1. Chapter 3 Value and logistics costs

2. Content Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model

3. Where does value come from
Key issues 1
How can shareholder value be defined? 2
What is economic value added, and how does it help in this definition?

4. Where does value come from
Business objectives
Business objective
Profit
Market share
Shareholder 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. Inventory＋Cash and Debtors－Creditors＋Fixed assets
Sales revenue－Costs
Inventory＋Cash and Debtors－Creditors＋Fixed assets
ROI＝
Sales revenue
Costs －
Profit
Capital employed
Inventory
Cash and debtors ＋
Creditors
Fixed assets
Return on capital employed
Working capital ÷

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

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

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
Managerial innovation
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
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.

12. Content Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model

13. How can logistics costs be represented
Key issues 1
What are the various ways of cutting up the total cost ‘cake’? 2
What are the relative merits of each?

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
Direct / Indirect costs
DPP (Direct product profitability) method
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
Example
Engineered costs
prevention
Input-output relationship
Quality cost
appraisal
Internal and external failure
Discretionary costs

22. Content Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model

23. Activity-based costing
Key issues 1
What are the shortcomings of traditional cost accounting from a logistics point of view? 2
How can costs be allocated to processes so that better decisions can be made?

24. Activity-based costing
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

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

26. Activity-based costing
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.

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

28. Activity-based costing
Traditional allocation method
Activity-based allocation method
Costs
Products
Costs
Activities
Products
First stage
Second stage

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

30. Activity-based costing
Example
Production line A B C D
Total
Machine hours
8,000
32,000
No. of changeovers 50 30 15 5
100
Equal allocation
250,000
1000,000
Allocation by activity
500,000
300,000
150,000
50,000
Difference
-100,000
-200,000

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

32. Content Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model

33. A balanced measurement portfolio
Financial
Operation
Future
Past
Traditional
Balanced

34. A balanced measurement portfolio

35. Content Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model

36. Supply chain operation reference model

37. Supply chain operation reference model