Chapter 3 Strategic and Financial Logistics.pdf
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Transcript of Chapter 3 Strategic and Financial Logistics.pdf
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Strategic and Financial
Logistics
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Strategic and Financial Logistics
Key Terms• Assets
• Asset turnover
• Balanced scorecard
(BSC)
• Balance sheet
• Cost leadershipstrategy
• Current ratio
• Differentiationstrategy
• Expenses (costs)
•
Focus strategy
Copyright © 2015
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Strategic and Financial Logistics
Key Terms
• Income statement
• Liabilities
• Net profit margin
• Owner’s equity
• Return on assets
(ROA)
• Revenues (sales)
• Strategic Profit
Model (SPM)
Copyright © 2015
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Connecting Strategy to Financial
Performance
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• 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 andbusiness unit strategies into discrete action plans.
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Connecting Strategy to Financial
Performance
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• Three generic strategies that can be pursued
by an organization
1. Cost leadership strategy
• Requires an organization to pursue activities that willenable it to become the low-cost producer in an
industry for a given level of quality
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Connecting Strategy to Financial
Performance
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• Three generic strategies that can be pursued
by an organization
2. Differentiation strategy
• Entails an organization developing a product and/orservice that offers unique attributes that are valued by
customers and that the customers perceive to be
distinct from competitor offerings
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Connecting Strategy to Financial
Performance
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• Three generic strategies that can be pursuedby an organization
3. Focus strategy
• Concentrates an organization’s effort on a narrowlydefined market to achieve either a cost leadership or
differentiation advantage
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Connecting Strategy to Financial
Performance
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• Functional level strategies exist in:
– Marketing
– Finance
– Manufacturing
– Procurement
– Logistics
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Connecting Strategy to Financial
Performance
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• 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
one’s own warehouse or use a third-party provider
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Connecting Strategy to Financial
Performance
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• Logistics strategy is directly influenced bystrategic decisions in functional areas of:
– Manufacturing
• Strategic decisions by manufacturing to implement just-in-time system would influence logistics decisions inwarehousing, transportation and inventorymanagement
– Procurement
• The decision to move from domestic to global sourcingwould naturally affect logistics activities such as thepotential use of new modes of transportation
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Connecting Strategy to Financial
Performance
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• Logistics function can positively affect the
financial outcome of an organization by
designing a strategy to optimally support the
requirement of the business.
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Basic Financial Terminology
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• 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
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Basic Financial Terminology
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Basic Financial Terminology
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• 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-termassets that have a useful life of more than one year
– Liabilities
• The financial obligations a company owes to another party
–
Owner’s equity • Difference between what a company owns and what it owes
a any particular point in time
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Basic Financial Terminology
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Strategic Profit Model
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• Issues with reporting financial figures withoutappropriate context
• Many financial measures reported as ratios
• Profitability analysis is useful in assessing logistics
activities and proposed changes to a firm’s logisticalsystems
• Return On Investment (ROI) is a common measure oforganizational financial success
•
Return On Net Worth (RONW) measures profitability offunds invested in the business
• Return On Assets (ROA) provides insight on how wellmanagers utilize operational assets to generate profits
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Strategic Profit Model
Copyright © 2015
• 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 inthe business is ultimately returned to the organization
as profit
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Strategic Profit Model
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• 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
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Strategic Profit Model
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Strategic Profit Model
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• 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
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Logistics Connections to Net Profit Margin
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• 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
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Logistics Connections to Net Profit Margin
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• 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
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Logistics Connections to Asset Turnover
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• 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
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Logistics Connections to Asset Turnover
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• Inventory can represent a significant part of a
firm’s current assets
• Accounts receivable is the amount of money
customers owe to an organization
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Balanced Scorecard
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• Balance scorecard (BSC) is a strategic planning
and performance management system used in
industry, government, and nonprofit
organizations.
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Balanced Scorecard
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• 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)
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Logistics Activity Measures
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• 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
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Logistics Activity Measures
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• 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 aresupporting organizational goals
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• Question 6 :
Use the 2012 income statement and balance
sheet to complete a Strategic Profit Model for
J.Q.
Case Study Analysis
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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?
Case Study Analysis
Copyright © 2015