SCM Terminology: WACC (Weighted Average Cost of Capital)
In Supply Chain Management (SCM), the perspective of whether invested systems and machinery are effectively performing is a crucial factor that determines a company's growth speed and stability.
No matter how excellent a system is introduced, it is meaningless if it does not generate cash commensurate with its cost. The concept of WACC (Weighted Average Cost of Capital) is important as a "hurdle" to measure whether that investment was successful.
In short, WACC is an indicator that shows "what percentage of cost is incurred on average to raise the money for a company to operate."
This concept is based on a theory proposed by economists in the 1950s and has developed into an essential tool for modern management.
There are broadly two ways for a company to raise money.
These are "debt," such as borrowing from banks, and "equity," which is capital provided by shareholders. It is necessary to pay interest to banks and dividends to shareholders, right?
WACC is the "average" of both of these costs, weighted according to their respective proportions.
In overall SCM optimization, WACC becomes a very important "investment decision criterion."
When introducing new logistics systems or factory equipment, a large amount of money is required.
Just by preparing those funds, a "WACC-equivalent cost" in the form of interest and dividends will inevitably occur.
If the profit margin of the new equipment falls below the WACC, that investment will result in "the more you do it, the more you lose."
Also, this "money hurdle" exists for inventory (assets for sale) as well.
The longer the "lead time" from purchasing materials to selling the product, the longer money remains dormant as inventory, wasting costs equivalent to the WACC.
A lower WACC is proof that money is being borrowed cheaply, while conversely, a higher WACC signifies a difficult situation where "shareholders and banks will not be satisfied unless profits are generated more efficiently."
In SCM, it is required to always be conscious of the "money hurdle bar" known as WACC.
・Quickly recovering dormant money through logistics and inventory improvements
・Generating profits through investments in machinery and systems
Building a structure that generates profits exceeding the WACC through these means leads to overall optimization.