1. APRIL 2018 - Presented by Dr. P Kilbourn DIPLOMA IN LOGISTICS MANAGEMENT TACTICAL LOGISTICS MANAGEMENT (TLMLMA2)

2. 2 AGENDA 1.Welcome 2.House rules 3.Learner Guide 4.Lecture 5.Assignment

3. 3 House Rules Please be considerate to others in class Please put cellphone on silent Do NOT take calls inside class Do NOT leave valuables unattended Please do not come late Please participate

4. 4 Learner Guide Read carefully for outcomes, assessment structure, etc. Includes assignment Learning guide was revised – check Ulink

5. Study Unit 1 Introduction to Tactical logistics management – Chapter 4 (Pienaar, et al)

6. 6 6 STUDY UNIT 1: Introduction to Tactical logistics management This study unit addresses the following four aspects: Tactical logistics activities Managing the goods flow Product supply chain processes Time management in supply chains

7. 7 7 Introduction Tactical logistics management refers to the arrangement and organisation required to ensure that desired products and information are made available to the customer at the designated time and place, in the required condition and quantity and at correct price… Tactical logistics management follows logistics strategy – which is led by mission, goals and objectives from strategic corporate management level Operating activities are therefore subordinate to logistics and corporate strategy

8. 8 8 Tactical logistics All activities are those that are undertaken to implement and organise functional supply chain activities:  Buying  Procurement of raw material, components, and activity in obtaining resources in SC  Making  Processing (Primary production, secondary manufacturing & assembly)  Moving  Transport and handling during forward & reverse flow  Storing  Carrying inventory at all transformation levels (Raw, WIP, finished)  Selling  All applied commercial activities

9. 9 9 Tactical logistics It is especially within the operational activities at tactical level that processes can be tailored to give the supply chain competitive advantage Managers on the Tactical Tier of the management hierarchy is responsible for the Implementation of operational activities Managers on Operational Tier of management is responsible for the Control of operational activities

10. 10 Tactical vs. Strategic logistics The tactical level (i.e. organisation and implementation) includes decisions that are updated any time between once every month and once a year. Strategic decisions may be made by company executives about the number and location of distribution centers to be operated. However, it is at a tactical level that decisions are made on how to distribute the products at the lowest cost Tactical management objectives normally strive to serve the combined strategic supply chain objective”: →Customer satisfaction

11. 11 Tactical logistics activities The main tactical management objectives in a supply chain are: Minimising time to convert orders into cash Minimising the total WIP in the supply chain Improving pipeline visibility Improving visibility of demand by each partner Improving quality Reducing costs Improving services

12. 12 Managing the goods flow Point of Consumption

13. 13 Managing the goods flow If finished goods are available in the finished goods store, the distribution function will deliver the goods to the customer (retailer / wholesaler…) If the finished goods are NOT available, the customer demand becomes part of the Master Production Schedule (MPS) The MPS is a time-phased plan which explicitly specifies how many of each end product the business intends to manufacture and when

14. 14 Managing the goods flow If the finished goods are NOT available, the customer demand becomes part of the Master Production Schedule (MPS) Production planning will place a works order on the production function, who will pick the components from the components store, assembles or manufactures the finished product and forwards to the finished goods store for distribution If components are not available in the components store, then Material Requirements Planning (MRP) program gets involved to place demand on Procurement function – via PO’s

15. 15 Managing the goods flow Where Inventory is kept Point of Consumption

16. 16 Managing the goods flow If components are not available in the components store, then Material Requirements Planning (MRP) program gets involved to place demand on Procurement function – via PO’s Procurement function (via MRP) converts the demand to raw materials requirement and places orders for raw materials against suppliers for delivery into the components store – to enable manufacture of finished product internally… MRP is mainly concerned with the scheduling of manufacturing activities and the associated inventory management

17. 17 Managing the goods flow Where inventory is kept Point of Consumption

18. 18 Material Requirement Planning (MRP) MRP Process: Begins by forecasting customer demand Customer demand is checked against existing inventories Remaining demand is broken down to component parts Component parts are scheduled against available production capacity, including those parts that must be purchased if any…) MRP process also identifies shortages that may occur due to capacity limitations or stock-outs…

19. 19 Material Requirement Planning (MRP) MRP Process: Updated at regular intervals, during which demand is forecasted and necessary adjustments made in order to fulfill this demand MRP requires considerable data capture (a) to accurately predict future demand and (b) for the scheduling of all component parts required to associated demand…

20. 20 Material Requirements Planning (MRP) MRP INPUTS: 1)Bill of Materials (BOM to identify the component parts required to fill demand 2)Master Production Schedule (MPS) which shows the quantity of each item required and when they are required 3)Opening inventory 4)Opening capacity 5)Lead time and lot sizing rules

21. 21 Material Requirement Planning (MRP) MRP OUTPUTS: 1)Purchase requirements 2)Manufacturing activity schedules 3)Expected shortages 4)Surplus components inventory 5)Available free capacity

22. 22 An MRP System* Master Production Schedule MRP Program Output and Reports Bill of Material File Inventory Status File Customer Orders Demand Forecasts

