1. Strategic and Financial Logistics
CHAPTER 3
Strategic and Financial Logistics
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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
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3. Strategic and Financial Logistics Key Terms
Assets
Asset turnover
Balanced scorecard (BSC)
Balance sheet
Cost leadership strategy
Differentiation strategy
Expenses (costs)
Focus strategy
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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)
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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.
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6. Connecting Strategy to Financial Performance
Three generic strategies that can be pursued by an organization
Cost leadership strategy
Differentiation strategy
Focus strategy
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7. Connecting Strategy to Financial Performance
Functional level strategies exist in:
Marketing
Finance
Manufacturing
Logistics
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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
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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
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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.
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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
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12. Figure 3-1: Example Income Statement
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
Interest
$11,000
Taxes
Ne Income
$13,000
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13. Basic Financial Terminology
Balance sheet reflects at any given point in time:
Assets
Liabilities
Owner’s equity
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14. Figure 3-2: Example Balance Sheet
Assets
Liabilities
Cash
$20,000
Current Liabilities
$60,000
Accounts Receivable
$35,000
Long-term Debt
$30,000
Inventory
$15,000
Total Liabilities
$90,000
Total Current Assets
$70,000
Shareholders' Equity
Net Fixed Assets
$80,000
Total Liabilities and Equity
$150,000
Total Assets

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
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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
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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
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18. Figure 3-3: Strategic Profit Model
Sales
Gross
Margin
Cost of Goods
Sold
Net Profit
Net Profit
Margin
Variable
Expenses
Sales
Total Expenses
Return on Assets
Fixed Expenses
Sales
Inventory
Asset
Turnover
Current
Assets
Accounts Receivable
Total
Assets
Fixed
Assets
Other Current 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
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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
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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
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22. Balanced Scorecard
Balance scorecard (BSC) is a strategic planning and performance management system used in industry, government, and nonprofit organizations.
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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)
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24. Common Logistics Measures
5 types of performance in Logistics Management Systems:
Asset management
Cost
Customer service
Productivity
Logistics quality
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25. Common Logistics Measures
Transportation
Warehousing
Inventory
Design and implementation of measures
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26. Transportation Measures
Focus:
Labor
Cost
Equipment
Energy
Transit time
Measurements:
ROI
Outbound freight costs
Transportation labor productivity
On-time deliveries
In-transit damage frequency
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27. Warehousing Measures Focus: Measurements: Labor ROI Cost
Time
Utilization
Administration
Measurements:
ROI
Warehouse order processing costs
Warehouse labor productivity
Picking errors
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28. Inventory Measures Focus: Measurements: Service levels
Inventory investment
Measurements:
Obsolete inventory
Inventory carrying costs
Inventory turnover
Information availability
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29. Design and Implementation of Measures
Tailored to organization and level of decision making
Data collection and analysis
Behavioral issues (change management)
Frequent communication and constant updating
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30. Case 3-1 Brant Freezer Co. Company Facts: Located in Fargo, N. Dakota
Product Facts:
Industrial freezers (one size)
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. 2009 Units Shipped Warehouse Costs 12 mo.
Atlanta
17,431
4,080
$156,830
$35,890
Boston
6,920
3,061
$63,417
$27,915
Chicago
28,104
14,621
$246,315
$131,618
Denver
3,021
1,005*
$28,019
$8,600*
Fargo
2,016
980
$16,411
$8,883 LA
16,491
11,431
$151,975
$109,690
Portland
8,333
4,028
$73,015
$36,021
St. Louis
5,921
2,331
$51,819
$23,232
* Denver warehouse closed by strike march 4-19, 2009

32. Case 3-1 Brant Freezer Co. 2,010 Units Shipped Warehouse Costs 12 mo.
Atlanta
18,000
7,035
$178,000
$40,228
Boston
7,200
3,119
$7,300
$29,416
Chicago
30,000
15,230
$285,000
$141,222
Denver
3,100
1,421
$31,000
$14,900
Fargo
2,000
804
$17,000
$9,605 LA
17,000
9,444
$176,000
$93,280
Portland
9,000
4,600
$85,000
$42,616
St. Louis
8,000
2,116
$56,000
$19,191

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

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

35. Case 3-1 Brant Freezer Co. Questions
When comparing performance during the first five months of 2010 with performance in 2009, which warehouse shows the most improvement?
When comparing performance during the first five months of 2010 with performance in 2009, which warehouse shows the poorest change in performance?
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
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?
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
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?
Use the 2009 income statement and balance sheet to complete a Strategic Profit Model for J. Q.
Holding all other information constant, what would be the effect on ROA for 2010 if warehousing costs declined 10 percent from 2009 levels?