Logistics and Supply Chain Management, 4th Edition

MEASURIN G LOGISTICS COSTS AND P ERFORMANCE

67

Probably one of the main reasons why the adoption of an integrated approach to

logistics and distribution management has proved so difficult for many companies

is the lack of appropriate cost information. The need to manage the total distribu-

tion activity as a complete system, having regard for the effects of decisions taken

in one cost area upon other cost areas, has implications for the cost accounting

systems of the organisation. Typically, conventional accounting systems group

costs into broad, aggregated categories which do not then allow the more detailed

analysis necessary to identify the true costs of servicing customers buying particu-

lar product mixes. Without this facility to analyse aggregated cost data, it becomes

impossible to reveal the potential for cost trade-offs that may exist within the logis-

tics system.

Generally the effects of trade-offs are assessed in two ways: from the point of

view of their impact on total costs and their impact on sales revenue. For example,

it may be possible to trade off costs in such a way that total costs increase, yet

because of the better service now being offered, sales revenue also increases. If

the difference between revenue and costs is greater than before, the trade-off may

be regarded as leading to an improvement in cost effectiveness. However, without

an adequate logistics-oriented cost accounting system it is extremely difficult to

identify the extent to which a particular trade-off is cost-beneficial.

The concept of total cost analysis

Many problems at the operational level in logistics management arise because

all the impacts of specific decisions, both direct and indirect, are not taken into

account throughout the corporate system. Too often decisions taken in one area

can lead to unforeseen results in other areas. Changes in policy on minimum

order value, for example, may influence customer ordering patterns and lead to

additional costs. Similarly, changes in production schedules that aim to improve

production efficiency may lead to fluctuations in finished stock availability and thus

affect customer service.

The problems associated with identifying the total system impact of distri-

bution policies are immense. By its very nature logistics cuts across traditional

company organisation functions with cost impacts on most of those functions.

Conventional accounting systems do not usually assist in the identification of these

company-wide impacts, frequently absorbing logistics-related costs in other cost

elements. The cost of processing orders, for example, is an amalgam of specific

costs incurred in different functional areas of the business which generally prove

extremely difficult to bring together. Figure 3.6 outlines the various cost elements

Because logistics management is a flow-oriented concept with the objective

of integrating resources across a pipeline which extends from suppliers

to final customers, it is desirable to have a means whereby costs and

performance of that pipeline flow can be assessed.

LOGISTIC S & SUPPLY CHAIN MANAGEMENT

68

involved in the complete order processing cycle, each of these elements having a

fixed and variable cost component which will lead to a different total cost for any

one particular order.

Accounting practice for budgeting and standard-setting has tended to result in

a compartmentalisation of company accounts; thus budgets tend to be set on a

functional basis. The trouble is that policy costs do not usually confine themselves

within the same watertight boundaries. It is the nature of logistics that, like a stone

thrown into a pond, the effects of specific policies spread beyond their immediate

area of impact.

A further feature of logistics decisions that contributes to the complexity of

generating appropriate cost information is that they are usually taken against a

background of an existing system. The purpose of total cost analysis in this con-

text is to identify the change in costs brought about by these decisions. Cost must

therefore be viewed in incremental terms – the change in total costs caused by the

change to the system. Thus the addition of an extra warehouse to the distribution

Order placement

and communication

Order entry

Credit check

Documentation

Order picking

Delivery

Invoicing and

collection

Figure 3.6 Stages in the order-to-collection cycle