The Dupont Model/Strategic Profit Model

The DuPont Identity/Strategic Profit Model

 

The Strategic Profit Model gives a visual view of an organization’s finances and provides the ability to understand and analyze financial performance and return on equity (ROE).

 

The tool provides visibility to the inter-relationship between the three major categories that contribute to ROE:  profit margins, asset utilization (turnover) and capitalization (financial leverage) through combinations of debt and equity.  Everything has an impact on ROE and the bottom line.  ROE can be improved by:

 

  • Increasing the net profit through price management, expense control or process and productive improvements.
  • Increasing inventory and accounts receivable turnover.
  • Managing capitalization (debt in proportion to equity).

 

As one can see, the supply chain has the biggest impact on profit margins and asset turnover, which make the components of return on assets (ROA).  One can use the Strategic Profit Model/DuPont Identity to compare the financial performance of different companies in the same industry and how the supply chain affects the performance.  One can gain insight into business models used and differences in strategy.  One can also use the model to compare operations of the same organization at different points in time.

 

When developing plans for major projects such as a new computer system, the Strategic Profit Model/DuPont Identity can help one to see the affects of supply chain decisions on the business by evaluating “what if” scenarios.

 

One can use the Strategic Profit Model/DuPont Identity to not only show the financial relationships, but how functional areas and even specific jobs contribute to ROE.

 

For example, one could see if a lean event to improve inventory management could get the desired return on equity.  One could also compare different supply chain initiatives to see which one would give the greatest return on equity.  One could look to see if the cumulative effect of supply chain initiatives would give the desired return on equity.  A expanded DuPont analysis would allow one to incorporate the individual ratios for further analysis into the issues the supply chain can solve.