Chapter 3 Value and logistics costs

1. Chapter 3Value and logistics costs

2. Where does value come from How can logistics costs be presented Activity-based costing A balanced measurement portfolio Supply chain operations reference model Content

3. How can shareholder value be defined? 1 What is economic value added, and how does it help in this definition? 2 Where does value come from • Key issues

4. Business objective Profit Market share Shareholder value Social value Where does value come from • Business objectives

5. Where does value come from • Concepts about shareholder value • Comparable investment • ROI (Return on investment) • Sales • Costs • Working capital（营运资本） • Cash and debtors（借方，债务人） • Creditors（贷方，债权人） • Fixed assets

6. Sales revenue Profit － Costs Return on capital employed Inventory ÷ ＋ Working capital Cash and debtors Capital employed － Creditors ＋ Fixed assets Sales revenue－Costs Inventory＋Cash and Debtors－Creditors＋Fixed assets ROI＝

7. Where does value come from ROI Profitability = Profit / Sales × Asset utilization = Sales / Employed investment • ROI is underpinned by two main drivers: • Increased profitability • Increased asset utilization

8. Where does value come from ROI and its key drivers

9. Average inventory turnover Key time-related ratios Average settlement period for debtors Average settlement period for creditors Where does value come from

10. Case study: The Wal-Mart effect In 1987, Wal-Mart had a market share of just 9 percent but was 40 percent more productive than its competitors as measured by real sales per employee. By 1995, it commanded a market share of 27 percent and had widened its productivity edge to 48 percent. Competitors began to adopt Wal-Mart’s innovations in earnest in the mid-1990s. From 1995 to 1999, Wal-Mart improved its own productivity by an additional 22 percent.

11. Case study: The Wal-Mart effect Managerial innovation Wal-Mart’s productivity edge stems from managerial innovations that improve the efficiency of stores. Employees who have been cross-trained, for instance, can function effectively in more than one department at a time. Information technology investments Wal-Mart was among the first retailers to use computers to track inventory (1969), just as it was one of the first to adopt bar codes (1980), EDI for better coordination with suppliers (1985), and wireless scanning guns (late 1980s). These investments, which allowed Wal-Mart to reduce its inventory significantly and to reap savings, boosted its capital productivity and labor productivity.

12. Where does value come from How can logistics costs be presented Activity-based costing A balanced measurement portfolio Supply chain operations reference model Content

13. What are the various ways of cutting up the total cost ‘cake’? 1 What are the relative merits of each? 2 How can logistics costs be represented • Key issues

14. How can logistics costs be represented • 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 at the expense of output. • The emphasis on full cost allocation to products ignores customer costs

15. How can logistics costs be represented Three ways to cost cube

16. Fixed cost Variable cost Volume of activity Volume of activity How can logistics costs be represented Fixed / Variable costs

17. Cost or revenue Sales revenue Break-even point Total cost Variable cost Fixed cost Volume of activity How can logistics costs be represented Fixed / Variable costs

18. Cost or revenue Sales revenue Cost or revenue Sales revenue Break-even point Total cost Total cost Break-even point High variable cost Fixed cost Low variable cost Fixed cost Volume of activity Volume of activity How can logistics costs be represented Fixed / Variable costs

19. Direct labor Direct costs Direct materials Whether the cost can be directly allocated to a given product Managing director’s salary Indirect costs (overheads) Administration expenditure Rent rates How can logistics costs be represented Direct / Indirect costs

20. How can logistics costs be represented Direct / Indirect costs • DPP (Direct product profitability) method • Sourcing costs • Operations support • Fixed-assets financing • Warehousing and distribution • Inventory financing • Order, invoice and collection processing

21. How can logistics costs be represented Engineered / Discretionary costs Example Engineered costs prevention Input-output relationship Quality cost appraisal Internal and external failure Discretionary costs

22. Where does value come from How can logistics costs be presented Activity-based costing A balanced measurement portfolio Supply chain operations reference model Content

23. What are the shortcomings of traditional cost accounting from a logistics point of view? 1 How can costs be allocated to processes so that better decisions can be made? 2 Activity-based costing • Key issues

24. Use of Advanced Technology Product Life Cycle Product Complexity Channels of Distribution Quality Requirements Product Diversity Activity-based costing Today’s businesses are working in an increasingly complex environment.

25. Activity-based costing Criticisms of Traditional Cost Allocation • Assumes all cost is volume-related • Departmental focus, not process focus • Focus on costs incurred, not cause of costs

26. Activity-based costing Conventional Costing • Total Cost = Material + Labour+ Overheads • Overheads are allocated to the products on volume based measures e.g. labour hours, machine hours, units produced Will this not distort the costing in the new environment? ABC provides an Alternative.

27. Activity-based costing Allocation of indirect costs based on causal activities ABC Purpose Results in better allocation Does not provide “true” cost

28. Activity-based costing • Traditional allocation method • Activity-based allocation method Costs Products Costs Activities Products First stage Second stage

29. When is ABC Most Useful? Activity-based costing • High Overheads • Product Diversity or Multiple Products • Customer Diversity • Service Diversity

30. Activity-based costing Example

31. Activity-based costing • Cost time profile (CTP) delivery loading sort processing storage transport

32. Where does value come from How can logistics costs be presented Activity-based costing A balanced measurement portfolio Supply chain operations reference model Content

33. Financial Financial Past Future Past Future Operation Operation Traditional Balanced A balanced measurementportfolio

34. A balanced measurementportfolio

35. Where does value come from How can logistics costs be presented Activity-based costing A balanced measurement portfolio Supply chain operations reference model Content

36. Supply chain operation reference model

37. Supply chain operation reference model