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Chapter 3 Value and logistics costs. Where does value come fromHow can logistics costs be presentedActivity-based costingA balanced measurement portfolioSupply.

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Presentation on theme: "Chapter 3 Value and logistics costs. Where does value come fromHow can logistics costs be presentedActivity-based costingA balanced measurement portfolioSupply."— Presentation transcript:

1 Chapter 3 Value and logistics costs

2 Where does value come fromHow can logistics costs be presentedActivity-based costingA balanced measurement portfolioSupply chain operations reference model Content

3 Where does value come from Key issues 11 How can shareholder value be defined? 22 What is economic value added, and how does it help in this definition?

4 Where does value come from Business objectives Business objective ProfitMarket share Shareholde r value Social value

5 Where does value come from Concepts about shareholder value –Comparable investment –ROI (Return on investment) –Sales –Costs –Working capital (营运资本) –Cash and debtors (借方,债务人) –Creditors (贷方,债权人) –Fixed assets

6 Sales revenue Costs - Profit Capital employed Inventory Cash and debtors + Creditors Fixed assets + - Return on capital employed Working capital ÷ Sales revenue - Costs Inventory + Cash and Debtors - Creditors + Fixed assets ROI =

7 Where does value come from Profitability = Profit / Sales Asset utilization = Sales / Employed investment ROI is underpinned by two main drivers: Increased profitability Increased asset utilization × ROI

8 Where does value come from Level 1Level 2Level 3Level 4 ROI Net Profit Sales Production costs / Sales Pay costs / sales Materials / Sales Selling costs / SalesPay costs / Sales Administration costs / SalesPay costs / Sales Sales Total assets Fixed assets / Sales Property / Sales Plant / Sales Vehicle / Sales Current assets / Sales Inventory / Sales Debtors / Sales Cash / Sales ROI and its key drivers

9 Where does value come from Key time- related ratios Average inventory turnover Average settlement period for debtors Average settlement period for creditors

10 Case study: The Wal-Mart effect In 1987, Wal-Mart had a market share of just 9 percent but was 40 percent more productive than its competitors as measured by real sales per employee. By 1995, it commanded a market share of 27 percent and had widened its productivity edge to 48 percent. Competitors began to adopt Wal-Mart’s innovations in earnest in the mid-1990s. From 1995 to 1999, Wal-Mart improved its own productivity by an additional 22 percent.

11 Case study: The Wal-Mart effect Wal-Mart was among the first retailers to use computers to track inventory (1969), just as it was one of the first to adopt bar codes (1980), EDI for better coordination with suppliers (1985), and wireless scanning guns (late 1980s). These investments, which allowed Wal-Mart to reduce its inventory significantly and to reap savings, boosted its capital productivity and labor productivity. Wal-Mart’s productivity edge stems from managerial innovations that improve the efficiency of stores. Employees who have been cross-trained, for instance, can function effectively in more than one department at a time. Information technology investments Managerial innovation

12 Where does value come fromHow can logistics costs be presentedActivity-based costingA balanced measurement portfolioSupply chain operations reference model Content

13 How can logistics costs be represented 11 What are the various ways of cutting up the total cost ‘cake’? 22 What are the relative merits of each? Key issues

14 How can logistics costs be represented Problems with traditional cost accounting as related to logistics (Christopher, 1998) –The true costs of servicing different customer types, channels and market segments are poorly understood. –Costs are captured at too high at a level of aggregation. –Costing is functionally oriented at the expense of output. –The emphasis on full cost allocation to products ignores customer costs

15 How can logistics costs be represented Three ways to cost cube

16 How can logistics costs be represented Fixed / Variable costs Volume of activity Fixed cost Volume of activity Variable cost

17 How can logistics costs be represented Fixed / Variable costs Volume of activity Cost or revenue Sales revenue Variable cost Fixed cost Total cost Break-even point

18 How can logistics costs be represented Fixed / Variable costs Cost or revenue Volume of activity Fixed cost High variable cost Total cost Sales revenue Break-even point Cost or revenue Volume of activity Fixed cost Low variable cost Total cost Sales revenue Break-even point

19 How can logistics costs be represented Direct / Indirect costs Direct costs Direct labor Direct materials Whether the cost can be directly allocated to a given product Indirect costs (overheads) Managing director’s salary Rent rates Administration expenditure

20 How can logistics costs be represented DPP (Direct product profitability) method Direct / Indirect costs Gross sales for product group Less product-specific discounts and rebates Net sales by product Less direct costs of product Gross product contribution Less product-based marketing expenses Product-specific direct sales support costs Less product-specific direct transportation costs Less product-attributable overheads Direct product profitability Sourcing costs Operations support Fixed-assets financing Warehousing and distribution Inventory financing Order, invoice and collection processing

21 How can logistics costs be represented Engineered / Discretionary costs Engineered costs Input-output relationship Discretionary costs Example Quality cost prevention appraisal Internal and external failure

22 Where does value come fromHow can logistics costs be presentedActivity-based costingA balanced measurement portfolioSupply chain operations reference model Content

23 Activity-based costing Key issues 11 What are the shortcomings of traditional cost accounting from a logistics point of view? 22 How can costs be allocated to processes so that better decisions can be made?

24 Today’s businesses are working in an increasingly complex environment. Use of Advanced Technology Product Life Cycle Product Complexity Channels of Distribution Quality Requirements Product Diversity Activity-based costing

25 Criticisms of Traditional Cost Allocation Assumes all cost is volume-related Departmental focus, not process focus Focus on costs incurred, not cause of costs Activity-based costing

26 Conventional Costing Total Cost = Material + Labour+ Overheads Overheads are allocated to the products on volume based measures e.g. labour hours, machine hours, units produced Will this not distort the costing in the new environment ? ABC provides an Alternative. Activity-based costing

27 Allocation of indirect costs based on causal activities Results in better allocation Does not provide “true” cost ABC Purpose

28 Traditional allocation method Activity-based allocation method CostsProducts CostsProductsActivities First stageSecond stage Activity-based costing

29 When is ABC Most Useful? High Overheads Product Diversity or Multiple Products Customer Diversity Service Diversity Activity-based costing

30 Example Production lineABCDTotal Machine hours8,000 32,000 No. of changeovers Equal allocation250, ,000 Allocation by activity500,000300,000150,00050, ,000 Difference250,00050, , ,0000

31 Activity-based costing Cost time profile (CTP) transport storage processing sort loading delivery

32 Where does value come fromHow can logistics costs be presentedActivity-based costingA balanced measurement portfolioSupply chain operations reference model Content

33 A balanced measurement portfolio Financial Operation FuturePast Traditional Financial Operation FuturePast Balanced

34 A balanced measurement portfolio

35 Where does value come fromHow can logistics costs be presentedActivity-based costingA balanced measurement portfolioSupply chain operations reference model Content

36 Supply chain operation reference model

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