1. Strategic and Financial Logistics
CHAPTER 3
Strategic and Financial Logistics
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2. 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
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3. 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
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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
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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
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6. 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.
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7. 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
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8. 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
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9. 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
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10. Connecting Strategy to Financial Performance
Functional level strategies exist in:
Marketing
Finance
Manufacturing
Procurement
Logistics
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11. 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
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12. 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
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13. 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
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14. 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.
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15. 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
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16. Basic Financial Terminology
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17. 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
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18. Basic Financial Terminology
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19. 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
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20. 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
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21. 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
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22. Strategic Profit Model
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23. 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
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24. 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
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25. 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
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26. 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
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27. 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
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Balanced Scorecard
Balance scorecard (BSC) is a strategic planning and performance management system used in industry, government, and nonprofit organizations.
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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)
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30. 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
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31. 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
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