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CHAPTER 3 Strategic and Financial Logistics © Pearson Education, Inc. publishing as Prentice Hall.

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Presentation on theme: "CHAPTER 3 Strategic and Financial Logistics © Pearson Education, Inc. publishing as Prentice Hall."— Presentation transcript:

1 CHAPTER 3 Strategic and Financial Logistics © Pearson Education, Inc. publishing as Prentice Hall

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 become aware of some of the more common measures of logistics performance © Pearson Education, Inc. publishing as Prentice Hall 3-2

3 Strategic and Financial Logistics Key Terms Assets Asset turnover Balanced scorecard (BSC) Balance sheet Cost leadership strategy Differentiation strategy Expenses (costs) Focus strategy © Pearson Education, Inc. publishing as Prentice Hall 3-3

4 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) © Pearson Education, Inc. publishing as Prentice Hall 3-4

5 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. © Pearson Education, Inc. publishing as Prentice Hall 3-5

6 Connecting Strategy to Financial Performance Three generic strategies that can be pursued by an organization –Cost leadership strategy –Differentiation strategy –Focus strategy © Pearson Education, Inc. publishing as Prentice Hall 3-6

7 Connecting Strategy to Financial Performance Functional level strategies exist in: –Marketing –Finance –Manufacturing –Logistics © Pearson Education, Inc. publishing as Prentice Hall 3-7

8 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 © Pearson Education, Inc. publishing as Prentice Hall 3-8

9 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 –Manufacturing Strategic decisions by manufacturing to implement just-in-time system would influence logistics decisions in warehousing, transportation and inventory management © Pearson Education, Inc. publishing as Prentice Hall 3-9

10 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. © Pearson Education, Inc. publishing as Prentice Hall 3-10

11 Basic Financial Terminology Income statement shows for a period of time: –Revenues –Expenses –Profit Also referred to as a profit and loss (P&L) statement © Pearson Education, Inc. publishing as Prentice Hall 3-11

12 Figure 3-1: Example Income Statement © Pearson Education, Inc. publishing as Prentice Hall 3-12 Sales $200,000 Cost of Goods Sold $130,000 Gross Profit Margin $70,000 Transportation Cost $6,000 Warehousing Cost $3,000 Inventory Carrying Cost $1,000 Other Operating Costs $30,000 Total Operation Costs $40,000 Earnings before interest and taxes $30,000 Interest $11,000 Taxes $6,000 Ne Income $13,000

13 Basic Financial Terminology Balance sheet reflects at any given point in time: –Assets –Liabilities –Owner’s equity © Pearson Education, Inc. publishing as Prentice Hall 3-13

14 Figure 3-2: Example Balance Sheet AssetsLiabilities Cash$20,000 Current Liabilities$60,000 Accounts Receivable$35,000 Long-term Debt$30,000 Inventory$15,000Total Liabilities$90,000 Total Current Assets$70,000Shareholders' Equity$60,000 Net Fixed Assets$80,000Total Liabilities and Equity$150,000 Total Assets$150,000

15 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 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 © Pearson Education, Inc. publishing as Prentice Hall 3-15

16 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 © Pearson Education, Inc. publishing as Prentice Hall 3-16

17 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 © Pearson Education, Inc. publishing as Prentice Hall 3-17

18 Figure 3-3: Strategic Profit Model 3-18 Sales Cost of Goods Sold Variable Expenses Fixed Expenses Inventory Accounts Receivable Other Current Assets Gross Margin Total Expenses Current Assets Fixed Assets Net Profit Sales Net Profit Margin Sales Total Assets Asset Turnover Return on Assets

19 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 © Pearson Education, Inc. publishing as Prentice Hall 3-19

20 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 © Pearson Education, Inc. publishing as Prentice Hall 3-20

21 Logistics Connections to Asset Turnover Asset turnover= total sales/total assets Inventory is the most relevant logistics asset Logistics decisions can influence speed at which invoices are paid – accounts receivable © Pearson Education, Inc. publishing as Prentice Hall 3-21

22 Balanced Scorecard Balance scorecard (BSC) is a strategic planning and performance management system used in industry, government, and nonprofit organizations. © Pearson Education, Inc. publishing as Prentice Hall 3-22

23 Balanced Scorecard Management should evaluate their businesses from four perspectives –Customers –Internal business processes –Learning and growth –Financial Forces managers to look beyond traditional financial measures (more holistic approach) © Pearson Education, Inc. publishing as Prentice Hall 3-23

24 Common Logistics Measures 5 types of performance in Logistics Management Systems: Asset management Cost Customer service Productivity Logistics quality © Pearson Education, Inc. publishing as Prentice Hall 3-24