23. 23 Bill Of Material (BOM) File BOM –more than a list of parts to produce a final product BOM is a listing of all the raw materials, sub-assemblies, semi- finished, and other items needed SEQUENTIALLY as they should be added in the process to form the product Like a recipe – how a product is assembled

24. 24 Impact of lead time on the management of goods flow… Lead time in time units (h,s,d,w,m) 5 Time Units9 Time Units 11 Time Units

25. 25 Impact of lead time on the management of goods flow… The example above shows that an unplanned, unexpected customer order could have a lead time of 25 time units This means that in order to guarantee customer service levels for this example, sales need to be forecasted accurately 25 time units in advance The unlikelihood of accurate forecasts over and extended time period necessitates the use of logistics systems to accommodate the above situations The next sections investigate logistics concepts that can alter order lead times and introduce flexibility

26. 26 Product supply chain processes A. Push-based supply chain systems B. Pull-based supply chain systems C. Push-pull-based supply chain systems The above-mentioned supply chain processes are at the heart of manufacturing and inventory management The decision to adopt one of the above strategies will dramatically influence the way in which manufacturing and inventory systems are handled…

27. 27 Product supply processes Pull versus Push Pull approach is a “reactive” system, relying on customer demand to “pull” product through a logistics system. (e.g. Dell Computers) Push approach is a “proactive” system, and uses inventory replenishment to anticipate future demand. (e.g. FMCG products)

28. 28 Push-based supply chain processes Manufacturing decides when, and how much of a product will be produced and sent to storage Inputs: Long-term forecast of demand, present inventory position Forecasts are based on orders from wholesalers and retailers – will take much longer to respond to changes in end-user demand

29. 29 Push-based supply chain processes Delay in response to market changes may lead to inability to meet market demand, obsolescence of product for which demand has disappeared Variability in replenishment orders from retailers and wholesalers is larger than that of end-users, and this increased variability leads to the BULLWHIP effect: uncertainty i.t.o size of orders will lead to excess / insufficient buffer stock: Excess in inventory carrying cost (ICC) – inefficiency Stock-outs losses - ineffectiveness

30. 30 Bullwhip Effect 30

31. 31 The Bull-whip effect*

32. 32 Pushed based supply chains and the Bullwhip effect (p.60) The bullwhip effect is associated with a push system The increase in variability of replenishment orders as one moves upstream in the supply chain is known as the bullwhip effect This effect arises when members upstream in the supply chain are faced with a high degree of uncertainty about the timing and size of replenishment orders from downstream members The amplification of order sizes is greater than the variation in demand Buffer stocks (safety stocks) at each level in the supply chain makes the problem worse Order variation is greater upstream in the supply chain Uncertainty and batch ordering is the problem Everybody orders up to cover uncertainty

33. 33 Push-based supply chain processes Increased variability also specifically leads to: a)Bigger and more variable production batches b)Excessive inventories due to a need for huge safety stock c)Product obsolescence d)Unacceptable service levels due to stock-outs Due to difficulty to plan - Inefficient resource utilisation Transport planning not clearly definable in variable situation of demand Often high transport, Inventory and manufacturing costs due to need for emergency manufacturing change-overs

34. 34 Push-based supply chain processes Push systems do have the following benefits: Increased lot sizes during manufacturing Reduced transport cost due to freight consolidation during transport Large buffer stocks close to customers also reduce stock-out losses

35. 35 Pull-based supply chain processes Inputs: Customer orders – must be FAST! Warehouse decides when, and how much of a product will be required and when Manufacturing and distribution are demand-driven (rather than forecast), consolidated from actual customer orders True pull-based systems carry no inventory and have system that can process information (POS) quickly to the various supply-chain members

36. 36 Pull-based supply chain processes Impact: A decrease in order lead times due to ability to better anticipate incoming orders from the retailers Less inventory at the retailers, since inventory at retailers increase with order delivery lead times Reduced variability in the system, but specifically for manufacturers due to order/delivery lead-time reduction… Less inventory at the manufacturer due to the reduction in order/delivery lead-time variability

37. 37 Pull-based supply chain processes Reduced variability also specifically leads to: Substantial decrease in system inventory levels Enhanced ability to manage resources Reduction in supply-cost when compared to equivalent push-based supply chains

38. 38 Pull-based supply chain processes Pull-based systems do have the following issues: Often difficult to implement when lead times are so long that it becomes unrealistic to respond to demand information Often more difficult to take advantage of economies of scale in manufacturing and transport The advantages and disadvantage of push- and pull- supply chain strategies have led firms to seek new supply chain tactics that enjoy the benefits of both. This often entails a combined push- pull supply chain configuration…..

