Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 18: Performance and Financial Assessment

Supply Chain Logistics Management

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Shareholder Value Focus

OPERATIONAL EXCELLENCE

ASSET UTILIZATION

FixedCapital

Reduction

WorkingCapital

Reduction

LowestLanded

Total Cost

IncreasedCustomerService

Measures• Perfect Order• Dwell Time

• Inventory Days• Total Landed Cost• Activity Based Cost

Measures• Cash-to-Cash cycle

time• Segment profitability• Return on assets• Free cash spin

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Traditional Functional Measurement

• Increasing scope and accuracy in functional measurement– Asset Management: – Cost– Customer Service– Quality– Productivity

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

TYPICAL PERFORMANCE METRICS

Customer Service Cost Management Quality Productivity Asset Management Fill rate Total cost Damage frequency Units shipped per

employee Inventory turns

Stockouts Cost per unit Order entry accuracy Units per labor dollar Inventory levels, number of days supply

Shipping errors Cost as a percentage of sales

Picking/ shipping accuracy

Orders per sales representative

Obsolete inventory

On-time delivery Inbound freight Document/ invoicing accuracy

Comparison to historical standard

Return on net assets

Backorders Outbound freight Information availability Goal programs Return on investment Cycle time Administrative Information accuracy Productivity index Inventory classification

(A,B,C) Delivery consistency Warehouse order

processing Number of credit claims

Equipment downtime Economic Value Added (EVA)

Response time to inquiries

Direct labor Number of customer returns

Order entry productivity

Response accuracy Comparison of actual versus budget

Warehouse labor productivity

Complete orders Cost trend analysis Transportation labor productivity

Customer complaints Direct product profitability

Sales force complaints Customer Segment profitability

Overall reliability Inventory carrying

Overall satisfaction Cost of returned good

Cost of damage

Cost of service failures

Cost of backorder

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Deficiencies of Traditional Functional Assessment

• Bias toward cost and traditional customer service persists.

• Most logistics executives actually believe that customer service and quality metrics reflect a customer perspective in their scorecard.

• Customer service metrics are not jointly defined.

• Metrics are “on-average, over-time”. Must be “de-averaged”. Research shows that world-class companies emphasize absolute metrics rather than percentages.

• Inability to reflect a true shareholder’s/financial perspective

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Internal Supply Chain:“Perfect Order” Achievement

• The “Perfect Order” Defined– Complete Orders Delivered To Customers Requested Date

And Time In Perfect Condition, Including All Documentation.

– .97 x.97 x.97 x.97 x.97 x.97 x.97 x.97 x.97 x.97=.73

• Perfect Orders Should Be Assessed At Each Stage In The Supply Chain

• Can you really capture the data?

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Internal Supply Chain: Cash-to-Cash

• Cash-To-Cash Cycle Time– Cash-To-Cash = Total Inventory Days Of Supply + Days

Sales Outstanding - Days Payables Outstanding

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Supply Chain: Days of Supply

• Days Of Supply– The Total Inventory In The Supply Chain Relationship --

Inbound, Plant And All Stocking Locations In the Channel -- Expressed As Calendar Days Of Supply Based On Recent Actual Daily Rate Of Sales (or forecasted rate of sales).

• Auto Industry

• Food Industry

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Supply Chain: Dwell Time

• The ratio of the number of days that inventory (or other assets) sit idle to the number of days it is actually moving in the supply chain.– Related to services industry measures.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Supply Chain: Focus on the Consumer

• Shelf Level In-Stock Position Is A Key Metric For The Supply Chain

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Supply Chain: Total Landed Cost

RawMaterialSource

Productionof

Components

Manufacturer Distributors Retailers

Could you manage your way out of the dilemma?

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Total Supply Chain: Supply Chain Response Time

• The (theoretical) time to recognize a fundamental shift in final customer demand, internalize that finding in all supply chain members, re-plan, and increase/decrease output by 20%.– Suppose one of your recently introduced products becomes the

most successful product in its category-taking 50% market share when your forecast was for only 20%. How long before you actually recognize this? How long before you can arrange production capacities, procurement and distribution arrangements to accommodate it?

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Aspects of benchmarking:

• Internal benchmarking

• Competitive benchmarking

• Non-restricted benchmarking

• Extends beyond metrics to include processes

Benchmarking

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Segmental Analysis

To properly assess financial performance you must segment:

By channel

By territory

By customer

By product

By supplier

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Variable Vs Fixed Expense

• VARIABLE EXPENSES Those which change predictably with some measure of output during a time period.

