Strategic and Financial Logistics CHAPTER 3 Strategic and Financial Logistics

Strategic and Financial Logistics Key Terms Assets Asset turnover Balanced scorecard (BSC) Balance sheet Cost leadership strategy Current ratio Differentiation strategy Expenses (costs) Focus strategy

Strategic and Financial Logistics Key Terms Return on assets (ROA) Revenues (sales) Strategic Profit Model (SPM) Income statement Liabilities Net profit margin Owner’s equity

Learning Objectives To appreciate how logistics can influence an organization’s strategic financial outcomes To review basic financial terminology To understand how the strategic profit model can demonstrate the financial impact of logistics activities

Learning Objectives To consider the value of utilizing the balanced scorecard approach for examining the performance of a logistics systems To become aware of some of the more common performance measures for logistics activities

Connecting Strategy to Financial Performance Logistics managers must find ways to: communicate how logistics capabilities provide value support corporate strategy and success in financial terms. Logistics resides at the functional level of the organization. Functional units must translate corporate and business unit strategies into discrete action plans.

Connecting Strategy to Financial Performance Three generic strategies that can be pursued by an organization Cost leadership strategy Requires an organization to pursue activities that will enable it to become the low-cost producer in an industry for a given level of quality

Connecting Strategy to Financial Performance Three generic strategies that can be pursued by an organization 2. Differentiation strategy Entails an organization developing a product and/or service that offers unique attributes that are valued by customers and that the customers perceive to be distinct from competitor offerings

Connecting Strategy to Financial Performance Three generic strategies that can be pursued by an organization 3. Focus strategy Concentrates an organization’s effort on a narrowly defined market to achieve either a cost leadership or differentiation advantage

Connecting Strategy to Financial Performance Functional level strategies exist in: Marketing Finance Manufacturing Procurement Logistics

Connecting Strategy to Financial Performance Logistic strategy decisions involve: Determining the number and location of warehouses Selecting appropriate transportation modes Deploying inventory Investments in technology that support logistics activities

Connecting Strategy to Financial Performance Logistics strategy is directly influenced by strategic decisions in functional areas of: Marketing Product availability, desired customer service levels, and packaging design directly influence logistics decisions Finance Rates of return may affect the decision to manager one’s own warehouse or use a third-party provider

Connecting Strategy to Financial Performance Logistics strategy is directly influenced by strategic decisions in functional areas of: Manufacturing Strategic decisions by manufacturing to implement just-in-time system would influence logistics decisions in warehousing, transportation and inventory management Procurement The decision to move from domestic to global sourcing would naturally affect logistics activities such as the potential use of new modes of transportation

Connecting Strategy to Financial Performance Logistics function can positively affect the financial outcome of an organization by designing a strategy to optimally support the requirement of the business.

Basic Financial Terminology Income statement shows for a period of time: Revenues Also referred to as sales, provide a dollar value of all the products and/or services provided by a company Expenses Also referred to as costs, provide a dollar value for the costs incurred in generating revenues during a given period of time Profit Also referred to as a profit and loss (P&L) statement

Basic Financial Terminology

Basic Financial Terminology Balance sheet reflects at any given point in time: Assets What a company owns and come in two forms: current assets that can be easily converted to cash and long-term assets that have a useful life of more than one year Liabilities The financial obligations a company owes to another party Owner’s equity Difference between what a company owns and what it owes a any particular point in time

Basic Financial Terminology

Strategic Profit Model Issues with reporting financial figures without appropriate context Many financial measures reported as ratios Profitability analysis is useful in assessing logistics activities and proposed changes to a firm’s logistical systems Return On Investment (ROI) is a common measure of organizational financial success Return On Net Worth (RONW) measures profitability of funds invested in the business Return On Assets (ROA) provides insight on how well managers utilize operational assets to generate profits

Strategic Profit Model Return On Investment (ROI) common measure of organizational financial success Return On Net Worth (RONW) measures profitability of funds invested in the business Return On Assets (ROA) Indicates what percentage of every dollar invested in the business is ultimately returned to the organization as profit

Strategic Profit Model Strategic Profit Model (SPM) provides the framework for conducting ROA analysis Incorporates revenues and expenses to generate net profit margin Includes assets to measure asset turnover

Strategic Profit Model

Strategic Profit Model Strategic Profit Model (SPM) Provides a way for managers to examine how a proposed change to their logistics system influences profit performance and ROA Fails to: Consider the timing of cash flows Subject to manipulation in the short run Fails to recognize assets dedicated to specific relationships

Logistics Connections to Net Profit Margin Net Profit Margin = net profit/sales Multiple ways in which net profit margin can be influenced by managerial decisions Relevant categories include: Sales Cost of goods sold Total expenses

Logistics Connections to Net Profit Margin Sales The dollar value of all the products or services an organization provides to its customers during a given period of time Cost of goods sold Includes all the costs or materials and labor directly involved in producing a product or delivering a service Total expenses Made up of the variable and fixed costs that are not directly related to making the product or delivering a service

Logistics Connections to Asset Turnover Asset turnover= total sales/total assets Asset turnover provides information on how efficiently capital is employed to support the business Inventory is typically the most relevant logistics asset Logistics decisions can influence the speed at which invoices are paid – accounts receivable

Logistics Connections to Asset Turnover Inventory can represent a significant part of a firm’s current assets Accounts receivable is the amount of money customers owe to an organization

Balanced Scorecard Balance scorecard (BSC) is a strategic planning and performance management system used in industry, government, and nonprofit organizations.

Balanced Scorecard Management should evaluate their businesses from four perspectives Customers Internal business processes Learning and growth Financial results Forces managers to look beyond traditional financial measures (more holistic approach)

Logistics Activity Measures Transportation measures Focus on labor, cost, equipment, energy and transit time Warehousing measures Include labor, cost, time, utilization and administration Inventory measures Include obsolete inventory, inventory carrying cost, inventory turnover and information availability

Logistics Activity Measures Design and Implementation of Measures Determination of key measures should be tailored to the organization and level of decision making Data collection and analysis are a major part of a performance measurement system in logistics Behavioral issues should be considered when establishing and implementing a system of logistics measures Frequent communication and constant updating of the measures is a necessary condition for ensuring they are supporting organizational goals