Analyzing the Connection: Logistics Strategy & Financial Performance

This report examines the critical link between logistics strategies and financial performance. It begins by defining the corporate, business, and functional levels of strategy, emphasizing how logistics, as a functional area, translates higher-level goals into actionable plans. The report then introduces ...Read More

Connecting Strategy to Financial Performance
 Logistics managers must find ways to:
1. communicate how logistics capabilities provide value
2. support corporate strategy and success in financial terms.
 Logistics resides at the functional level of the organization.
o Functional units must translate corporate and business unit
strategies into discrete action plans.
o Corporate Level- Corporate-level strategy is focused on determining the
goals for the company, the types of businesses in which the company
should compete, and the way the company will be managed.
o Business Level- Strategy at a business unit level is primarily focused on
the products and services provided to customers and on finding ways to
develop and maintain a sustainable competitive advantage with these
customers.
o Functional Level- The functional-level strategies are related to business
activities that support the achievement of the higher-level goals set by the
business unit and corporation.

o Three generic strategies that can be pursued by an
organization
Cost leadership strategy - A cost leadership strategy requires an
organization to pursue activities that will enable it to become a low-
cost producer in an industry for a given level of quality.
Differentiation strategy- A differentiation strategy entails an
organization developing a product and/or service that offers unique
attributes that are valued by customers and that the customers
perceive to be distinct from competitor offerings.
Focus strategy- A focus strategy concentrates an organization’s
effort on a narrowly defined market to achieve either a cost
leadership or differentiation strategy.
o Functional level strategies exist in:
 Marketing
 Finance
 Manufacturing
 Logistics
o Logistic strategy decisions involve:
 Determining the number and location of warehouses
 Selecting appropriate transportation modes
 Deploying inventory
 Investments in technology that support logistics activities
o Logistics strategy is directly influenced by strategic
decisions in functional areas of:
o Marketing


 Product availability, desired customer service levels,
and packaging design directly influence logistics
decisions
o Manufacturing
 Strategic decisions by manufacturing to implement
just-in-time system would influence logistics
decisions in warehousing, transportation and
inventory management
 Logistics function can positively affect the financial outcome of an
organization by designing a strategy to optimally support the
requirement of the business.
Basic Financial Terminology
o Income statement shows for a period of time:
 Revenues -(sales) provide a dollar value of all the products and/or
services an organization provides to its customers during a given
period of time.
 Expenses - (costs) provide a dollar value for the costs incurred in
generating services during a given period of time
 Profit
o Also referred to as a profit and loss (P&L) statement
Example of an Income Statement

o Balance sheet reflects at any given point in time:
 Assets - Assets are what a company owns and come in two
temporal forms, current assets and long-term assets.
 Liabilities- Liabilities are the financial obligations a company
owes to another party, and liabilities also come in two temporal
forms, current liabilities and long-term liabilities.
 Owner’s equity- Owners’ equity is the difference between
what a company owns and what it owes at any particular time.
Example of a Balance Sheet
(Source: Pearson Education, Inc. publishing as Prentice Hall)

Strategic Profit Model
o Issues with reporting financial figures without appropriate
context
o Many financial measures reported as ratios
o Profitability analysis is useful in assessing logistics activities
o Return On Investment (ROI) is a common measure of
organizational financial success
o Return On Net Worth (RONW) measures profitability of funds
invested in the business
o Return On Assets (ROA) provides insight on how well
managers utilize operational assets to generate profits
o Return On Investment (ROI)
 common measure of organizational financial success
o Return On Net Worth (RONW)
 measures profitability of funds invested in the business
o Return On Assets (ROA)
 Indicates what percentage of every dollar invested in the
business is ultimately returned to the organization as
profit
Consider this: Return on assets (ROA) indicates what percentage of
every dollar invested in the business ultimately is returned to the
organization as profit. As such, ROA gives an indication of how
efficient managers are at using a firm’s assets to generate earnings.

However, like most metrics, relying on a single measure can be
misleading.
Strategic Profit Model (SPM)
 provides the framework for conducting ROA analysis
 Incorporates revenues and expenses to generate net
profit margin
 Includes assets to measure asset turnover
o Strategic Profit Model (SPM)
 Provides a way for managers to examine how a
proposed change to their logistics system influences
profit performance and ROA
 Fails to:
 Consider the timing of cash flows
 Subject to manipulation in the short run
 Fails to recognize assets dedicated to specific
relationships
 Example of Strategic Profit Model
 Read article below to see an example of how Dupont uses the SPM:
 (Source: Hall, Charlie and Thomas, Paul, "Applying the Strategic Profit Model in the Real
World" March 12, 2010 Retrieved 9/12/ 2013 from
http://www.greenhousemag.com/gmpro-0310-management-strategic-profit-model.aspx)

Logistics Connections to Net Profit Margin
o Net Profit Margin = net profit/sales
o Multiple ways in which net profit margin can be influenced by
managerial decisions
o Relevant categories include:
 Sales
 Cost of goods sold
 Total expenses
Logistics Connections to Asset Turnover
o Asset turnover= total sales/total assets
o Inventory is the most relevant logistics asset
o Logistics decisions can influence speed at which invoices are
paid – accounts receivable

Balanced Scorecard
o Balance scorecard (BSC) is a strategic planning and
performance management system used in industry,
government, and nonprofit organizations. The Balanced
Scorecard (BSC) is made up of performance measures that
address particular goals or capabilities in the areas of
customers, internal business processes, learning and growth,
and financial. This holistic approach is needed in order to force
management to look beyond the traditional financial measures
when conducting a strategic analysis.
 Management should evaluate their businesses from four perspectives
o Customers
o Internal business processes
o Learning and growth
o Financial
 Forces managers to look beyond traditional financial measures (more
holistic approach)
Common Logistics Measures
Transportation- The major transportation measures focus on such things as
labor, cost, equipment, energy and transit time. Measurements in this area
include items such as return on investment (investments in transportation
equipment), outbound freight costs, transportation labor productivity, on-
time deliveries and in-transit damage frequency, to name a few.
Warehousing- The primary warehousing measures include such things as
labor, cost, time, utilization, and administration. Some common
measurements focused on warehouse activities include return on
investment (investments in warehousing facilities or equipment),

warehouse order processing costs, warehouse labor productivity, and
picking errors.
Inventory- Inventory management measures tend to relate to the inventory
service levels to customers as well as controlling inventory investment
across an organization’s logistics system. Some common performance
measures include obsolete inventory, inventory carrying cost, inventory
turnover, and information availability.
 Design and implementation of measures
 A recurring theme in the logistics research is that an organization’s
logistics capabilities need to be directly connected to objective firm
performance measures. In addition, this research stream asserts that
logistics managers must continue to find ways to effectively
communicate how these logistics capabilities provide value and
ultimately support corporate strategy and success in financial terms.
The ability of the logistics function to ultimately influence the overall
financial success of an organization is based on the ability of logistics
managers to develop and implement strategies that are aligned with
the overall corporate strategy. This entails working directly with other
functional areas such as marketing and manufacturing. This working
relationship is directly influenced by the corporate culture that exists
with a firm and thus holds the potential to help or hinder these
alignment efforts.
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