• FIXED EXPENSES Those which do not change in relationship to output during a time period

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Direct Vs Indirect Expense

• DIRECT EXPENSES Those which exist due to the specific organizational unit being analyzed.

• INDIRECT EXPENSE Those which exist due to more than one unit under analysis.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Two Approaches to Profitability Assessment

• Contribution margin focuses on the variable and direct fixed costs incurred and the contribution that each segment makes to covering indirect expenses and profit.

• Net profit allocates all expenses to segments.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Activity Based Costing and Management

• ABC and ABM are allocation techniques

• Allocations are more realistic than traditional cost accounting which relies on sales volume or direct labor hours to allocate “overhead”.

• If you aren’t doing activity-based costing you probably don’t know which customers, products, services, or channels are the profitable ones.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

$

$

$

$

$ $

$

$

$

$

$

$

$

$-

Cost of goods sold

Direct expenses

Sales

+Indirect expenses

Inventory

+Accounts receivable

+Other current assets

%

%

net profts

net worth( )

Gross Margin

-

Total Expenses

Net Profit

÷Sales

Net profitmargin

(net proftnet sales )

Current assets

+

Fixed assets

Sales

Total assets

Assets turnover

Return on net worth

Financial leverage

Return on assets

= x

(total assetsnet worth )= x (

net profittotal assets)

Strategic Profitability Model

(Dupont Model)

$

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

SPM RATIOS FOR TWO FICTITIOUS RETAILERS

Return onnet worth

Leverage Return onassets

Asset turnover

Net profitmargin

Company A 26.1 5.55 5.5 2.20 2.9Company B 24.6 2.73 10.5 1.99 6.2

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

SALES

COST OF GOODS SOLD

DIRECT EXPENSE

INDIRECT EXPENSE

INVENTORY

ACCOUNTS RECEIVABLE

OTHER CURRENT ASSETS

GROSS MARGIN

TOTAL EXPENSES

CURRENT ASSETS

FIXED ASSETS

TOTAL ASSETS

SALES

SALES

NET PROFIT

NET PROFIT MARGIN

ASSET TURNOVER

RETURN ON ASSETS

2000

300

1500

100

400

100

100

500

400

600

400

2000

1000

5%

TIMES

net profitnet sales

net salestotal assets

Strategic Profit Model-

+

+

+

-

+

÷

÷

( )

)(

2

100

(BASE CASE)

10%

2000

Price

Quantity

x

Cost of goods

Quantity

x

TransportationHandlingStorage Space Promotionetc.

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

SALES

COST OF GOODS SOLD

VARIABLE EXPENSES

FIXED EXPENSES

INVENTORY

ACCOUNTS RECEIVABLE

OTHER CURRENT ASSETS

GROSS MARGIN

TOTAL EXPENSES

CURRENT ASSETS

FIXED ASSETS

TOTAL ASSETS

SALES

SALES

NET PROFIT

NET PROFIT MARGIN

ASSET TURNOVER

RETURN ON ASSETS

2000

280

1500

100

300

100

100

500

380

500

400

2000

2000

900

6%

TIMES

net profitnet sales

net salestotal assets

-

+

+

+

-

+

÷

÷

( )

)(

2.22

120

13.32%

(INVENTORY REDUCTION)

Strategic Profit Model

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

SALES

COST OF GOODS SOLD

VARIABLE EXPENSES

FIXED EXPENSES

INVENTORY

ACCOUNTS RECEIVABLE

OTHER CURRENT ASSETS

GROSS MARGIN

TOTAL EXPENSES

CURRENT ASSETS

FIXED ASSETS

TOTAL ASSETS

SALES

SALES

NET PROFIT

NET PROFIT MARGIN

ASSET TURNOVER

RETURN ON ASSETS

2000

275

1500

100

400

100

100

500

375

600

400

2000

2000

1000

.

TIMES

net profitnet sales

net salestotal assets

-

+

+

+

-

+

÷

÷

( )

)(

2

125

12.5%

(EXPENSE REDUCTION)

6.25%

Strategic Profit Model

Supply Chain Logistics Management, First Edition , Bowersox, Closs, and CooperCopyright© 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Dream Beauty Case Discussion

• Activity Based Management

• Strategic Profit Model