Probable Questions for BBA 8 sem Student

What is total cost analysis in logistics

management? Illustrate with
diagram.
What are principles of logistics costing?

Logistics plays vital role in maximizing shareholder value. explain in context of logistics management
Short notes:
Activity based costing
Bottom Line

Logistics costs
logistics management is a flow-oriented concept with the
objective of integrating resources across a pipeline which extends
from suppliers to final customers, it is desirable to have a means
whereby costs and performance of that pipeline flow can be
assessed.
Total cost analysis concept:
It is the analysis of the different cost incurred in entire stages of
supply chain/pipeline to create customer value and deliver goods
and services to ultimate consumers.
Total Logistics Cost= Warehousing cost +Inventory cost+
Transportation costs +Material handling cost + Customer
cost
The basic purpose of logistics total cost analysis is to provide managers with

Customer Service

Cost minimization using the total cost logistics model/Total cost

analysis
Traditional Cost Logistics Model

Total Cost Logistics Model/Total cost analysis

Expected lowest cost based on

decisions that were cheapest for
individual functions.
The purpose of total cost analysis in thiscontext is to identify the change in
Expected lowest cost based on decisions
costs due to change in management decision.
that were cheapest for total logistics

functions.
Cost must be viewed in incremental terms.
For example, The addition of an extra warehouse to the distribution network
will bring about cost changes in transport, inventory, and communications.

The principle of logistics costing

Logistics costing should be capable of identifying the costs

that result from providing customer service in the
marketplace.
A second principle is that it should be capable of enabling
separate cost and revenue analyses to be made by
customer type and by market segment or distribution
channel.
We must first define desired outputs of the logistics system
and then seek to identify the costs associated with providing
those outputs.
Mission Costing(mission here refers to set of customer
service goals to be achieved by the system).

Mission is a set of customer service goals to be achieved by the system within

the specific market/product context. A successful achievement of defined mission
involves a large input from various activity centers of the firm. Hence the logistics
costing should be able to identify the total costs of meeting a desired mission.
This is referred as Mission Based Costing.

There are four stages in implementing an effective

Mission Based Costing.

Define the customer service segment This is required as all customers do not
have the same service requirements
Identify factors that produce variations in the cost of service: for example
reducing the frequency of delivery .will reduce the costs.
Identify the specifies specific resources used to support customer segments.
Attribute activity cost by customer type or segment.

An effective costing system must seek to determine the total systems cost of meeting
desired mission objectives (the output of the system) and the costs of the various
inputs involved in meeting these outputs.

Logistics cost and Bottom line

The Bottom line has become the driving force which
determines the direction of the company.
Strong positive cash flow, profit and improvement of
Productivity of Capital are bottom line of any business.
ROI(Return on Investment is used)
Profit Ratio and Capital Turnover Ratio

ROI

Sales revenue Costs

Inventory Cash and Debtors Creditors Fixed assets
Sales
revenue

Profit

Costs

Inventory

Return on
capital
employed

Working
capital

Cash and
debtors

Capital
employed

Creditors

Fixed
assets

Logistics impact on ROI

Logistics and shareholder value

Not only the impact that logistics service can have upon
net operating income (profit) but also the impact on
capital efficiency (asset turnover). Many companies have
come to realize the effect
that lengthy pipelines and highly capital-intensive logistics
facilities can have on EVA and hence shareholder value.

Logistics & shareholder value

Profitable growth
Perfect orders
Global excellence
After-sales services
New product introductions

Working capital efficiency

Cash to cash cycle time
Days of supply in inventory
Inventory turns
Receivables and payables

Cost minimisation
Total delivered cost
Process cost reductions
Outsourcing
Shared services

Improved
shareholder
value

Tax minimization
Assets and sales locations
Transfer prices
Customs
Fuel and property taxes

Fixed capital efficiency

Return on assets
Network optimizations
Capacity mgmt./throughput
Outsourcing
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Customer Profitability Analysis

According to Philip Kotler-A profitable customer is a person, household or a company

that overtime yields a revenue stream that exceeds by acceptable amount the companys cost
stream of attracting, selling and servicing customers.
The term customer profitability analysis describes any attempt to relate the revenue
produced by a customer, market segment or distribution channel to the costs of servicing
that customer/segment/channel.
1. How profitable is this customer compared to others ?
2.What costs would I avoid and what revenues would I lose if I lost this customer ?
(What sort of Costs should be taken into account in this type of analysis)