39. 39 Flow processes in the supply chain* 39

40. 40 Push-Pull boundaries vary* 40

41. 41 Push-pull-based supply chain processes Upstream stages are push-based, downstream stages are pull-based The point where push- becomes pull is known as the order decoupling point or the push-pull boundary The pull-phase normally consists of stages that contribute towards product differentiation

42. 42 Push-pull-based supply chain processes Imagine a manufacturer of cell-phones, with manufacturing based on forecast of actual demand…. The push phase would be the manufacturing of all components up JUST before the differentiation per product The pull phase will be represented by ACTUAL orders / customer demand Decoupling point is at the start of final assembly per order (Postponement)

43. 43 Push-pull-based supply chain processes Demand for a COMPONENT is the sum of the demand for ALL finished products that use the component Aggregate forecasts are more accurate than individual forecasts, therefore uncertainty in component forecast is smaller than for that of finished product demand Postponing the decoupling point (where push becomes pull) to the latest point of product differentiation, based on actual demand for the specific product reduces inventory of components and reduces safety stock requirements

44. 44 Identifying the appropriate supply chain approach Box 2 and 4 – mismatch between the approaches suggested by the two inputs – The point where one approach moves into the next must be carefully considered!! Furniture is Pull-Push approach where manufacturing is based on pull-based approach according to orders received; but delivery is push-based – using FIXED schedules to achieved economies of scale

45. 45 Identifying the appropriate supply chain approach

46. 46 Customer order decoupling point position determines the supply chain approach Different approaches are needed for different industries and market conditions Decoupling point is the furthest upstream point in the supply chain where a specific customer order affects inventory-level decisions directly In push-pull strategy, interaction happens only at the customer decoupling point generally through buffer stock Buffer stock fulfills different roles in different positions in the supply chain Different ways in which supply chain can respond to customer demand…. Push-pull-based supply chain processes

47. 47 Implementing a supply chain approach - Customer order decoupling points PUSHPULL

48. 48 Implementing a supply chain approach - Customer order decoupling points PUSHPULL

49. 49 Pick and ship to stock: Characteristics: Swift delivery to customer, inventory MUST be available to avoid substitution Decoupling point – distribution center Industry – FMCG Challenge: demand management, forecasting of independent demand Risks: inventory levels, short – poor customer service, surplus – obsolescence or demand evaporation Implementing a supply chain approach - Customer order decoupling points

50. 50 Implementing a supply chain approach - Customer order decoupling points PUSHPULL

51. 51 Make to stock: Characteristics: finished goods held at plant or warehouse inventory, display stock held with back-up at finished goods store Decoupling point – finished goods store Industry – Domestic appliances Challenge: demand management, forecasting of independent demand Risks: inventory levels, short – poor customer service, surplus – obsolescence or demand evaporation Implementing a supply chain approach - Customer order decoupling points

52. 52 Implementing a supply chain approach - Customer order decoupling points PUSHPULL

53. 53 Assemble to order: Characteristics: Key components are stocked, assembly when order is received, common where many finished products require same components, more pull than push, inventory is managed at sub-assembly level Decoupling point – finished goods store Industry – E.g.. Cell phone manufacturer / Laptops Challenge: Forecasting of demand at sub-assembly level, keeping assembly lead times short to create value for customers Risks: excess stocks, obsolescence of sub-assembly components due to changes in market Implementing a supply chain approach - Customer order decoupling points

54. 54 Implementing a supply chain approach - Customer order decoupling points PUSHPULL

55. 55 Make to order: Characteristics: trigger for manufacturing is customer order, push-pull where push is the minor part, more than 20% of value add happens after order is placed Decoupling point – components or sub-assembly manufacturing point Industry – Custom made furniture Challenge: Forecasting to replenish the sub-assemblies or components, balancing the capacities of the supply chain Implementing a supply chain approach - Customer order decoupling points

56. 56 Implementing a supply chain approach - Customer order decoupling points PUSHPULL

57. 57 Purchase and make to order: Characteristics: Manufacturing, packaging and all other aspects of order only commences once a FIRM order has been received, pure pull process, components are only ordered once the order is received – no inventory is carried Decoupling point – Raw material store Industry – Manufacturing where components are VERY EXPENSIVE Challenge: Ensuring stock of components is available at time of order Risks: never knowing what components to have available due to nature of approach, availability shifts to supplier network…. Implementing a supply chain approach - Customer order decoupling points

58. 58 Implementing a supply chain approach - Customer order decoupling points PUSHPULL

59. 59 Engineer to order: Characteristics: Manufacturing of components and final products is an engineering process WITH the customer with exact instructions and requirements, not repeat orders, no economies of scale, individual PROJECTS are priced independently Decoupling point – Raw material supplier level Industry – products that must be engineered to customer requirement – Airplanes! Challenge: requires fully integrated system to be able to give customer a lead time that is accurate Risks: customer service is critical Implementing a supply chain approach - Customer order decoupling points

60. 60 Supply chain responses to customer demands – Table 4.2

61. 61 Concept of service levels can be used in many manufacturing or inventory-based situations: Pick and ship-to-stock and make to stock systems (PUSH) the service level is the % of products / orders that are immediately available from inventory Assemble-to-order, make-to-order, purchase and make-to-order, and engineer to order (PULL) the service level normally translates to on-time delivery Improving the on-time delivery can be done by: Improve reliability of promise of on-time by reducing production-cycle and order lead times. Time compression opportunities during production cycle Assessment of business response service level

