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Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 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 CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Shareholder Value Focus
OPERATIONAL EXCELLENCE
ASSET UTILIZATION
FixedCapital
Reduction
WorkingCapital
Reduction
LowestLanded
Total Cost
IncreasedCustomerService
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 CooperCopyright© 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 CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
TYPICAL PERFORMANCE METRICS
Customer Service Cost Management Quality Productivity Asset Management Fill rate Total cost Damage frequency Units shipped per
employee Inventory turns
Stockouts Cost per unit Order entry accuracy Units per labor dollar Inventory levels, number of days supply
Shipping errors Cost as a percentage of sales
Picking/ shipping accuracy
Orders per sales representative
Obsolete inventory
On-time delivery Inbound freight Document/ invoicing accuracy
Comparison to historical standard
Return on net assets
Backorders Outbound freight Information availability Goal programs Return on investment Cycle time Administrative Information accuracy Productivity index Inventory classification
(A,B,C) Delivery consistency Warehouse order
processing Number of credit claims
Equipment downtime Economic Value Added (EVA)
Response time to inquiries
Direct labor Number of customer returns
Order entry productivity
Response accuracy Comparison of actual versus budget
Warehouse labor productivity
Complete orders Cost trend analysis Transportation labor productivity
Customer complaints Direct product profitability
Sales force complaints Customer Segment profitability
Overall reliability Inventory carrying
Overall satisfaction Cost of returned good
Cost of damage
Cost of service failures
Cost of backorder
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Total Supply Chain: Total Landed Cost
RawMaterialSource
Productionof
Components
Manufacturer Distributors Retailers
Could you manage your way out of the dilemma?
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 CooperCopyright© 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 profitmargin
(net proftnet sales )
Current assets
+
Fixed assets
Sales
Total assets
Assets turnover
Return on net worth
Financial leverage
Return on assets
= x
(total assetsnet worth )= x (
net profittotal assets)
Strategic Profitability Model
(Dupont Model)
$
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
SPM RATIOS FOR TWO FICTITIOUS RETAILERS
Return onnet worth
Leverage Return onassets
Asset turnover
Net profitmargin
Company A 26.1 5.55 5.5 2.20 2.9Company B 24.6 2.73 10.5 1.99 6.2
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 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
SALES
NET PROFIT
NET PROFIT MARGIN
ASSET TURNOVER
RETURN ON ASSETS
2000
300
1500
100
400
100
100
500
400
600
400
2000
1000
5%
TIMES
net profitnet sales
net salestotal assets
Strategic Profit Model-
+
+
+
-
+
÷
÷
( )
)(
2
100
(BASE CASE)
10%
2000
Price
Quantity
x
Cost of goods
Quantity
x
TransportationHandlingStorage Space Promotionetc.
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 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
SALES
NET PROFIT
NET PROFIT MARGIN
ASSET TURNOVER
RETURN ON ASSETS
2000
280
1500
100
300
100
100
500
380
500
400
2000
2000
900
6%
TIMES
net profitnet sales
net salestotal assets
-
+
+
+
-
+
÷
÷
( )
)(
2.22
120
13.32%
(INVENTORY REDUCTION)
Strategic Profit Model
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 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
SALES
NET PROFIT
NET PROFIT MARGIN
ASSET TURNOVER
RETURN ON ASSETS
2000
275
1500
100
400
100
100
500
375
600
400
2000
2000
1000
.
TIMES
net profitnet sales
net salestotal assets
-
+
+
+
-
+
÷
÷
( )
)(
2
125
12.5%
(EXPENSE REDUCTION)
6.25%
Strategic Profit Model
Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Dream Beauty Case Discussion
• Activity Based Management
• Strategic Profit Model