Ch. 4 Measuring logistics costs and performance Flashcards
Logistics activity requires resources, which are these?
- fixed capital
- working capital
What are traditionally the influences on decision-making?
- the bottom line (net income after taxes)
- cash flow
- resource utilization (fixed and working capital)
What’s the ROI equation? Expand further
hint: margin, asset turnover
- profit ÷ capital employed
- profit ÷ sales (margin) x sales ÷ capital employed (asset turn)
Companies typically focus on the margin to improve ROI, however a small net margin can improve ROI if…
capital turnover is improved. Excellent ROI can be gained if the productivity of capital is high. E.g.:
- limited inventory
- high sales per sq. ft.
- leased fixed assets (plants, machinery, buildings)
What are the major elements that impact ROI?
hint: Dupont chart
Profit
- Customer service > sales revenue
- Logistics efficiency > costs
Capital employed
- Pipeline management > cash
- Invoice accuracy > net receivables
- JIT logistics > inventory
- Asset deployment > fixed assets
Current assets - current liabilities =
working capital
How does logistics management impact assets on the balance sheet
Cash/receivables
- order cycle time
- order completion rate
- invoice accuracy
- Inventories > inventory
Property/plant/equipment
- Distribution facilities & equipment
- Plant and equipment
How does logistics management impact liabilities on the balance sheet
Current liabilities:
- Purchase order quantities (excessive materials purchased)
Debt & equity:
- Financing options for inventory, plant and equipment
What is the key measure of corporate performance?
Shareholder value:
- net present value of future cashflow
- economic value added (EVA)
How is cash flow determined?
Net operating income - tax - working capital investment - fixed capital investment = after-tax free cash flow
How is EVA determined?
hint: true cost of capital employed
profit after tax - true cost of capital employed
Net present value of EVA is known as ‘market value added’ (MVA) and represents…
the true value of a business to shareholders.
How is MVA determined?
(stock price x issues shares) - book value of total capital invested
What needs to be added to the ROI to determine the ROE?
Leverage: the equity multiplier
Total assets ÷ total equity
What needs to be added to the ROI to determine the ROE?
Leverage: the equity multiplier
Total assets ÷ total equity
EBIT (earnings before interest & tax) is an indicator of…
profitability of a company’s operations
Revenue - COGS - OE (operating expenses)
What does the asset turnover (net revenue/total assets) measure?
the efficiency of a company
Profitability (profit margin) x efficiency (asset turnover) x leverage (equity multiplier) =
Return on Equity
What are the basic drivers of shareholder value?
- Revenue growth (service/customer retention)
- Operating cost reduction (time compression/reduce non-value-adding activities)
- Working capital efficiency (balanced stock’s short pipelines)
- Fixed capital efficiency (leasing/outsourcing)
- Tax minimization (location of inventory)
The value of any strategy is inherently driven by 4 things…
hint: strategy should accelerate or enhance cash flow
- acceleration of cash flows
- increased level of cash flows
- reducing cash flow risk
- the residual business value
What is logistics management’s objective
Integrating resources across a pipeline, extending from suppliers to final customers
Why do traditional accounting systems distort profitability?
Because it has trouble allocating ‘shared’ or ‘indirect’ costs.
The process from order-to-cash are allocated to different departments and the borders can be unclear.
What costs are involved in the true cost of inventory?
- cost of capital
- storage and handling
- obsolescence
- damage & deterioration
- pilferage/shrinkage
- insurance
- management costs
What 4 strategies are there to servicing customers?
hint: net sales value & cost of service (high/low)
- Build
- Protect
- Danger zone
- Cost engineer