62. 62 Time management in supply chains The importance of time: Time-based competition is one of the major factors that is forcing companies to participate in supply chain management initiative Reducing cycle lead time is the result of coordinated supply chain management efforts Reliability or consistency of cycle lead time required continuous improvement in today’s competitive market Manufacturing quality no longer the differentiator – Cycle time is critical

63. 63 Time management in supply chains Causes of long production cycle and order lead times: Ambiguous goals and objectives Batching (ICC to keep stock at critical points should not weigh heavier than the revenue opportunities created…) Excessive controls (multiple checks and signatures should add value…) Lack of information (from within organisation and other partners)

64. 64 Time management in supply chains Causes of long production cycle and order lead times (continued): Lack of synchronisation in materials movement (between organisation and customer) Lack of proper training (training to ensure staff focus on reducing cycle time together..) Limited co-operation (Cycle time reduction is a function of all supply chain members and ALL should be committed) Limited co-ordination (inter-firm is critical to provide supply chain processes that add value)

65. 65 Time management in supply chains Causes of long production cycle and order lead times (continued): Non-value-added activities (eliminate where possible… Check at receiving or use credible supplier?) Outdated information technology (EDI, RF, manual or paper driven??) Poor communication (List of contacts in and between supply chain organisations can be very valuable tool) Poorly designed procedures and forms (some procedures and forms add time not value)

66. 66 Time management in supply chains Causes of long production cycle and order lead times (continued): Repeating process activities (Quality issues adds DOUBLE time… must be avoided during first attempt) Serial versus parallel operations (Opportunities to manufacture components in parallel or concurrently to get to final assembly FASTER must be explored where possible…) Waiting (In some cases the waiting time exceeds the total process step times when added together…. Issue - Visibility / poor process step integration / lack of information??)

67. 67 Example: Airbus A380 – cancellation of orders example

68. 68 Airbus A380 Fortune Magazine 2007

69. 69 Airbus A380 Singapore Airlines first order Late delivery Cancelled orders from FedEx, UPS Increased orders for Boeing

70. 70 Airbus A380: Emirates compromises January 16, 2007 Dubai-based Emirates expects Airbus to take a "massive write- off" after the two sides negotiate late charges for delayed deliveries of the Airbus A380 superjumbo. "I am sure we will come to a compromise, which Airbus will take as a massive write-off," Emirates President Tim Clark said in this week's issue of Flight International magazine. "We now have a figure, and in the next few weeks we will begin talking," he said. Emirates has ordered 43 of the USD$300 million planes, making it by far the largest buyer of the plane, whose delay has triggered demands for late fees to be paid to carriers, which must make alternative plans until the aircraft arrive.

71. 71 Airbus A380: Emirates compromises (continued) Trouble with the wiring of the mammoth double-deckers has delayed deliveries by about two years, and Singapore Airlines received the first one in late 2008. Emirates was originally meant to begin taking the planes in April 2006 but it was postponed to August 2008. Clark said Emirates grew by 14 percent in the year to April 2008, versus an estimated 30 percent if the A380s had been delivered on schedule. In October, Clark told reporters that the difference equated to a revenue shortfall of "hundreds of millions of dollars".

72. 72 Time management in supply chains (continued) Opportunities for production cycle and order lead- time reduction Requires effective co-ordination between: Selling Moving Manufacturing Storing and Buying activities

73. 73 Time management in supply chains (continued) When a product is ordered, the buy, make, move, and sell activities should be scheduled simultaneously, taking into account the schedule of the products that were ordered previously and the availability of external resources, such as raw material and order input suppliers… A REAL-TIME supply chain scheduling system is illustrated in fig. 4.5 The system enables the supply chain to meet customer demand in the shortest time and at the lowest cost by maximising the cooperation between the five activities of the supply chain….

74. 74 Real-time supply chain scheduling

75. 75 Time management in supply chains (continued) When an order is placed, the following questions must be answered ASAP: Can order be fulfilled from existing inventories, or nearest location than will not incur undue transport costs? Is manufacturing required, which facility is best positioned to manufacture from a cost/capacity perspective? Can transport partner add value through consolidating shipments or direct drops to customers?...

76. 76 Time management in supply chains (continued) Process time improvement approach proposed by Harrington: 1.Establish a time management team. 2.Understand given supply chain process and current cycle time and order lead time. 3.Identify opportunities for time reduction and on-time delivery improvement. 4.Develop and implement recommendations. 5.Measure process cycle time and lead time performance 6.Implement continuous improvement efforts.

77. Study Unit 2 Financial aspects of logistics and supply chain management – Chapter 5 (Pienaar, et al)

78. 78 Contents Introduction Part A: Introduction to financial management decision making Part B: Introduction to cost accounting and calculations for decision-making purposes

79. Part A: Introduction to financial management decision making Shareholder value Cost of equity Free cash flow Economic value added Value drivers Return on investment

80. Part B: Introduction to cost accounting and calculations for decision-making purposes Logistics costing and activity-based costing Marginal costing Cost-volume-profit analysis

81. 81 Learning outcomes Understand the concepts of shareholder value, cost of equity, free cash flow, economic value added and give a brief account of how these values are determined. Identify and describe the various drivers of value. Analyse and interpret a statement of financial position in terms of return on investment, profit margin and asset turnover. Describe the objectives of activity-based costing, marginal costing, cost structure calculation, cost-volume-profit analysis, breakeven analysis and explain how these values are determined. Solve examples of the various abovementioned concepts numerically and interpret your answers.

