Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: Performance and Financial Assessment Supply Chain Logistics Management

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Shareholder Value Focus OPERATIONAL EXCELLENCE ASSET UTILIZATION Fixed Capital Reduction Working Capital Reduction Lowest Landed Total Cost Increased Customer Service Measures Perfect Order Dwell Time Inventory Days Total Landed Cost Activity Based Cost Measures Cash-to-Cash cycle time Segment profitability Return on assets Free cash spin

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Traditional Functional Measurement Increasing scope and accuracy in functional measurement –Asset Management: – Cost –Customer Service –Quality –Productivity

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Deficiencies of Traditional Functional Assessment Bias toward cost and traditional customer service persists. Most logistics executives actually believe that customer service and quality metrics reflect a customer perspective in their scorecard. Customer service metrics are not jointly defined. Metrics are “on-average, over-time”. Must be “de-averaged”. Research shows that world-class companies emphasize absolute metrics rather than percentages. Inability to reflect a true shareholder’s/financial perspective

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Internal Supply Chain:“Perfect Order” Achievement The “Perfect Order” Defined –Complete Orders Delivered To Customers Requested Date And Time In Perfect Condition, Including All Documentation. –.97 x.97 x.97 x.97 x.97 x.97 x.97 x.97 x.97 x.97=.73 Perfect Orders Should Be Assessed At Each Stage In The Supply Chain Can you really capture the data?

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Internal Supply Chain: Cash-to-Cash Cash-To-Cash Cycle Time –Cash-To-Cash = Total Inventory Days Of Supply + Days Sales Outstanding - Days Payables Outstanding

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Total Supply Chain: Days of Supply Days Of Supply –The Total Inventory In The Supply Chain Relationship -- Inbound, Plant And All Stocking Locations In the Channel -- Expressed As Calendar Days Of Supply Based On Recent Actual Daily Rate Of Sales (or forecasted rate of sales). Auto Industry Food Industry

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Total Supply Chain: Dwell Time The ratio of the number of days that inventory (or other assets) sit idle to the number of days it is actually moving in the supply chain. –Related to services industry measures.

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Total Supply Chain: Focus on the Consumer Shelf Level In-Stock Position Is A Key Metric For The Supply Chain

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Total Supply Chain: Total Landed Cost Raw Material Source Production of Components ManufacturerDistributorsRetailers Could you manage your way out of the dilemma?

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Total Supply Chain: Supply Chain Response Time The (theoretical) time to recognize a fundamental shift in final customer demand, internalize that finding in all supply chain members, re-plan, and increase/decrease output by 20%. –Suppose one of your recently introduced products becomes the most successful product in its category-taking 50% market share when your forecast was for only 20%. How long before you actually recognize this? How long before you can arrange production capacities, procurement and distribution arrangements to accommodate it?

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Aspects of benchmarking: Internal benchmarking Competitive benchmarking Non-restricted benchmarking Extends beyond metrics to include processes Benchmarking

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Segmental Analysis To properly assess financial performance you must segment: By channel By territory By customer By product By supplier

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Variable Vs Fixed Expense VARIABLE EXPENSES Those which change predictably with some measure of output during a time period. FIXED EXPENSES Those which do not change in relationship to output during a time period

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Direct Vs Indirect Expense DIRECT EXPENSES Those which exist due to the specific organizational unit being analyzed. INDIRECT EXPENSE Those which exist due to more than one unit under analysis.

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Two Approaches to Profitability Assessment Contribution margin focuses on the variable and direct fixed costs incurred and the contribution that each segment makes to covering indirect expenses and profit. Net profit allocates all expenses to segments.

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Activity Based Costing and Management ABC and ABM are allocation techniques Allocations are more realistic than traditional cost accounting which relies on sales volume or direct labor hours to allocate “overhead”. If you aren’t doing activity-based costing you probably don’t know which customers, products, services, or channels are the profitable ones.

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. $ $ $ $ $ $ $ $ $ $ $ $ $ $ - Cost of goods sold Direct expenses Sales + Indirect expenses Inventory + Accounts receivable + Other current assets % % net profts net worth () Gross Margin - Total Expenses Net Profit ÷ Sales Net profit margin ( net proft net sales ) Current assets + Fixed assets Sales  Total assets Assets turnover Return on net worth Financial leverage Return on assets =x ( total assets net worth ) = x ( net profit total assets ) Strategic Profitability Model (Dupont Model) $

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. SPM RATIOS FOR TWO FICTITIOUS RETAILERS Return on net worth LeverageReturn on assets Asset turnover Net profit margin Company A Company B

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. SALES COST OF GOODS SOLD DIRECT EXPENSE INDIRECT EXPENSE INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES NET PROFIT NET PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS % TIMES net profit net sales net sales total assets Strategic Profit Model ÷ ÷ () )( (BASE CASE) 10% 2000 Price Quantity x Cost of goods Quantity x Transportation Handling Storage Space Promotion etc.

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES NET PROFIT NET PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS % TIMES net profit net sales net sales total assets ÷ ÷ () )( % (INVENTORY REDUCTION) Strategic Profit Model

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. SALES COST OF GOODS SOLD VARIABLE EXPENSES FIXED EXPENSES INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES NET PROFIT NET PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS TIMES net profit net sales net sales total assets ÷ ÷ () )( % (EXPENSE REDUCTION) 6.25% Strategic Profit Model

Supply Chain Logistics Management, First Edition, Bowersox, Closs, and Cooper Copyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Dream Beauty Case Discussion Activity Based Management Strategic Profit Model