Measuring logistics costs and performance tom line lios and shareholder value © Logistics cost analysis © Thee of total cost analysis, © Princip istics costing © Customer profitability analysis 1 product profitability sl drivers and activity-t he costs of satisfying cu they are not abways fully traditional accounting costs raltier than cus by industry, acro: Ing product ry by company and as a propor nal just g e availability ~ thus it is important to understand the profit and supph cisions. Al the same tim oim of fixed capital and working oz ° s 10 ¢ considered oply chain strategies are devised, 8758 Logistics and the bottom line Today's lurbulent business envitonment has produced an ever greater awaren amongst managers of the linaneial dimension cf decision making, “The bottom line has become the driving force which. perhaps erroneously, determines the direction of the company. In some cases this has led to a limiting. and potentially dangerous. focus on the shorl term, Hence we fine! thal investment in brands, in R&D ang in tailed il there is no prospect of an immediate payback influence on Gecision making and management horizons is sh flow has become as much a desired goal of man- proiil e third financial dimension to cifically the use of fixed and workin Ince utilisation and 5 st organisations is sion making is res: apital. The pressute in m to improve the productivity of capital ~ to make the assets sweal’. In this regard it is usual to ullise the concept of return on investment (RON. Relurn cn investment is the ratio between the nel profit and tne capital that was employed fuce that profit, thus Rol= Profit Capital employed This ratio can be further expanded Profit Sales RO! = Profit, —__Sales__ Sales ~ Capital employed It will be seen that ROL is the product of two ratios: the first, protit/sales, being commonly referred to as the margin and the second, sales/capltal employed termed capital lurnover or asset turn. Thus to gain im nt on ROL one or other, or bolh, of these ratios must increase. Typically many companies will focus their main attent it can often be more effective to a of od cap F to boost ROI For example, many s net margins can lead to ited inventory, high sal owned and so on Figure 3.1 illustrates the opportuniti margins 9 high ent ways the mbination. The challenge te logis curve to the right he ways in which lo varied. Figure 3.2 bi for improvement th that very small ductivity of capital is high, &.g lim S per square feat, premises that are leased rather than that exist for boosting RO! threugh ether tums er both. Each ‘ise 5 management is to find ways of moving an impact on AOL are many and determining ROI and the potential LOGISTICS & SUPPLY CHAIN MANAGEMENTFigure 3.1 The impact of margin and asset turn on ROL (Margin) 20% RO! 15% ROI 10% RO! Sap Em (Asset turn) Figure 3.2 Logistics impact on ROL Profit efficiency = >| Costs Pipeline Return on tment Invo >] Net receiva re Net receiva Capital employ vu Inventory logistics Inventory Asset deployment ef Fixed assets and villzation Logistics and the balance sheet As well as its impact on operating income (revenue less costs) logistic the balance sheel of the business in a number of ways. In today's finer lenging business environment imp of the balance sheet through belter use of assets and resources has become a priority MEASURING LOGISTICS COSTS AND PERFORMANCE 59