82. 82 5.2 Shareholder value Shareholder value is determined by the market value of a company’s shares. Investments by shareholders = Equity of the company Expected return on equity = Cost of Equity Management can increase the market value by either:  increasing and expediting the projected free cash flow of the company; or  reducing the risk of the company, thereby reducing the cost of equity.

83. 5.3. Cost of equity The return that shareholders require on their investment Shareholders require compensation for the risk of investing in that company Ce = Rf + Mrp Where: Ce = Cost of Equity Rf = Risk Free Rate Mrp = Market Risk Premium

84. 5.3. Cost of equity Risk-free rate Long–term government bond rates After tax rate Market risk premium refer to the average risk of the market the total expected return from market will vary refers to the difference between the expected rate of return on the market as a whole that shareholders require and the risk-free rate of return over the same period

85. 5.3. Cost of equity The beta factor return required for an investment in an individual share might be higher or lower than the market return depending on the risk Analyse individual share’s movement relative to market More volatile → higher the risk Beta factor represents relative movement Capital asset pricing model (CAPM) Model that calculates the return that investors require based on the risk they bear Ce = Rf + (ß x Mrp)

86. 5.4. Free cash flow Free cash flow is the cash flow from operating activities actually available for distribution to the shareholders. Net Operating Profit after Tax plus any non-cash adjustments shown on the statement of cash flows less investments in working capital and in property, plant and equipment To increase free cash flow, management needs to: increase the profit after tax; decrease the investment in working capital; and decrease the investment in property, plant and equipment.

87. 5.4. Free cash flow Expedite free cash flow Increase the present value of the discounted free cash Time value of money The closer the cash flow is to the present date, the higher the present value

88. 88 Advise* You need a financial/business calculator or Excel The following websites can assist: https://financial-calculators.com/present-value-calculator http://www.investinganswers.com/education/time-value-money/how- calculate-present-value-using-excel-or-financial-calculator-2138

89. 89 https://financial-calculators.com/present-value-calculator

90. 90 Present value Future cash flow 13.2%After 1 yearAfter 2 yearAfter 3 yearAfter 4 yearAfter 5 year R 1 0.883392226 0.780381825 0.689383238 0.608995793 0.537982149 3.500135 5.11. Worked Example 6%+ (1,2x6%) = 13,2%

91. Footer91 CAPM Present value Future cash flow 13.2%After 1 yearAfter 2 yearAfter 3 yearAfter 4 yearAfter 5 year R 40,000,000 R 35,335,689 R 31,215,273 R 27,575,330 R 24,359,832 R 21,519,286 R 140,005,409 Present value of the terminal valueR 215,192,860 Value of Trans Country Ltd at valuation dateR 355,198,269 Value of the shareR 35.52 5.11. Worked Example

92. Economic value added Economic value added (EVA) is a residual income measure that subtracts the cost of capital employed from the operating profits generated. EVA = NOPAT – CCE

93. 93 Market Value Add (MVA) MVA = share price x shares issued minus book value of capital employed In other words: MVA measures the difference between the market value of the firm and the amount of Capital invested. 93

94. Value drivers Revenue Operating costs Tax Working capital Property, plant and equipment

95. Value drivers Revenue increase the volume of sales / maximise sales Made difficult by:  Competition in the market (threat of new entrants)  Substitute products  Bargaining power of buyers How do we retain customers or increase sales?  reliable service  meet customers requirement  Satisfied customers attract other customers and/or place larger orders

96. Value drivers Operating costs All costs Budgets Gross margin:  (Revenue less COGS) / Revenue Net profit:  Gross profit less expenses  Expenses: Primary Activities Support Activities Tax

97. 97 Working Capital Cash; Accounts receivable, Inventories

98. Return on investment Profit margin Asset Turnover

99. 99 Text book example of Income Statement p. 82*

100. Return on investment Profit margin Asset Turnover Also called: Financial Leverage

101. 101 Strategic Profit Model (or Du Pond Analysis) Free template Downloads available on Google* Total Assets / Equity

102. 102 5.11 Worked Examples (example no.2) – Current ROE (RAS Ltd 2010)* Includes Interest

103. 103 5.11 Worked Examples (example no.2) – ROE up by 20% (RAS Ltd)* One option: Reduced by 80 000 a x 1.8 = 9.6 a = 9.6/1.8 a = 5.33% a x 2.5 = 24 a = 24/2.5 a = 9,6

104. Part B: Introduction to cost accounting and calculations for decision-making purposes Logistics costing and activity-based costing Marginal costing Cost-volume-profit analysis

105. Logistics costing and activity-based costing Logistics costing limitations of financial accounting and reporting? Activity-based costing (ABC) Is a refined costing system that assign costs to products (or services) based on the manner a product (or services) “causes” costs / (cost drivers) ABC process:  Identifying main activities  Allocating cost to activities (cost pools)  Determining cost drivers (causes)  Assigning costs to product/service (usage)

