to when it is received. In terms of finance, shorter lead times can reduce the need for holding large inventory amounts, improving cash flow.
Factoring
Factoring is a financial transaction and a type of debtor finance where a business sells its accounts receivable to a third party at a discount. This provides immediate cash flow, which is essential for maintaining a robust supply chain.
Supply Chain Risk Management
Supply Chain Risk Management is the process of identifying, assessing, and mitigating risks in the supply chain. Financially, it's critical to maintain continuity and protect against costly disruptions.
Unit Economics
Unit Economics is the direct revenues and costs associated with a particular business model expressed on a per-unit basis. In supply chain management, it helps to understand profitability at the item level, which is essential for making strategic financial decisions.
Cost-Benefit Analysis
Cost-Benefit Analysis is a systematic approach to estimating the strengths and weaknesses of alternatives in business. For supply chain, it's used to justify financial investments in new projects or warehouse operations.
Supply Chain Optimization
Supply Chain Optimization involves streamlining operations to maximize efficiency and minimize costs. Financially, this results in a leaner and more cost-effective supply chain, increasing the organization's profitability.
Cross-Docking
Cross-Docking is a logistics procedure where products from a supplier or manufacturing plant are distributed directly to customers or retail chains with minimal handling or storage time. This reduces the need for warehouse space and handling costs, impacting the financial efficiency of the supply chain.
Supply Chain Analytics
Supply Chain Analytics involves the use of data analysis tools to optimize the supply chain process. Financially, it can uncover cost-saving opportunities and improve decision-making.
Vertical Integration
Vertical Integration is when a company expands its business into different stages of production within its supply chain. Financially, this can lead to cost savings and more control over the supply process, but it also involves significant investment and risk.
Reverse Logistics
Reverse Logistics is the process of moving goods from their final destination for the purpose of capturing value or proper disposal. Financially relevant in the supply chain for recovering costs and managing returns efficiently.
Freight Auditing
Freight Auditing is the process of examining, adjusting, and verifying freight bills for accuracy. It has financial relevance in supply chain management for ensuring that shipping costs are correctly allocated and not overcharged.
Procurement
Procurement is the process of finding, acquiring, buying goods, services, or works from an external source, often via a tendering or competitive bidding process. In supply chain finance, efficient procurement directly affects a company's profit margins by reducing costs.
Triple Bottom Line (3BL)
Triple Bottom Line (3BL) is a sustainability framework that includes social, environmental, and financial performance. In supply chain management, this holistic approach can lead to financially beneficial outcomes through sustainable practices.
Net Present Value (NPV)
Net Present Value (NPV) is the calculation of the present value of cash inflows minus the present value of cash outflows over a period of time. In supply chain decisions, a positive NPV indicates that a project can be financially beneficial.
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