Contemporary Logistics Eleventh Edition Chapter 03 Strategic and

Contemporary Logistics Eleventh Edition Chapter 03 Strategic and Financial Logistics Copyright©© 2015, 2012, 2009 Pearson. Education, Inc. All. Rights. Reserved Copyright 1

Strategic and Financial Logistics Key Terms • Assets • Income statement • Asset turnover • Liabilities • Balanced scorecard (BSC) • Net profit margin • Balance sheet • Owner’s equity • Cost leadership strategy • Return on assets (ROA) • Current ratio • Revenues (sales) • Differentiation strategy • Strategic Profit Model (SPM) • Expenses (costs) • Focus strategy Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 2

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 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 3

4 Overview of Class • Chapter 3 • In-Class Activities (seen on pwpt) – Participation Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 4

News and Books • Supply Chain Brian • Good Read: – " Discover how your supply chain and operations work impacts financial performance, and how to align your efforts to help your company succeed – the fastest, best way to supercharge your own career! As a supply chain or operations professional, you may clearly understand your operational performance goals. But if you want to get promoted, you need to know how your day-to-day work powerfully impacts the financial metrics your top executives care about most. 2015 Cengage Learning Copyright © 2015, 2012, 2009 Pearson©Education, Inc. All Rights Reserved 5

Connecting Strategy to Financial Performance (1 of 8) • 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. Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 6

Connecting Strategy to Financial Performance (2 of 8) • Three generic strategies that can be pursued by an organization 1. 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 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 7

Connecting Strategy to Financial Performance (3 of 8) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 8

Connecting Strategy to Financial Performance (4 of 8) • Functional level strategies exist in: • Marketing • Finance • Manufacturing • Procurement • Logistics Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 9

Connecting Strategy to Financial Performance (5 of 8) • Logistic strategy decisions involve: • Determining the number and location of warehouses • Selecting appropriate transportation modes • Deploying inventory • Investments in technology that support logistics activities Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 10

Connecting Strategy to Financial Performance (6 of 8) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 11

Connecting Strategy to Financial Performance (7 of 8) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 12

Connecting Strategy to Financial Performance (8 of 8) • Logistics function can positively affect the financial outcome of an organization by designing a strategy to optimally support the requirement of the business. Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 13

Basic Financial Terminology (1 of 4) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 14

Basic Financial Terminology (2 of 4) Figure 3. 1: Example Income Statement 2012 Empty $200, 000 Empty $130, 000 Empty $70, 000 Transportation cost $6, 000 Empty Warehousing cost $3, 000 Empty Inventory carrying cost $1, 000 Empty Other operating $30, 000 Empty Total operating cost $40, 000 Empty $30, 000 Interest Empty $11, 000 Taxes Empty $6, 000 Empty $13, 000 Sales Cost of goods sold Gross Margin Earnings Before Interest and Taxes Net income Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 15

Basic Financial Terminology (3 of 4) • 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 longterm 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 16

Basic Financial Terminology (4 of 4) Figure 3. 2: Example Balance Sheet 2012 Empty Assets Cash $20, 000 Accounts receivable $35, 000 Inventory $15, 000 Total current assets $70, 000 Net fixed assets $80, 000 Total assets $150, 000 Liabilities Current liabilities $60, 000 Long-term debt $30, 000 Total liabilities $90, 000 Shareholder’s Equity $60, 000 Total Liabilities and Equity $150, 000 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 17

Strategic Profit Model (1 of 5) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 18

Strategic Profit Model (2 of 5) • 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 • Return On Investment (ROI) • common measure of organizational financial success • Return On Net Worth (RONW) • measures profitability of funds invested in the business Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 19

Strategic Profit Model (3 of 5) • Return On Assets (ROA) • Indicates what percentage of every dollar invested in the business is ultimately returned to the organization as profit • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 20

Strategic Profit Model (4 of 5) Figure 3. 3: Strategic Profit Model Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 21

Strategic Profit Model (5 of 5) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 22

Logistics Connections to Net Profit Margin (1 of 2) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 23

Logistics Connections to Net Profit Margin (2 of 2) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 24

Logistics Connections to Asset Turnover (1 of 2) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 25

Logistics Connections to Asset Turnover (2 of 2) • Inventory can represent a significant part of a firm’s current assets • Accounts receivable is the amount of money customers owe to an organization Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 26

Balanced Scorecard (1 of 2) • Balance scorecard (BSC) is a strategic planning and performance management system used in industry, government, and nonprofit organizations. Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 27

Balanced Scorecard (2 of 2) • 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) Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 28

Logistics Activity Measures (1 of 2) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 29

Logistics Activity Measures (2 of 2) • 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 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 30

31 Next Week • Chapter 4 Copyright © 2015, 2012, 2009 Pearson Education, Inc. All Rights Reserved 31