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Revenues

Less
M Net sales value
Costs
(attributable costs only)
M Cost of sales (actual product mix)
M Commissions
M Sales calls
M Key account management time
M Trade bonuses and special discount
M Order processing costs
M Promotional costs (visible and hidden)
M Merchandising costs
M Non-standard packaging
M Dedicated inventory holding costs
M Dedicated warehouse space
M Materials handling costs
M Transport costs
M Documentation/communications costs
M Returns/refusals
M Trade credit (actual payment period)
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Customer profitability matrix

High
PROTECT

COST
ENGINEER

BUILD

DANGER
ZONE

NET SALES
VALUE OF
CUSTOMER
ACCOUNT

Low
Low

High
COST OF SERVICE
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Build
These customers are relatively cheap to service but their net sales value is low. Can volume be increased without
a proportionate increase in the costs of service? Can our sales team be directed to seek to influence these
customers purchases towards a more profitable sales mix?

Danger zone
These customers should be looked at very carefully. Is there any medium- to long-term prospect either of
improving net sales value or of reducing the costs of service? Is there a strategic reason for keeping them? Do
we need them for their volume even if their profit contribution is low?
Cost engineer
These customers could be more profitable if the costs of servicing them could be reduced. Is there any scope
for increasing drop sizes? Can deliveries be consolidated? If new accounts in the same geographic area were
developed would it make delivery more economic? Is there a cheaper way of gathering orders from these
customers, e.g. the Internet?

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Protect
The high net sales value customers who are relatively cheap to service are worth their weight in
gold. The strategy for these customers should be to seek relationships which make the customer
less likely to want to look for alternative suppliers. At the same time we should constantly seek
opportunities to develop the volume of business that we do with them whilst keeping strict
control of costs.

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Direct Product Profitability(DPP)

An application of logistics cost analysis that has gained widespread

acceptance, particularly in the retail industry, is a technique known as
direct product profitability or more simply DPP. In essence it is
somewhat analogous to customer profitability analysis in that it attempts
to identify all the costs that attach to a product or an order as it moves
through the distribution channel.

Total Cost of Ownership

The importance of DPP is:
To reduce the customers cost of ownership
How can I favorably influence the DPP of my customers by changing either
the characteristics of the products I sell, or the way I distribute
them ?
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DPP(Direct Product Productivity)

DPP (Direct product profitability)
Gross sales for product group
Less product-specific discounts and rebates

Net sales by product

Less direct costs of product

Gross product contribution

Less product-based marketing expenses

Product-specific direct sales support costs

Less product-specific direct transportation costs
Less product-attributable overheads
Direct product profitability

Sourcing costs
Operations support
Fixed-assets financing
Warehousing and
distribution
Inventory financing
Order, invoice and
collection processing

Cost Drivers and Activity Based costing

Problems with traditional cost accounting as related to

logistics (Christopher, 1998)
The true costs of servicing different customer types, channels
and market segments are poorly understood.
Costs are captured at too high at a level of aggregation.
Costing is functionally oriented.
The emphasis on full cost allocation to products ignores
customer costs

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Difference between ABC and Traditional cost accounting methods

In traditional cost accounting it is assumed that cost

objects consume resources whereas in ABC it is assumed
that cost objects consume activities.
Traditional cost accounting mostly utilizes volume related
allocation bases while ABC uses drivers at various levels.
Traditional cost accounting is structure-oriented whereas
ABC is Process-oriented.

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Definition of Activity Based Costing

Activity-based accounting (ABC) seeks out the cost drivers along the logistics

pipeline that cause cost because they consume resources. For example invoice
items costs instead of invoice costs
ABC Costing approach is a management accounting method that has helped
many companies to improve their profitability and cost structure. ABC identifies
opportunities for management to improve pricing, products, services, operations
and key business processes in order to improve competitiveness.

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Activity-based costing
Products

Costs
Traditional Costing

Activities

Costs
First stage

Products
Second stage

Activities of ABC

Identification of organizational
activities
Assigning cost to each activity
Identifying Outputs
Assigning costs traced for each
activity to products
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Cost Drivers
A cost driver is the unit of an activity that causes the change of an activity cost.
Cost Drivers are the structural determinants of the cost of an activity, reflecting
any linkages or interrelationships that affect it.- M. Porter
Each activity has cost drivers which are used to calculate or estimate the cost of
Drivers :
activities.
Activities:
Purchasing
Product Design
Sales Calls
Product Delivery
Receiving
Stocking
Order Processing

Number of Calls
Percent of time spent on stocking each product
Square feet
Labor Hours per Product
Machine Hours per Product
Number of Shipments per product
Receiving Hours per product
Stocking Hours Per product
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