Strategic and Financial Logistics CHAPTER 3 Strategic and Financial Logistics © Pearson Education, Inc. publishing as Prentice Hall

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 To become aware of some of the more common measures of logistics performance © Pearson Education, Inc. publishing as Prentice Hall

Strategic and Financial Logistics Key Terms Assets Asset turnover Balanced scorecard (BSC) Balance sheet Cost leadership strategy Differentiation strategy Expenses (costs) Focus strategy © Pearson Education, Inc. publishing as Prentice Hall

Strategic and Financial Logistics Key Terms Income statement Liabilities Net profit margin Owner’s equity Return on assets (ROA) Revenues (sales) Strategic Profit Model (SPM) © Pearson Education, Inc. publishing as Prentice Hall

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. © Pearson Education, Inc. publishing as Prentice Hall

Connecting Strategy to Financial Performance Three generic strategies that can be pursued by an organization Cost leadership strategy Differentiation strategy Focus strategy © Pearson Education, Inc. publishing as Prentice Hall

Connecting Strategy to Financial Performance Functional level strategies exist in: Marketing Finance Manufacturing Logistics © Pearson Education, Inc. publishing as Prentice Hall

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 © Pearson Education, Inc. publishing as Prentice Hall

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 Manufacturing Strategic decisions by manufacturing to implement just-in-time system would influence logistics decisions in warehousing, transportation and inventory management © Pearson Education, Inc. publishing as Prentice Hall

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. © Pearson Education, Inc. publishing as Prentice Hall

Basic Financial Terminology Income statement shows for a period of time: Revenues Expenses Profit Also referred to as a profit and loss (P&L) statement © Pearson Education, Inc. publishing as Prentice Hall

Figure 3-1: Example Income Statement Sales $200,000 Cost of Goods Sold $130,000 Gross Profit Margin $70,000 Transportation Cost $6,000 Warehousing Cost $3,000 Inventory Carrying Cost $1,000 Other Operating Costs $30,000 Total Operation Costs $40,000   Earnings before interest and taxes Interest $11,000 Taxes Ne Income $13,000 © Pearson Education, Inc. publishing as Prentice Hall

Basic Financial Terminology Balance sheet reflects at any given point in time: Assets Liabilities Owner’s equity © Pearson Education, Inc. publishing as Prentice Hall

Figure 3-2: Example Balance Sheet Assets Liabilities Cash $20,000 Current Liabilities $60,000 Accounts Receivable $35,000 Long-term Debt $30,000 Inventory $15,000 Total Liabilities $90,000 Total Current Assets $70,000 Shareholders' Equity Net Fixed Assets $80,000 Total Liabilities and Equity $150,000 Total Assets

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 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 © Pearson Education, Inc. publishing as Prentice Hall

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 © Pearson Education, Inc. publishing as Prentice Hall

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 © Pearson Education, Inc. publishing as Prentice Hall

Figure 3-3: Strategic Profit Model Sales Gross Margin Cost of Goods Sold Net Profit Net Profit Margin Variable Expenses Sales Total Expenses Return on Assets Fixed Expenses Sales Inventory Asset Turnover Current Assets Accounts Receivable Total Assets Fixed Assets Other Current Assets

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 © Pearson Education, Inc. publishing as Prentice Hall

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 © Pearson Education, Inc. publishing as Prentice Hall

Logistics Connections to Asset Turnover Asset turnover= total sales/total assets Inventory is the most relevant logistics asset Logistics decisions can influence speed at which invoices are paid – accounts receivable © Pearson Education, Inc. publishing as Prentice Hall

Balanced Scorecard Balance scorecard (BSC) is a strategic planning and performance management system used in industry, government, and nonprofit organizations. © Pearson Education, Inc. publishing as Prentice Hall

Balanced Scorecard Management should evaluate their businesses from four perspectives Customers Internal business processes Learning and growth Financial Forces managers to look beyond traditional financial measures (more holistic approach) © Pearson Education, Inc. publishing as Prentice Hall

Common Logistics Measures 5 types of performance in Logistics Management Systems: Asset management Cost Customer service Productivity Logistics quality © Pearson Education, Inc. publishing as Prentice Hall

Common Logistics Measures Transportation Warehousing Inventory Design and implementation of measures © Pearson Education, Inc. publishing as Prentice Hall

Transportation Measures Focus: Labor Cost Equipment Energy Transit time Measurements: ROI Outbound freight costs Transportation labor productivity On-time deliveries In-transit damage frequency © Pearson Education, Inc. publishing as Prentice Hall