106. Activity-Based Costing

107. 107 5.11 Worked Example 3. Activity Based Costing NSU Ltd provides bodybuilding pharmaceutical products to pharmacies On Invoice: Cost of Product & Sales & Distr Costs 107

108. 108 5.11 Worked Example 3. Activity Based Costing

109. 109 5.11 Worked Example 3. Activity Based Costing

110. Marginal costing Only costs & benefits affected by decisions (i.e. Relevant costing) 1.Special-order decisions 2.Discontinuation of a department or product 3.Replacement of equipment 4.Choice of products where a limiting factor exists

111. Special-order decisions Lower than normal price Once-off orders to fill short-term space capacity Raw material (5kg @ R14)R70 Labour (2h @ R20) 40 Rental (Apportionment) 35 Packaging 10 Cost of 1 Unit: R155 Capacity 10 000 units Should they accept once-off order @ R140? Selling price is below cost price of manufacture!!

112. Special-order decisions Only consider costs & benefits that are affected. Raw material (5kg @ R14)R70 Labour Fixed labour – no add costs Rental Based on normal capacity Packaging Can’t be avoided R10 Marginal Cost of 1 Unit:R80 Marginal BenefitR60 (R140 – 80)

113. Choice of products where a limiting factor exists Fixed and Variable costs (know the difference!) Concept of contribution per unit (CU): CU = sales price per unit minus variable cost per unit Contribution of each sales unit makes in covering fixed costs Increasing profit Section 5.10 – Cost-Volume-Profit Analysis

114. Choice of products where a limiting factor exists Limiting- factor decisions: There may be a factor (resource) that limits the firm activities from satisfying demand for product / services Step 1:Identify main limiting factor Step 2: Calc contribution per unit Step 3: Calc contribution per limiting factor Step 4:Rank product Step 5:Calc profit-max production mix

115. Choice of products where a limiting factor exists - Example

116. Step 1: Identify main limiting factor Determine how much of each resource is needed

117. Choice of products where a limiting factor exists - Example Step 2: Calc contribution per unit Step 3: Calc contribution per limiting factor Step 4:Rank product

118. Choice of products where a limiting factor exists - Example Step 5:Calc profit-max production mix

119. Cost-volume-profit analysis Effect that changes in variable & fixed costs, sales price and sales volume have on profitability Reduction sales volume = reduction in profit  CVP assist in determining at what point firm starts making a loss  LM strategies have substantial impact on sales and FC  E.g. Service levels, # and location of warehouses

120. Cost-volume-profit analysis Contribution approach to CVP analysis The Breakeven Point where total sales and total costs are even and the firm shows neither profit or loss BEP (in units) = Fixed costs / contribution per unit BEP (sales value) = number of units X sales price / unit

121. Cost-volume-profit analysis Units sold increase:  sales revenue ↑  total variable cost & contribution ↑ proportionally.  total fixed costs remains constant Must sell enough units to earn contribution to cover fixed costs Sale Price / Unit= R80 Variable costs / unit= R30 Fixed costs / period= R200 Expected sales= 6 units Contribution / unit= R50 (R80 – 30)

122. Cost-volume-profit analysis Helpful in determining feasibility of new product/service  if less products will be sold than units required to break even probably running at loss, not feasible

123. Contribution approach to cost-volume-profit analysis Margin of safety Contribution of units above BE units represents Profit  number of units the firm’s sales can decrease before incurring a loss (better expressed as a percentage of sales) = (total sales – breakeven sales)/ total sales X 100% = (6 units – 4 units) / 6 units x 100% = 33,3% Sales to achieve a target profit How many units must we sell to cover fixed cost and required profit? = (fixed cost + target profit) / contribution per unit = (R200 + R100) / R50 = 6 units

124. Contribution approach to cost-volume-profit analysis

125. Cost-volume-profit analysis in decision making Change in fixed cost how many facilities & logistics personnel? own or outsources transport (paid variable rate)?  will have notable effect on fixed & variable cost composition  In example: If FC increase to R250  BEP requires more units to 5 units (R250/R50)  Increase in losses if fewer or no units are sold  Margin of safety will decrease

126. Cost-volume-profit analysis in decision making Change in variable cost Increase in VC = reduction in contribution / unit  higher BEP  decelerate the pace at which profit is increased beyond the BEP Change in selling price Increase SP = contribution will increase  contribution covering FC & profit at accelerated pace  decreasing effect on sales volume  Price elasticity of products market/demand

127. Conclusion Questions

128. Study Unit 3 ORDER MANAGEMENT AND CUSTOMER SERVICE – Coyle et al (Additional Material - Learning Material)

129. 129 MANAGING SUPPLY CHAINS A LOGISTICS APPROACH 9e COYLE | LANGLEY | NOVACK | GIBSON Chapter 8 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

130. 130 Know the various elements of customer service and how they impact both buyers and sellers. Calculate the cost of a stockout. Understand the major outputs of order management, how they are measured, and how their financial impacts on buyers and sellers are calculated. Be familiar with the concept of service recovery and how it is being implemented in organizations today. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objectives After reading this chapter, you should be able to do the following:

