chapter 3 value and logistics costs
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Chapter 3 Value and logistics costs. Where does value come from. How can logistics costs be presented. Activity-based costing. A balanced measurement portfolio. Supply chain operations reference model. Content. How can shareholder value be defined?. 1. - PowerPoint PPT PresentationTRANSCRIPT
Chapter 3
Value and logistics costs
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
Content
Where does value come from
• Key issues
1111How can shareholder value be defined?
2222What is economic value added, and how does it help in this definition?
Where does value come from
• Business objectives
Business objective
Profit Market shareShareholde
r valueSocial value
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
Sales revenue
Costs
－ Profit
Capital employed
Inventory
Cash and debtors
＋
Creditors
Fixed assets
＋
－
Return on capital
employed
Working capital
÷
Sales revenue － CostsInventory ＋ Cash and Debtors － Creditors ＋ Fixed assets
ROI＝
Where does value come from
Profitability = Profit / Sales
Asset utilization = Sales / Employed investment
ROI is underpinned by two main drivers:Increased profitabilityIncreased asset utilization
×
ROI
Where does value come from
Level 1 Level 2 Level 3 Level 4
ROI
Net Profit
Sales
Production costs / Sales Pay costs / sales
Materials / Sales
Selling costs / Sales Pay costs / Sales
Administration costs / Sales Pay costs / Sales
Sales
Total assets
Fixed assets / Sales
Property / Sales
Plant / Sales
Vehicle / Sales
Current assets / Sales
Inventory / Sales
Debtors / Sales
Cash / Sales
ROI and its key drivers
Where does value come from
Key time-related ratios
Average inventory turnover
Average settlement period for debtors
Average settlement period for creditors
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.
Case study: The Wal-Mart effect
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.
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
Managerial innovation
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
Content
How can logistics costs be represented
1111What are the various ways of cutting up the total cost ‘cake’?
2222What are the relative merits of each?
• Key issues
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
How can logistics costs be represented
Di screti onary
Engi neered
Fi xed
Vari abl e
Di rect I ndi rect
Three ways to cost cube
How can logistics costs be represented
Fixed / Variable costs
Volume of activity
Fixed cost
Volume of activity
Variable cost
How can logistics costs be represented
Fixed / Variable costs
Volume of activity
Cost or revenue
Sales revenue
Variable cost
Fixed cost
Total costBreak-even point
How can logistics costs be represented
Fixed / Variable costs
Cost or revenue
Volume of activity
Fixed cost
High variable cost
Total cost
Sales revenue
Break-even point
Cost or revenue
Volume of activity
Fixed cost
Low variable cost
Total cost
Sales revenue
Break-even point
How can logistics costs be represented
Direct / Indirect costs
Direct costs
Direct labor
Direct materials
Whether the cost can be directly allocated to a given product
Indirect costs (overheads)
Managing director’s salary
Rent rates
Administration expenditure
How can logistics costs be represented
• DPP (Direct product profitability) method
Direct / Indirect costs
Gross sales for product groupLess product-specific discounts and rebates
Net sales by productLess direct costs of product
Gross product contributionLess product-based marketing expenses
Product-specific direct sales support costsLess 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
How can logistics costs be represented
Engineered / Discretionary costs
Engineered costs
Input-output relationship
Discretionary costs
Example
Quality cost
prevention
appraisal
Internal and external failure
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
Content
Activity-based costing
• Key issues
1111What are the shortcomings of traditional cost accounting from a logistics point of view?
2222How can costs be allocated to processes so that better decisions can be made?
Today’s businesses are working in an increasingly complex environment.
Use of Advanced Technology
Product Life Cycle
Product Complexity
Channels of Distribution
Quality Requirements
Product Diversity
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
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.
Activity-based costing
Activity-based costing
Allocation of indirect costs based on causal activities
Results in better allocation
Does not provide “true” cost
ABC PurposeABC Purpose
• Traditional allocation method
• Activity-based allocation method
Costs Products
Costs ProductsActivities
First stage Second stage
Activity-based costing
When is ABC Most Useful?
• High Overheads
• Product Diversity or Multiple Products
• Customer Diversity
• Service Diversity
Activity-based costing
Activity-based costing
Example
Production line A B C D Total
Machine hours 8,000 8,000 8,000 8,000 32,000
No. of changeovers 50 30 15 5 100
Equal allocation 250,000 250,000 250,000 250,000 1000,000
Allocation by activity 500,000 300,000 150,000 50,000 1000,000
Difference 250,000 50,000 -100,000 -200,000 0
Activity-based costing
• Cost time profile (CTP)
Cost-time profile
0
20
40
60
80
100
120
15 45 60 70 75 85
Cumulative time (hours)
Cum
ulat
ive
cost
(%
)
transport
storageprocessing
sort
loading
delivery
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
Content
A balanced measurement portfolio
Financial
Operation
FuturePast
Traditional
Financial
Operation
FuturePast
Balanced
A balanced measurement portfolio
Where does value come from
How can logistics costs be presented
Activity-based costing
A balanced measurement portfolio
Supply chain operations reference model
Content
Supply chain operation reference model
Supply chain operation reference model