one rule:

“interactive”
 &
Value Logistics Costs
This topic addresses five key issues…

1 Where does value come from?

2 How can logistics costs be represented?

3 Activity-based costing (ABC)

This topic addresses five key issues…

4 A balanced measurement portfolio

5 Supply chain operations reference model (SCOR)

o Creating shareholder value is widely used today to
describe the main objective of a business.
o Shareholder value is created when the shareholder
gets a better return by investing in your business.
o Return on investment is an important measure that
is widely used to assess shareholder value.

1 Where does value come from?

Return on investment (ROI)
o It is measured as profit (in PHP) before interest and
tax as a percentage of capital employed (also in
PHP)
𝐏𝐫𝐨𝐟𝐢𝐭
% 𝐑𝐎𝐈 = × 𝟏𝟎𝟎
𝐂𝐚𝐩𝐢𝐭𝐚𝐥 𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐝

1 Where does value come from?

 sales revenue

- profit

costs

return on

inventory
÷ capital
employed

+
working
cash and debtors
capital

- capital employed

creditors

+
fixed assets The make-up of return on capital employed (investment)
Financial ratios and ROI drivers
o ROI is an important measure for assessing
shareholder value and is underpinned by two main
drivers
o increased profitability
o increased asset utilization

1 Where does value come from?

 ROI

profitability = profit / sales

x
asset utilization = sales / capital employed

increased profitability
increased asset utilization
 advantages of financial ratios

o a benchmark for comparing one organization with another

o used as a comparator for a particular industrial sector
o used to track past performance
o a motivator for setting performance targets
o an early warning indicator if the organization’s performance
starts to decline

1 Where does value come from?

 average inventory turnover
the number of times inventory is turned over in
relation to the cost of good sold

Key average settlement period for debtors

time-related the time taken for customers to pay their
ratios invoices

average settlement period for creditors

the time taken for an organization to pay
its creditors

key time-related ratios

 Fixed

Variable Engineered

Discretionary

Direct Indirect

2 How can logistics costs be represented?

Fixed/variable volume of activity

fixed cost variable cost

stepped fixed costs

raw materials

warehouse rental

volume of activity volume of activity

2 How can logistics costs be represented?

 o A break-even chart shows the sales
volume level at which total costs equal
sales.
o Break-even point (BEP) is a level of
activity where revenue will exactly
equal total cost, so there is neither profit
nor loss.
o The usefulness of being able to deduce
the BEP is that it makes it possible to
compare the planned or expected
volume of activity with the BEP and so
make a judgement about risk.

2 How can logistics costs be represented?

Direct/indirect allocated to a given product

indirect costs
direct costs
‘overheads’

administration
direct labor direct materials rent rates
expenditure

2 How can logistics costs be represented?

Engineered/discretionary ease of allocating

input-output
relationship

engineered discretionary
costs costs

2 How can logistics costs be represented?

 use of advanced technology

o Today’s product life cycle

businesses are product complexity

working in an
channels of distribution
increasingly
complex quality requirements

environment. product diversity

3 Activity-based costing (ABC)

Criticisms of traditional cost allocation

o assumes all cost is volume-related

o departmental focus, not process focus
o focus on costs incurred, not cause of costs

3 Activity-based costing (ABC)

 traditional allocation method

costs products

Activity-based allocation method

costs activities products

first stage second stage

3 Activity-based costing (ABC)

 product product
124 366

low-volume item
high-volume item
requires certain activities
running continuously
special engineering
requires little attention
additional testing
no special activities
machine setups

3 Activity-based costing (ABC)

ABC is most useful when…
o high overheads
o product diversity or multiple products
o customer diversity
o service diversity

3 Activity-based costing (ABC)

 financial financial

past future past future

traditional operation balanced operation

4 A balanced measurement portfolio

A cross supply chain measures need to have the following characteristics…

o simple to understand
o no more than 10 in total number
o representative of a significant causal relationship
o have an associated target
o capable of being shared across the supply chain

4 A balanced measurement portfolio

 Eight measures that meet the characteristics…

on time in full, outbound cost reduction

on time in full, inbound stock turns

internal defect rates order to delivery lead time

new product introduction rate financial flexibility

4 A balanced measurement portfolio

o The supply chain operations reference model (SCOR) is
a management tool used to assess waste, establish
standards, and continuously improve.
o It is a repetitive framework of constant engagement and
discovery, developed to describe all the business
activities associated with the phases of satisfying a
customer.
o The SCOR model is based on three major principles:
process modeling/re-engineering, measuring
performance, and best practices.

5 Supply chain operations reference model (SCOR)

The five distinct management processes…

1 plan

5
return

2 source

3
make

4 deliver

5 Supply chain operations reference model (SCOR)

The three levels to the SCOR model…

Level Level Level

1 2 3

5 Supply chain operations reference model (SCOR)

5 Supply chain operations reference model (SCOR)
AS A SUMMARY…

o Return on investment (ROI) is a widely used method for

measuring shareholder value and it encourages logistics
management to control costs, working capital and fixed
assets.
o Logistics is increasingly concerned with funds flow as
well as material flow and information flow. It is a cross-
functional discipline that addresses management
processes of plan, source, make, deliver and return -
repeated across the supply chain.
o Traditional cost accounting is unhelpful in making
logistics-related decisions because it is insensitive to
processes and to cost drivers and tends to understate
profits on high-volume products and to overstate profits
on low-volume/high-variety products.
o Logistics costs can be better described by using a
variety of methods of allocating costs to products - the
purpose of such is to gain better information about the
cost base of logistics operations, and hence to take
better decisions.
o Activity-based costing (ABC) seeks to understand what
factors drive costs, and how costs are incurred by
logistics processes that span the organization – and the
supply chain in general.
o A balanced measurement portfolio is called for, one that
considers the needs of different stakeholders in a
business which is extended into the supply chain by
means of the supply chain operations reference model
(SCOR).