131. 131 Influencing the Order This is the phase where an organization attempts to change the manner by which its customers place orders. Order Execution This occurs when the order is received. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

132. 132 is anything that touches the customer. This includes all activities that impact information flow, product flow, and cash flow between the organization and its customers. Philosophy Philosophy elevates customer service to an organization-wide commitment to providing customer satisfaction through superior customer service. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Service:

133. 133 Performance emphasizes customer service as specific performance measures that pervade all three definitions of customer service and address strategic, tactical, and operational aspects of order management. Activity treats customer service as a particular task that an organization must perform to satisfy a customer’s order requirements. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Service:

134. 134 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-1 Relationship Between Order Management and Customer Service

135. 135 is the art and science of strategically positioning customers to improve the profitability of the organization and enhance its relationships with its customer base. is not a new concept used by service industries. has not been widely used in the business-to business environment until lately. Customer action affects firm’s cost how customers order how much customers order what customers order when customers order an order ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Relationship Management

136. 136 Step 1: Segment the Customer Base by Profitability Step 2: Identify the Product/Service Package for Each Customer Segment Step 3: Develop and Execute the Best Processes Step 4: Measure Performance and Continuously Improve ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Four Basic Steps in the Implementation of the CRM

137. 137 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-1 Hypothetical Product/Service Offerings

138. 138 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-1 Relationship Between Order Management and Customer Service

139. 139 ABC measures the cost and performance of activities, resources, and cost objects. Resources are assigned to activities, then activities are assigned to cost objects based on their use Traditional cost accounting is well suited to situations where an output and an allocation process are highly correlated. Traditional cost accounting is not very effective in situations where the output is not correlated with the allocation base. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Activity-Based Costing

140. 140 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-2 Traditional Accounting versus Activity- Based Costing

141. 141 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-3 Distribution Center Process Flow Chart

142. 142 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-3 Distribution Center Space Allocation

143. 143 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-4 Distribution Center Labour Allocation

144. 144 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-4 Flow-Through Costing for a Distribution Center

145. 145 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-5 Customer Profitability Analysis

146. 146 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-5 Customer Profitability Analysis-cont.

147. 147 Protect Zone Those customers who fall into the “Protect” segment are the most profitable. Danger Zone Customers in the “Danger Zone” segment are the least profitable and incur a loss. The firm has has three alternatives for danger zone customers: (1) change customer interaction with firm so the customer can move to another segment (2) charge the customer the actual cost of doing business (3) switch the customer to an alternative distribution channel Build Zone These customers have a low cost to serve and a low net sales value, so the firm should maintain the cost to serve and build net sales value to help drive the customer into the “Protect” segment. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. One Method to Classify Customers by Profitability

148. 148 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-5 Customer Segmentation Matrix

149. 149 This system represents the principle means by which buyers and sellers communicate information regarding orders. Effective order management is key to operational efficiency and customer satisfaction. Logistics needs timely and accurate information relating to orders so many firms place order management in the logistics area. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Order Management

150. 150 Order to cash (OTC) or Order Cycle (outbound shipments) Thirteen principle activities constitute the OTC cycle as per SCOR model (page 276): D1.1 through D1.7 represent information flows D1.8 through D1.12 represent product flows D1.13 represents cash flow Order cycle all activities that occur from when an order is received until the product is received (lead time) Replenishment cycle refers to acquisition of additional inventory one firm’s order cycle is another’s replenishment cycle ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

151. 151 recent attention has centered on the variability or consistency of this process absolute length of time is important, variability is more important a driving force is safety stock, as absolute length of the order cycle will influence demand inventory ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Order To Cash Cycle:

152. 152 Many firms use Internet technology to capture order information for fulfillment systems for picking, packing, and shipping. Internet allows faster collection of cash by the seller. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. E-Commerce Order Fulfillment Strategies

153. 153 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-7 Order Cycle Length and Variability

154. 154 Customer service is the key link between logistics and marketing within an organization. Manufacturing can produce a quality product at the right cost and marketing can sell it, but if logistics does not deliver it when and where promised, the customer will not be satisfied. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Logistics/Marketing Interface

155. 155 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-8 The Traditional Logistics/Marketing Interface

156. 156 Three different perspectives on customer service philosophy as a set of performance measures as an activity Customer service needs to be put into perspective as including anything that touches the customer ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three different perspectives on customer service:

157. 157 (1) the core benefit or service, which constitutes what the buyer is really buying (2) the tangible product, or the physical product or service itself (3) the augmented product, which includes benefits, adds value for the customer ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three levels of a product

158. 158 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-9 Relationship Between Customer Service and ROI

159. 159 Time cycle time safe delivery correct orders Dependability more important than the absolute length of lead time Communications pretransaction transaction posttransaction Convenience service level must be flexible ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Four distinct dimensions of customer service:

160. 160 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-10 Example of the Frequency Distribution of Lead Time

161. 161 Orders received on time Orders received complete Orders received damage Orders filled accurately Orders billed accurately ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Customer Service Performance Measures from buyer’s view

162. 162 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-6 Elements and Measurement of Customer Service (sellers’ view)

