Chapter 3 Strategic and Financial Logistics.pdf

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Strategic and Financial

Logistics



Strategic and Financial Logistics

Key Terms• Assets

• Asset turnover

• Balanced scorecard

(BSC)

• Balance sheet

• Cost leadershipstrategy

• Current ratio

• Differentiationstrategy

• Expenses (costs)

•

Focus strategy

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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)

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Connecting Strategy to Financial

Performance

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• 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 andbusiness unit strategies into discrete action plans.




Performance

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• Three generic strategies that can be pursued

by an organization

1. Cost leadership strategy

• Requires an organization to pursue activities that willenable it to become the low-cost producer in an

industry for a given level of quality




Performance

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• Three generic strategies that can be pursued

by an organization

2. Differentiation strategy

• Entails an organization developing a product and/orservice that offers unique attributes that are valued by

customers and that the customers perceive to be

distinct from competitor offerings




Performance

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• Three generic strategies that can be pursuedby an organization

3. Focus strategy

• Concentrates an organization’s effort on a narrowlydefined market to achieve either a cost leadership or

differentiation advantage




Performance

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• Functional level strategies exist in:

– Marketing

– Finance

– Manufacturing

– Procurement

– Logistics




Performance

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• 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




Performance

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• Logistics strategy is directly influenced bystrategic decisions in functional areas of:

– Manufacturing

• Strategic decisions by manufacturing to implement just-in-time system would influence logistics decisions inwarehousing, transportation and inventorymanagement

– Procurement

• The decision to move from domestic to global sourcingwould naturally affect logistics activities such as thepotential use of new modes of transportation




Performance

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• 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

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• 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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• 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-termassets 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



Strategic Profit Model

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• Issues with reporting financial figures withoutappropriate context

• Many financial measures reported as ratios

• Profitability analysis is useful in assessing logistics

activities and proposed changes to a firm’s logisticalsystems

• Return On Investment (ROI) is a common measure oforganizational financial success

•

Return On Net Worth (RONW) measures profitability offunds invested in the business

• Return On Assets (ROA) provides insight on how wellmanagers utilize operational assets to generate profits




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• 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 inthe business is ultimately returned to the organization

as profit




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• 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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• 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

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• 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

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• 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

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• 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

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• 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

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• 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

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• 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

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• 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 aresupporting organizational goals

Chapter 3 Strategic and Financial Logistics.pdf

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