Strategic and Financial

Logistics

Strategic and Financial Logistics

Key Terms
Assets
Asset turnover
Balanced scorecard
(BSC)
Balance sheet

Cost leadership
strategy
Current ratio
Differentiation
strategy
Expenses (costs)
Focus strategy

Copyright 2015

Strategic and Financial Logistics

Key Terms

Income statement
Liabilities
Net profit margin
Owners equity

Return on assets
(ROA)
Revenues (sales)
Strategic Profit
Model (SPM)

Copyright 2015

Learning Objectives
To explain how logistics can influence an
organizations strategic financial outcomes
To define basic financial terminology
To analyze how the strategic profit model can
demonstrate the financial impact of logistics
activities

Copyright 2015

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.

Copyright 2015

Connecting Strategy to Financial

Performance
Three generic strategies that can be pursued
by an organization
1. Cost leadership strategy
Requires an organization to pursue activities that will
enable it to become the low-cost producer in an
industry for a given level of quality

Copyright 2015

Connecting Strategy to Financial

Performance
Three generic strategies that can be pursued
by an organization
2. Differentiation strategy
Entails an organization developing a product and/or
service that offers unique attributes that are valued by
customers and that the customers perceive to be
distinct from competitor offerings

Copyright 2015

Connecting Strategy to Financial

Performance
Three generic strategies that can be pursued
by an organization
3. Focus strategy
Concentrates an organizations effort on a narrowly
defined market to achieve either a cost leadership or
differentiation advantage

Copyright 2015

Connecting Strategy to Financial

Performance
Functional level strategies exist in:
Marketing
Finance
Manufacturing
Procurement
Logistics

Copyright 2015

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

Copyright 2015

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

Finance
Rates of return may affect the decision to manager
ones own warehouse or use a third-party provider

Copyright 2015

Connecting Strategy to Financial

Performance
Logistics strategy is directly influenced by
strategic decisions in functional areas of:
Manufacturing
Strategic decisions by manufacturing to implement justin-time system would influence logistics decisions in
warehousing, transportation and inventory
management

Procurement
The decision to move from domestic to global sourcing
would naturally affect logistics activities such as the
potential use of new modes of transportation
Copyright 2015

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.

Copyright 2015

Basic Financial Terminology

Income statement shows for a period of time:
Revenues
Also referred to as sales, provide a dollar value of all the
products and/or services provided by a company

Expenses
Also referred to as costs, provide a dollar value for the costs
incurred in generating revenues during a given period of
time

Profit

Also referred to as a profit and loss (P&L)

statement
Copyright 2015

Basic Financial Terminology

Copyright 2015

Basic Financial Terminology

Balance sheet reflects at any given point in time:
Assets
What a company owns and come in two forms: current
assets that can be easily converted to cash and long-term
assets that have a useful life of more than one year

Liabilities
The financial obligations a company owes to another party

Owners equity
Difference between what a company owns and what it owes
a any particular point in time

Copyright 2015

Basic Financial Terminology

Copyright 2015

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 and proposed changes to a firms logistical
systems
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
Copyright 2015

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
Copyright 2015

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

Copyright 2015

Strategic Profit Model

Copyright 2015

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
Copyright 2015

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

Copyright 2015

Logistics Connections to Net Profit Margin

Sales
The dollar value of all the products or services an
organization provides to its customers during a given
period of time

Cost of goods sold

Includes all the costs or materials and labor directly
involved in producing a product or delivering a service

Total expenses
Made up of the variable and fixed costs that are not
directly related to making the product or delivering a
service
Copyright 2015

Logistics Connections to Asset Turnover

Asset turnover= total sales/total assets
Asset turnover provides information on how
efficiently capital is employed to support the
business
Inventory is typically the most relevant
logistics asset
Logistics decisions can influence the speed at
which invoices are paid accounts receivable
Copyright 2015

Logistics Connections to Asset Turnover

Inventory can represent a significant part of a
firms current assets
Accounts receivable is the amount of money
customers owe to an organization

Copyright 2015

Balanced Scorecard
Balance scorecard (BSC) is a strategic planning
and performance management system used in
industry, government, and nonprofit
organizations.

Copyright 2015

Balanced Scorecard
Management should evaluate their businesses
from four perspectives
Customers
Internal business processes
Learning and growth
Financial results

Forces managers to look beyond traditional

financial measures (more holistic approach)
Copyright 2015

Logistics Activity Measures

Transportation measures
Focus on labor, cost, equipment, energy and transit
time

Warehousing measures
Include labor, cost, time, utilization and administration

Inventory measures
Include obsolete inventory, inventory carrying cost,
inventory turnover and information availability

Copyright 2015

Logistics Activity Measures

Design and Implementation of Measures
Determination of key measures should be tailored to the
organization and level of decision making
Data collection and analysis are a major part of a performance
measurement system in logistics
Behavioral issues should be considered when establishing and
implementing a system of logistics measures
Frequent communication and constant updating of the
measures is a necessary condition for ensuring they are
supporting organizational goals

Copyright 2015

Case Study Analysis

Question 6 :
Use the 2012 income statement and balance
sheet to complete a Strategic Profit Model for
J.Q.

Copyright 2015

Case Study Analysis

Question 8 :
Holding all other information constant, what
would be the effect on ROA for 2012 if
warehousing costs declined 10 percent from
2012 levels?

Copyright 2015