163. 163 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-11 SCOR Process Model D1: Performance Metrics

164. 164 Stockout occurs when desired quantities are not available Four possible events: the buyer waits until the product is available the buyer back-orders the product the seller loses current revenue the seller loses a buyer and future revenue ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Expected Cost of Stockouts:

165. 165 Back Orders : occurs when a seller has only a portion of the products ordered by the buyer are created to secure the portion of the inventory that is currently not available Lost Sales : some customers will turn to alternative supply sources Lost Customers : customer permanently switches to another supplier ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

166. 166 back order lost sale lost customer identify potential consequences calculate each result’s expense or lost profit ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determining the Expected Cost of Stockouts

167. 167 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-12 Linking Order Management Outputs

168. 168 Did I get what I wanted? When I wanted it? In the quantity I wanted? Product availability is the ultimate measure of logistics and supply chain performance. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Product availability from customer perspective:

169. 169 four are widely used across multiple industries : internal metrics item fill rate line fill rate external metrics order fill rate perfect order ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Metrics

170. 170 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-7 Multiple Line Order

171. 171 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-13 Fill Rate and Inventory Investment

172. 172 Cash Flow Lost = (Number of Incomplete Orders Back- Ordered x Back Order Cost per Order) + (Number of Incomplete Orders Cancelled x Lost Pretax Profit per Order) + (Number of Incomplete Back-Ordered x Invoice Deduction per Order) ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Calculation for lost cash flow:

173. 173 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-8 Cash Flow Lost and Inventory Investment

174. 174 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-14 Cash Flow Lost/Inventory Investment Tradeoff

175. 175 the time that elapses from when a buyer places an order until receipt of the order absolute length and reliability of order cycle time influences both firm’s inventories, resulting in impacts on both revenues and profits for both organizations ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Order Cycle Time:

176. 176 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 8-15 Customer Wait Time (CWT)

177. 177 reduced standard deviation of order cycle time (OCT) on safety stocks Safety Stock = {Demand per Day x [OCT + (z x Standard Deviation of OCT)]} – (Demand per Day x OCT) determine the impact of the reduction of absolute order cycle time on demand inventories Demand Inventory Cost Reduction = Difference in Absolute OCT x Demand per Day x Cost per Unit x Inventory Carrying Cost Percent Two inventory cost reduction calculations ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

178. 178 Examines how well a seller can respond to a buyer’s needs. This “response” can take two forms: LOR can be how well a seller can customize its service offerings to the unique requirements of a buyer LOR can be how quickly a seller can respond to a sudden change in a buyer’s demand pattern. Logistics operations responsiveness (LOR) ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

179. 179 is critical to the logistics and order management processes underlies ability to provide quality product availability, order cycle time, logistics operations responsiveness, and post-sale logistics support timely and accurate information can reduce inventories in the supply chain and improve cash flow to all supply chain partners ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Logistics System Information:

180. 180 ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Table 8-10 Information Needed to Manage the Transportation Process

181. 181 The calculation used to measure the result on cash flow for decreasing the order-to-cash cycle is as follows: Cast Flow Increase = Invoice Value x (Cost of Capital/365) x Difference in Days in the Order-to- Cash Cycle ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Impact

182. 182 PLS can be the management of product returns from the customer to the supplier. The second form of PLS is product support through the delivery and installation of spare parts. Calculation to determine the spare part service cost is as follows: Service Cost = Penalty Cost + Lost Purchase Margin + Lost Support Margin ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Post-sale logistics support (PLS) can take two forms:

183. 183 No matter how well an organization plans to provide excellent service, mistakes will occur. Recovery requires a firm to realize that mistakes will occur and have plans in place to fix them. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Service Recovery

184. 184 Order management and customer service are not mutually exclusive; there is a direct and critical relationship between these two concepts. There are two distinct, yet related, aspects of order management: influencing the customer’s order and executing the customer’s order. Customer relationship management (CRM) is a concept being used today by organizations to help them better understand their customers’ requirements and understand how these requirements integrate back into their internal operations processes. Activity-based costing (ABC) is being used today to help organizations develop customer profitability profiles which allow for customer segmentation strategies. Order management, or order execution, is the interface between buyers and sellers in the market and directly influences customer service. Order management can be measured in various ways. Traditionally, however, buyers will assess the effectiveness of order management using order cycle time and dependability as the metric, while sellers will use the order-to-cash cycle as their metric. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Summary

185. 185 Customer service is considered the interface between logistics and marketing in seller organizations. The three definitions of customer service are: (1) as an activity, (2) as a set of performance metrics, and (3) as a philosophy. The major elements of customer service are time, dependability, communications, and convenience. Stockout costs can be calculated as back order costs, the cost of lost sales, and/or the cost of a lost customer. The five outputs from order management that influence customer service, customer satisfaction, and profitability are: (1) product availability, (2) order cycle time, (3) logistics operations responsiveness, (4) logistics system information, and (5) postsale logistics support. The concept of service recovery is being used by organizations today to help identify service failure areas in their order management process and to develop plans to address them quickly and accurately. ©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Summary, continued

186. 186