Ch. 4 Measuring logistics costs and performance

Question 1

Logistics activity requires resources, which are these?

Answer 1

• fixed capital

- working capital

Question 2

What are traditionally the influences on decision-making?

Answer 2

• the bottom line (net income after taxes)
• cash flow
• resource utilization (fixed and working capital)

Question 3

What’s the ROI equation? Expand further

hint: margin, asset turnover

Answer 3

• profit ÷ capital employed

- profit ÷ sales (margin) x sales ÷ capital employed (asset turn)

Question 4

Companies typically focus on the margin to improve ROI, however a small net margin can improve ROI if…

Answer 4

capital turnover is improved. Excellent ROI can be gained if the productivity of capital is high. E.g.:

• limited inventory
• high sales per sq. ft.
• leased fixed assets (plants, machinery, buildings)

Question 5

What are the major elements that impact ROI?

hint: Dupont chart

Answer 5

Profit

• Customer service > sales revenue
• Logistics efficiency > costs

Capital employed

• Pipeline management > cash
• Invoice accuracy > net receivables
• JIT logistics > inventory
• Asset deployment > fixed assets

Question 6

Current assets - current liabilities =

Answer 6

working capital

Question 7

How does logistics management impact assets on the balance sheet

Answer 7

Cash/receivables

• order cycle time
• order completion rate
• invoice accuracy
• Inventories > inventory

Property/plant/equipment

• Distribution facilities & equipment
• Plant and equipment

Question 8

How does logistics management impact liabilities on the balance sheet

Answer 8

Current liabilities:
- Purchase order quantities (excessive materials purchased)

Debt & equity:
- Financing options for inventory, plant and equipment

Question 9

What is the key measure of corporate performance?

Answer 9

Shareholder value:

• net present value of future cashflow
• economic value added (EVA)

Question 10

How is cash flow determined?

Answer 10

Net operating income - tax - working capital investment - fixed capital investment = after-tax free cash flow

Question 11

How is EVA determined?

hint: true cost of capital employed

Answer 11

profit after tax - true cost of capital employed

Question 12

Net present value of EVA is known as ‘market value added’ (MVA) and represents…

Answer 12

the true value of a business to shareholders.

Question 13

How is MVA determined?

Answer 13

(stock price x issues shares) - book value of total capital invested

Question 14

What needs to be added to the ROI to determine the ROE?

Answer 14

Leverage: the equity multiplier

Total assets ÷ total equity

Question 15

What needs to be added to the ROI to determine the ROE?

Answer 15

Leverage: the equity multiplier

Total assets ÷ total equity

Question 16

EBIT (earnings before interest & tax) is an indicator of…

Answer 16

profitability of a company’s operations

Revenue - COGS - OE (operating expenses)

Question 17

What does the asset turnover (net revenue/total assets) measure?

Answer 17

the efficiency of a company

Question 18

Profitability (profit margin) x efficiency (asset turnover) x leverage (equity multiplier) =

Answer 18

Return on Equity

Question 19

What are the basic drivers of shareholder value?

Answer 19

1. Revenue growth (service/customer retention)
2. Operating cost reduction (time compression/reduce non-value-adding activities)
3. Working capital efficiency (balanced stock’s short pipelines)
4. Fixed capital efficiency (leasing/outsourcing)
5. Tax minimization (location of inventory)

Question 20

The value of any strategy is inherently driven by 4 things…

hint: strategy should accelerate or enhance cash flow

Answer 20

1. acceleration of cash flows
2. increased level of cash flows
3. reducing cash flow risk
4. the residual business value

Question 21

What is logistics management’s objective

Answer 21

Integrating resources across a pipeline, extending from suppliers to final customers

Question 22

Why do traditional accounting systems distort profitability?

Answer 22

Because it has trouble allocating ‘shared’ or ‘indirect’ costs.

The process from order-to-cash are allocated to different departments and the borders can be unclear.

Question 23

What costs are involved in the true cost of inventory?

Answer 23

1. cost of capital
2. storage and handling
3. obsolescence
4. damage & deterioration
5. pilferage/shrinkage
6. insurance
7. management costs

Question 24

What 4 strategies are there to servicing customers?

hint: net sales value & cost of service (high/low)

Answer 24

1. Build
2. Protect
3. Danger zone
4. Cost engineer