What's Your Strategy for Supply Chain Disclosure? Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for What's Your Strategy for Supply Chain Disclosure? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. What's Your Strategy for Supply Chain Disclosure? case study is a Harvard Business School (HBR) case study written by Donna Marshall, Lucy McCarthy, Paul McGrath, Fiona Harrigan. The What's Your Strategy for Supply Chain Disclosure? (referred as “Disclosure Supply” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, .

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of What's Your Strategy for Supply Chain Disclosure? Case Study

While global supply chains are expected to be lean, agile, and sustainable, they have also become the focus of growing attention from a variety of external stakeholders seeking information that includes and frequently exceeds what the company is legally obliged to disclose. In this article, the authors discuss the pressures on companies to disclose supply chain information, the drivers and impediments to such disclosure, and the types of supply chain information typically made available to the public. The article identifies the broad disclosure strategies companies can use to release supply chain information and offers managers guidance on designing the optimal disclosure strategy for their company. In addition to exploring the topic with examples from companies including Nike Inc., WD-40, and Patagonia Inc., the authors take a detailed look at how Apple's approach to supply chain disclosure has evolved since 2009. In considering how to manage supply chain information disclosure, the authors argue that managers must appreciate the diverse forces and actors driving and enabling this trend. Aside from internal governance and risk concerns, external pressure has come from government regulations, best practices of peers, changing expectations from salient stakeholder groups, and, of course, external events (such as the 2013 Rana Plaza garment factory collapse in Bangladesh). The authors note that improving transparency can be expensive. The lack of standardized reporting systems, the absence of a common technology platform, ill-defined standards, and a lack of supplier education can also pose serious hindrances to companies wishing to improve their supply chain transparency. The authors identify four common types of supply chain information that tends to be publicly disclosed: supply chain membership, provenance of materials, environmental information, and information on social impacts such as working conditions. Based on their research, they developed a transparency matrix to frame four typical supply chain disclosure strategies: transparent, secret, distracting, and withheld. The authors say managers must understand the demands and respond in creative and meaningful ways without undermining the competitive advantage of their company. The tools and advice presented in the article can help managers navigate this complex and evolving area. This is an MIT Sloan Management Review article.

Case Authors : Donna Marshall, Lucy McCarthy, Paul McGrath, Fiona Harrigan

Topic : Strategy & Execution

Related Areas :

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Calculating Net Present Value (NPV) at 6% for What's Your Strategy for Supply Chain Disclosure? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10013047)	-10013047	-	-
Year 1	3458584	-6554463	3458584	0.9434	3262815
Year 2	3979474	-2574989	7438058	0.89	3541718
Year 3	3946517	1371528	11384575	0.8396	3313572
Year 4	3239253	4610781	14623828	0.7921	2565792
TOTAL			14623828		12683896

The Net Present Value at 6% discount rate is 2670849

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Internal Rate of Return
3. Payback Period
4. Net Present Value

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Disclosure Supply shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Disclosure Supply have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of What's Your Strategy for Supply Chain Disclosure?

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Strategy & Execution Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Disclosure Supply often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Disclosure Supply needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10013047)	-10013047	-	-
Year 1	3458584	-6554463	3458584	0.8696	3007464
Year 2	3979474	-2574989	7438058	0.7561	3009054
Year 3	3946517	1371528	11384575	0.6575	2594899
Year 4	3239253	4610781	14623828	0.5718	1852053
TOTAL					10463471

The Net NPV after 4 years is 450424

(10463471 - 10013047 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10013047)	-10013047	-	-
Year 1	3458584	-6554463	3458584	0.8333	2882153
Year 2	3979474	-2574989	7438058	0.6944	2763524
Year 3	3946517	1371528	11384575	0.5787	2283864
Year 4	3239253	4610781	14623828	0.4823	1562140
TOTAL					9491681

The Net NPV after 4 years is -521366

At 20% discount rate the NPV is negative (9491681 - 10013047 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Disclosure Supply to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Disclosure Supply has a NPV value higher than Zero then finance managers at Disclosure Supply can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Disclosure Supply, then the stock price of the Disclosure Supply should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Disclosure Supply should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What can impact the cash flow of the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of What's Your Strategy for Supply Chain Disclosure?

References & Further Readings

Donna Marshall, Lucy McCarthy, Paul McGrath, Fiona Harrigan (2018), "What's Your Strategy for Supply Chain Disclosure? Harvard Business Review Case Study. Published by HBR Publications.