Management of Business Logistics

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Performance measurement
Learning outcomes
• Explain the scope and importance of SC performance measurement.
• Explain the characteristics of good performance measures.
• Discuss the various methods used to measure SC costs, service, profit, and
revenue.
• Explain the basics of an income statement and a balance sheet.
• Demonstrate the impacts of supply chain strategies on the income statement,
balance sheet, profitability, and return on investment (ROI).
• Explain the use of the strategic profit model.
• Analyze the financial impacts of supply chain service failures.
• Utilize spreadsheet computer software to analyze the financial implications of
supply chain decisions.

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SC profile
Page 508

• Background:
• It is an Internet company that began operation in 2001 for the sale and
distribution of college textbooks and instructional materials.
• CLGN’s mission was to be a seller of low-priced college textbooks and
instructional materials in the United States.
• The typical textbook price at CLGN averaged 15 percent below that of the local
bookstore, and supplies averaged 20 percent lower.
• When the cost of shipping was included, the landed cost of the textbook was
about 10 percent lower and materials 15 percent lower than purchases at the
local bookstore.
• This lower cost and the convenience of online purchasing resulted in
double-digit sales increases every year.
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SC profile
Problems:
• Beginning in 2002, CLGN made a profit and has done so every year since
then.
• In 2015, CLGN had sales of $150 million with a net income of $10.5
million.
• This net profit margin of 7 percent was above average for business-to-
consumer (B2C) Internet companies.
• However, net income as a percent of sales, or net profit margin, was lower
than in the previous years.
• In 2013 net profit margin was 10.3 percent, and in 2014 it was 9.1 percent.
This decreasing profit margin trendwas causing considerable
concern with top management and CLGN’s stockholders.
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Terminology
Business-to-consumer (B2C):

• refers to the process of businesses selling products and

services directly to consumers, with no middle person.

• B2C typically refers to online retailers who sell products and

services to consumers through the Internet.

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Terminology
• Landed cost:
• A landed cost is the total amount of money it costs a vendor to create a
product, transport it, and have the customer receive it.
Landed cost of an order = Manufacturing cost + shipping cost + shipping
insurance + import duties + other fees
Average landed cost (landed cost per unit) = (Total landed cost of an
order)/number of units in the order

Examples:

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Terminology
Net income (NI), also called net earnings, is calculated as sales
minus cost of goods sold, selling, general and administrative
expenses, operating expenses, depreciation, interest, taxes, and other
expenses.

It is a useful number to assess how much revenue exceeds the

expenses of an organization.

This number appears on a company's income statement and is also

an indicator of a company's profitability.

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Terminology

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Terminology
Net profit income = Net margin = net income as a percent of sales
• Net profit margin measures how much net income is generated as a
percentage of revenues received.
• Net profit margin helps to assess if a company's management is
generating enough profit from its sales and whether operating costs and
overhead costs are being contained.
• Net profit margin is one of the most important indicators of a company's
overall financial health.

Example: CLGN book distributor (2015) 10.3

9.1
Net margin = (10,5/150)*100% = 7%
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2013 2014 2015

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Iceberg model Sales increase
Net margin > 0

Problem
10.3 decreasing profit margin

trend
9.1

2013 2014 2015 Causes

• Problem solving
• Meeting: CEO and executive committee consisting of the vice presidents of marketing,
finance, information systems, and SCM
• Review the 2015 financial results and discussing the underlying causes for the lower net
profit margin,
• each vice president was given the assignment of examining his/her respective area for
process changes that would remove costs while maintaining the same level of service
customers expected
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SC profile – Problem solving
• SC cost increases exceeded those in other areas of the
company.
• during the past year the CEO had been receiving
complaints from irate customers regarding late deliveries
of orders and receipt of improperly filled orders (wrong
items or not all items ordered).

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SC profile – Problem solving
• Vice president of SCM said:
• she was aware of these problems and was working on solutions for order
fulfillment problems as well as the escalating shipping costs.
• her area was developing plans to transition from measuring orders shipped
on time and orders shipped complete to measuring the perfect order (orders
received on time, orders received complete, and accurate documentation).
• She then gathered her operating managers to review the situation
and explore alternatives.
• SC analyst: prepare financial data measuring the supply chain process.
• Warehouse manager: examine the nature and cause of the order fulfillment
problems and to suggest solutions.
• Transportation manager: examine the rising transportation costs and longer,
and less reliable, delivery times.
Pls read the rest to see how they analyze data and propose solution
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Financial statements

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SC Performance measurement
• Measure:
• A "measure" is a number that is derived from taking a measurement.
• Ex: height, weight,…

• Metric:
• is more complex to define and usually involves a calculation or a combination of measurements,
often in the form of a ratio.
• Ex: inventory turns; sales dollars per SKU (stock-keeping-unit)

• Index:
• An index combines two or more metrics into a single indicator.
• An index is used to track trends in the output of a process.
• Ex: perfect order

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Characteristics of good metric

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Top 12 most popular measures

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KPIs – Key performance indicators

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Develop SC performance metrics
• Driving forces: New technologies, changing business
environment
• From a ”cost center” to an “investment center”
• How can organizations justify investment

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Develop SC performance metrics
Steps to develop SC performance metrics
1. Establish a team comprised of individuals representing functional
areas within the firm that will be impacted by the metrics.
2. Involve customers and suppliers, where appropriate
3. Develop a tiered structure for the metrics.
• KPIs: Strategic – Tactical – Operational levels
4. Identify metric “owners” and tie metric goal achievement to an
individual’s or division’s performance evaluation.
5. Establish a procedure to mitigate conflicts arising from metric
development and implementation.
• Ex: on time delivery vs. transportation expenditure
6. Alignment SC metrics with corporate strategy
7. Establish top management support for development of SC metrics
program.

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Performance Categories

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SCOR model

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SCOR model

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SCOR model

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The Supply Chain–Finance Connection
• The Revenue–Cost Savings Connection

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The Revenue–Cost Savings Connection

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The Revenue–Cost Savings Connection
• Ex:

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The Revenue–Cost Savings Connection
• Ex:

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The Revenue–Cost Savings Connection
• return on assets (ROA):
• profit it generates in relationship to the assets utilized
• used as a benchmark to compare management and organization
performance to that of other organizations in t he same industry or
similar industries.

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ROA

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Financial statements

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Balance sheet

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Financial Impact of Supply Chain Decisions

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Financial
Impact of
Supply Chain
Decisions

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Financial
Impact of
Supply Chain
Decisions

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Financial
Impact of
Supply Chain
Decisions

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Financial Impact of Supply Chain Decisions

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Supply
Chain
Service
Financial
Implications

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Supply
Chain
Service
Financial
Implications

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Supply
Chain
Service
Financial
Implications

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Supply
Chain
Service
Financial
Implicati
ons

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Supply Chain
Service
Financial
Implications

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Supply Chain
Service
Financial
Implications

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