CHAPTER 17

Measuring and Selling the Value of Logistics

Options for Measuring Value
1. 2. 3. 4. Customer satisfaction Customer value-added (CVA) Total cost analysis Profitability analysis (includes considerations) 5. Strategic profit model 6. Shareholder value

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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Components of Customer Value
Product attributes Service attributes Perceived benefit Transaction cost Life cycle cost Risk Perceived sacrifice Expected customer value

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McGraw-Hill/Irwin

Source: Earl Naumann, Creating Customer Value: The Path to Sustainable Competitive Advantage Copyright © 2001 by Press, 1995), p. 103. (Cincinnati, OH: Thomson Executive The McGraw-Hill Companies, Inc. All rights reserved.

How Customers Select Among Competitive Suppliers
• Customer buys on value • Value equals quality relative to price • Quality includes all nonprice attributes -- Product -- Customer Service • Quality, price, and value are relative Product Value Quality Price
McGraw-Hill/Irwin

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Customer service

Copyright © 2001 by The McGraw-Hill York: The Free Press, 1994), p. 29. Source:Bradley T. Gale, Managing Customer Value (NewCompanies, Inc. All rights reserved.

Creating Value That Customers Can See
Understanding customer needs in a well-defined market Superior quality in areas that matter to customers

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Effective design and quality control

Advertising and other marketing communications

Market-perceived quality

Low “cost of quality” and overall cost leadership

Exceptional customer value Business results Profitability, growth, and shareholder value
McGraw-Hill/Irwin Copyright Managing The McGraw-Hill Companies, Inc. All rights reserved. Source:Bradley T. Gale, © 2001 by Customer Value (New York: The Free Press, 1994), p. 19.

Customer Value Added
Provide products and services to customers that are a better value than those they could purchase from competitive companies in similar markets
Customer Satisfaction Market Share

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Distribution of CVA Levels

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Calibration Category World class Above parity Parity Below parity

CVA Levels >110 103-110 98-102 <98

# of Businesses by Category 15% 25 20 40

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Source: PIMS Database.

Calculating CVA
THE VALUE QUESTION

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– Considering the products and services that you purchased. How would you rate them as being worth what you paid for them? Perceived Value of Company’s Offer Perceived Value of Competitive Offers

CVA =

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Order Fulfillment Customer Satisfaction Survey Results Delivering Material
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Performance (1 poor…5 excellent) Best Other Company Vendor 3.35 3.67 4.00 3.32 NA 3.76 1.05 Ratio Company/best Other Vendor 1.01

Questions Attributes Delivering Material When You Wanted It Having the Necessary Info on All Shipping Documentation Having the Correct Materials Delivered Relative to What You Ordered

Overall Quality of Delivery of Materials

3.89

3.74

1.04

McGraw-Hill/Irwin

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Cost Analysis
Purchase Price plus
 Transportation costs  Inventory turns  Terms of sale  Ordering costs  Receiving costs  _______________  _______________  _______________
McGraw-Hill/Irwin

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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

Segment Profitability Analysis:
A CONTRIBUTION APPROACH WITH CHARGE FOR ASSETS EMPLOYED
SUPPLIER A SALES COST OF GOODS SOLD GROSS MARGIN PLUS: DISCOUNTS AND ALLOWANCES MARKET DEVELOPMENT FUNDS SLOTTING ALLOWANCES CO-OP ADVERTISING NET MARGIN VARIABLE MARKETING & LOGISTICS COSTS: TRANSPORTATION RECEIVING ORDER PROCESSING _____________ _____________ CONTRIBUTION MARGIN ASSIGNABLE NONVARIBLE COSTS: SALARIES ADVERTISING INVENTORY CARRYING COSTS LESS: CHARGE FOR ACCOUNTS PAYABLE _____________ _____________ SEGMENT CONTROLLABLE MARGIN
McGraw-Hill/Irwin

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SUPPLIER B

SUPPLIER C

SUPPLIER D

Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

IMPACT OF LOGISTICS ON RETURN ON NET WORTH
Logistics’ Impact
Sales $ Gross Margin $ Net Profit Net Profit Margin % net profit net sales $ $ - Sales increase due to better

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STRATEGIC PROFIT MODEL

_
Cost of Goods Sold $

customer service - Lower cost due to new or more efficient manufacturing facilities - Lower cost of purchased materials

_ ÷
Sales Total Expenses $

Variable Expenses Lot Quantity Costs Transportation Costs Inventory Carrying Costs

- Reduced order management costs - Fewer last minute production changes - Fewer LTL shipments - Fewer freight claims - Lower freight costs - Insurance - Taxes - Variable Storage costs - Inventory risk costs - Fewer employees required - Lower third-party warehousing costs Reduced IS costs

Return on Net Worth

Financial Leverage

Return on Assets

Warehousing Costs Information Systems General and Administrative Inventory $ Sales $ Asset Turnover Current Assets

=
Net profit net worth

X
Total assets net worth

% Net profit total assets

X

=

X

Reduced cost of supervision

Reduced inventory investment

Accounts Receivable $ Other Current Assets $ Less warehouse space required Reduced due to more prompt paying customers (reduced errors)

+

÷
Total Assets $

$

+

net sales total assets

+
Fixed Assets $

Increase investment in modernized production facilities

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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

How Logistics Affects EVA
Revenue Customer Service Levels Transportation Costs Net Operating Profit After Taxes (NOPAT) Expenses Warehousing Costs Lot Quantity Costs Information System Costs Non Cost of Money Components of Inventory Carrying Cost

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EVA
Working Capital Capital Charge Cost of Capital Inventory Accounts Receivable Equipment/Vehicles Land/Facilities (owned) Equipment/Facilities (leased)
McGraw-Hill/Irwin Copyright Logistics," The International Journal Companies, Inc. All rights reserved. Source: Douglas M. Lambert and Renan Burduroglu, "Measuring and Selling the Value of© 2001 by The McGraw-Hill of Logistics Management, Vol.11, No.1 (2000),

=

x

+
Fixed Assets

Selling the Value Advantage
• Who is the customer? • Must measure value from the customer’s perspective • Market segmentation based on value • Value is a moving target • Changing role of the sales force
McGraw-Hill/Irwin

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Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.

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