Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation 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 Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation case study is a Harvard Business School (HBR) case study written by Gerry Yemen, Ronald G. Kamin, Karen Delchet-Cochet. The Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation (referred as “Sncf Achats” from here on) case study provides evaluation & decision scenario in field of Leadership & Managing People. It also touches upon business topics such as - Value proposition, Competitive strategy, Economics, Organizational culture.

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

---

Case Description of Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation Case Study

"With a global leadership and sustainability perspective, this case uses SNCF, a state-owned railway and public service company based in France, to set the stage for an analysis of change management in a large company. It also allows for an exploration of sustainable development within the context of a large company. Written from the field, it depicts the firm's overall strategy to adopt sustainable practices and provides an opportunity to introduce basic leadership, strategy, sustainability, and operational terms that can be explored in subsequent classes. The case opens with a summary of urgent issues that include an influential employee who resists new policies, a public scandal around a supplier that employed undocumented workers, and pressure to present the accounting department with financial metrics to evaluate the sustainable procurement efforts. In a big-picture view, Olivier Menuet, directeur dA?lA?guA? achats durable et solidaires, and his boss, Pierre Pelouzet, directeur des achats, want more visibility around sustainable development not only within the procurement function but throughout the organization. How might changes already made at SNCF be driven deeper into the company? "

Case Authors : Gerry Yemen, Ronald G. Kamin, Karen Delchet-Cochet

Topic : Leadership & Managing People

Related Areas : Competitive strategy, Economics, Organizational culture

---

Calculating Net Present Value (NPV) at 6% for Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10025371)	-10025371	-	-
Year 1	3455623	-6569748	3455623	0.9434	3260022
Year 2	3966753	-2602995	7422376	0.89	3530396
Year 3	3938489	1335494	11360865	0.8396	3306831
Year 4	3247967	4583461	14608832	0.7921	2572694
TOTAL			14608832		12669943

The Net Present Value at 6% discount rate is 2644572

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.

---

Capital Budgeting Approaches

Methods of Capital Budgeting

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

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

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. Sncf Achats 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 Sncf Achats have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

---

Formula and Steps to Calculate Net Present Value (NPV) of Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation

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 Leadership & Managing People 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 Sncf Achats 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 Sncf Achats 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	(10025371)	-10025371	-	-
Year 1	3455623	-6569748	3455623	0.8696	3004890
Year 2	3966753	-2602995	7422376	0.7561	2999435
Year 3	3938489	1335494	11360865	0.6575	2589620
Year 4	3247967	4583461	14608832	0.5718	1857036
TOTAL					10450981

The Net NPV after 4 years is 425610

(10450981 - 10025371 )

---

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	(10025371)	-10025371	-	-
Year 1	3455623	-6569748	3455623	0.8333	2879686
Year 2	3966753	-2602995	7422376	0.6944	2754690
Year 3	3938489	1335494	11360865	0.5787	2279218
Year 4	3247967	4583461	14608832	0.4823	1566342
TOTAL					9479936

The Net NPV after 4 years is -545435

At 20% discount rate the NPV is negative (9479936 - 10025371 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Sncf Achats 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 Sncf Achats has a NPV value higher than Zero then finance managers at Sncf Achats 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 Sncf Achats, then the stock price of the Sncf Achats 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 Sncf Achats 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 will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in 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 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.

---

Negotiation Strategy of Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation

References & Further Readings

Gerry Yemen, Ronald G. Kamin, Karen Delchet-Cochet (2018), "Sustainable Procurement at SNCF: An Impressionist's Approach to Transformation Harvard Business Review Case Study. Published by HBR Publications.