25 Common Logistics Measures Transportation Warehousing Inventory Design and implementation of measures © Pearson Education, Inc. publishing as Prentice Hall 3-25

26 Transportation Measures Focus: Labor Cost Equipment Energy Transit time © Pearson Education, Inc. publishing as Prentice Hall 3-26 Measurements: ROI Outbound freight costs Transportation labor productivity On-time deliveries In-transit damage frequency

27 Warehousing Measures Focus: Labor Cost Time Utilization Administration © Pearson Education, Inc. publishing as Prentice Hall 3-27 Measurements: ROI Warehouse order processing costs Warehouse labor productivity Picking errors

28 Inventory Measures Focus: Service levels Inventory investment © Pearson Education, Inc. publishing as Prentice Hall 3-28 Measurements: Obsolete inventory Inventory carrying costs Inventory turnover Information availability

29 Design and Implementation of Measures © Pearson Education, Inc. publishing as Prentice Hall 3-29 Tailored to organization and level of decision making Data collection and analysis Behavioral issues (change management) Frequent communication and constant updating

30 Case 3-1 Brant Freezer Co. Located in Fargo, N. Dakota 1-30 Company Facts: Industrial freezers (one size) Product Facts: Market Facts: Distributed through public warehouses in Atlanta, Boston, Chicago, Denver, Los Angels, Portland, and St. Louis Fargo warehouse

31 Case 3-1 Brant Freezer Co Units ShippedWarehouse Costs 12 mo.5 mo.12 mo.5 mo. Atlanta17,4314,080$156,830$35,890 Boston6,9203,061$63,417$27,915 Chicago28,10414,621$246,315$131,618 Denver3,0211,005*$28,019$8,600* Fargo2,016980$16,411$8,883 LA16,49111,431$151,975$109,690 Portland8,3334,028$73,015$36,021 St. Louis5,9212,331$51,819$23,232 * Denver warehouse closed by strike march 4-19, 2009

32 Case 3-1 Brant Freezer Co ,010 Units ShippedWarehouse Costs 12 mo.5 mo.12 mo.5 mo. Atlanta18,0007,035$178,000$40,228 Boston7,2003,119$7,300$29,416 Chicago30,00015,230$285,000$141,222 Denver3,1001,421$31,000$14,900 Fargo2,000804$17,000$9,605 LA17,0009,444$176,000$93,280 Portland9,0004,600$85,000$42,616 St. Louis8,0002,116$56,000$19,191

33 Case 3-1 Brant Freezer Co Income Statement 2009 Sales $ 4,003,450 Cost of Goods Sold $ 937,000 Gross Profit Margin $ 3,066,450 Transportation Cost $ 657,322 Warehousing Cost $ 735,982 Inventory Carrying Cost $ 567,987 Other Operating Costs $ 345,876 Total Operation Costs $ 2,307,167 Earnings before interest and taxes $ 759,283 Interest $ 110,000 Taxes $ 69,000 Ne Income $ 580,283

34 Case 3-1 Brant Freezer Co Balance Sheet 2009 AssetsLiabilities Cash$706,034 Current Liabilities$1,678,589 Accounts Receivable$355,450 Long-term Debt$398,060 Inventory$1,590,435Total Liabilities$2,076,649 Total Current Assets$2,651,919Shareholders' Equity$1,378,326 Net Fixed Assets$803,056Total Liabilities and Equity$3,454,975 Total Assets$3,454,975

35 Case 3-1 Brant Freezer Co. Questions 1.When comparing performance during the first five months of 2010 with performance in 2009, which warehouse shows the most improvement? 2.When comparing performance during the first five months of 2010 with performance in 2009, which warehouse shows the poorest change in performance? 3.When comparisons are made among all eight warehouses, which one do you think does the best job for the Brant Company? What criteria did you use? Why?

36 Case 3-1 Brant Freezer Co. Questions 4.J. Q. is aggressive and is going to recommend that his father cancel the contract with one of the warehouses and give that business to a competing warehouse in the same city. J. Q. feels that when word of this gets around, the other warehouses they use will “shape up.” Which of the seven should J. Q. recommend be dropped? Why? 5.The year 2010 is nearly half over. J. Q. is told to determine how much the firm is likely to spend for warehousing at each of the eight warehouses for the last six months in Do his work for him.

37 Case 3-1 Brant Freezer Co. Questions 6.When comparing the 2009 figures with the 2010 figures shown in the table, the amount budgeted for each warehouse in 2010 was greater than actual 2009 costs. How much of the increase is caused by increased volume of business (units shipped) and how much by inflation? 7.Use the 2009 income statement and balance sheet to complete a Strategic Profit Model for J. Q. 8.Holding all other information constant, what would be the effect on ROA for 2010 if warehousing costs declined 10 percent from 2009 levels?

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