Warehousing Measures Focus: Measurements: Labor ROI Cost Time Utilization Administration Measurements: ROI Warehouse order processing costs Warehouse labor productivity Picking errors © Pearson Education, Inc. publishing as Prentice Hall

Inventory Measures Focus: Measurements: Service levels Inventory investment Measurements: Obsolete inventory Inventory carrying costs Inventory turnover Information availability © Pearson Education, Inc. publishing as Prentice Hall

Design and Implementation of Measures Tailored to organization and level of decision making Data collection and analysis Behavioral issues (change management) Frequent communication and constant updating © Pearson Education, Inc. publishing as Prentice Hall

Case 3-1 Brant Freezer Co. Company Facts: Located in Fargo, N. Dakota Product Facts: Industrial freezers (one size) Market Facts: Distributed through public warehouses in Atlanta, Boston, Chicago, Denver, Los Angels, Portland, and St. Louis Fargo warehouse

Case 3-1 Brant Freezer Co. 2009 Units Shipped Warehouse Costs 12 mo. Atlanta 17,431 4,080 $156,830 $35,890 Boston 6,920 3,061 $63,417 $27,915 Chicago 28,104 14,621 $246,315 $131,618 Denver 3,021 1,005* $28,019 $8,600* Fargo 2,016 980 $16,411 $8,883 LA 16,491 11,431 $151,975 $109,690 Portland 8,333 4,028 $73,015 $36,021 St. Louis 5,921 2,331 $51,819 $23,232 * Denver warehouse closed by strike march 4-19, 2009

Case 3-1 Brant Freezer Co. 2,010 Units Shipped Warehouse Costs 12 mo. Atlanta 18,000 7,035 $178,000 $40,228 Boston 7,200 3,119 $7,300 $29,416 Chicago 30,000 15,230 $285,000 $141,222 Denver 3,100 1,421 $31,000 $14,900 Fargo 2,000 804 $17,000 $9,605 LA 17,000 9,444 $176,000 $93,280 Portland 9,000 4,600 $85,000 $42,616 St. Louis 8,000 2,116 $56,000 $19,191

Case 3-1 Brant Freezer Co. Income Statement 2009 Sales $ 4,003,450 $ 4,003,450 Cost of Goods Sold $ 937,000 Gross Profit Margin $ 3,066,450 Transportation Cost $ 657,322 Warehousing Cost $ 735,982 Inventory Carrying Cost $ 567,987 Other Operating Costs $ 345,876 Total Operation Costs $ 2,307,167   Earnings before interest and taxes $ 759,283 Interest $ 110,000 Taxes $ 69,000 Ne Income $ 580,283

Case 3-1 Brant Freezer Co. Balance Sheet 2009 Assets Liabilities Cash $706,034 Current Liabilities $1,678,589 Accounts Receivable $355,450 Long-term Debt $398,060 Inventory $1,590,435 Total Liabilities $2,076,649 Total Current Assets $2,651,919 Shareholders' Equity $1,378,326 Net Fixed Assets $803,056 Total Liabilities and Equity $3,454,975 Total Assets

Case 3-1 Brant Freezer Co. Questions When comparing performance during the first five months of 2010 with performance in 2009, which warehouse shows the most improvement? When comparing performance during the first five months of 2010 with performance in 2009, which warehouse shows the poorest change in performance? When comparisons are made among all eight warehouses, which one do you think does the best job for the Brant Company? What criteria did you use? Why?

Case 3-1 Brant Freezer Co. Questions J. Q. is aggressive and is going to recommend that his father cancel the contract with one of the warehouses and give that business to a competing warehouse in the same city. J. Q. feels that when word of this gets around, the other warehouses they use will “shape up.” Which of the seven should J. Q. recommend be dropped? Why? The year 2010 is nearly half over. J. Q. is told to determine how much the firm is likely to spend for warehousing at each of the eight warehouses for the last six months in 2010. Do his work for him.

Case 3-1 Brant Freezer Co. Questions When comparing the 2009 figures with the 2010 figures shown in the table, the amount budgeted for each warehouse in 2010 was greater than actual 2009 costs. How much of the increase is caused by increased volume of business (units shipped) and how much by inflation? Use the 2009 income statement and balance sheet to complete a Strategic Profit Model for J. Q. Holding all other information constant, what would be the effect on ROA for 2010 if warehousing costs declined 10 percent from 2009 levels?