Logistics and Supply Chain Management, 4th Edition

Logistics and the bottom line

Today’s turbulent business environment has produced an ever greater awareness

amongst managers of the financial dimension of decision making. ‘The bottom line’

has become the driving force which, perhaps erroneously, determines the direction

of the company. In some cases this has led to a limiting, and potentially dangerous,

focus on the short term. Hence we find that investment in brands, in R&D and in

capacity may well be curtailed if there is no prospect of an immediate payback.

Just as powerful an influence on decision making and management horizons is

cash flow. Strong positive cash flow has become as much a desired goal of man-

agement as profit.

The third financial dimension to decision making is resource utilisation and spe-

cifically the use of fixed and working capital. The pressure in most organisations is

to improve the productivity of capital – ‘to make the assets sweat’. In this regard it

is usual to utilise the concept of return on investment (ROI). Return on investment

is the ratio between the net profit and the capital that was employed to produce

that profit, thus:

Profit

ROI = –––––––––––––––––––

Capital employed

This ratio can be further expanded:

Profit Sales

ROI = –––––––

×

–––––––––––––––––––

Sales Capital employed

It will be seen that ROI is the product of two ratios: the first, profit/sales, being

commonly referred to as the margin and the second, sales/capital employed,

termed capital turnover or asset turn. Thus to gain improvement on ROI one or

other, or both, of these ratios must increase. Typically many companies will focus

their main attention on the margin in their attempt to drive up ROI, yet it can often

be more effective to use the leverage of improved capital turnover to boost ROI.

For example, many successful retailers have long since recognised that very small

net margins can lead to excellent ROI if the productivity of capital is high, e.g. lim-

ited inventory, high sales per square foot, premises that are leased rather than

owned and so on.

Figure 3.1 illustrates the opportunities that exist for boosting ROI through either

achieving better margins or higher assets turns or both. Each ‘iso-curve’ reflects

the different ways the same ROI can be achieved through specific margin/asset

turn combination. The challenge to logistics management is to find ways of moving

the iso-curve to the right.

The ways in which logistics management can impact on ROI are many and

varied. Figure 3.2 highlights the major elements determining ROI and the potential

for improvement through more effective logistics management.

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

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MEASURIN G LOGISTICS COSTS AND P ERFORMANCE

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Logistics and the balance sheet

As well as its impact on operating income (revenue less costs) logistics can affect

the balance sheet of the business in a number of ways. In today’s financially chal-

lenging business environment improving the shape of the balance sheet through

better use of assets and resources has become a priority.

20% ROI

15% ROI

10% ROI

Profit

Sales

(Margin)

Sales

Cap Emp

(Asset turn)

Figure 3.1 The impact of margin and asset turn on ROI

Sales

revenue

Costs

Cash

Net receivables

Inventory

Fixed assets

Profit

Capital

employed

Return on

investment

Customer

service

Pipeline

management

Invoice

accuracy

Logistics

efficiency

Just-in-time

logistics

Asset

deployment

and utilization

Figure 3.2 Logistics impact on ROI