Logistics Management
LSCH_C03.QXD 12/11/04 12:04 pm Page 81
Cha pter
Measuring logistics costs and performance
Logistics and the bottom line 83 Logistics and shareholder value 88 Logistics cost analysis 95 The concept of total cost analysis 96 Principles of logistics costing 99 Customer profitability analysis 103 Direct product profitability 109 Cost drivers and activity-based costing 111
3
81
LSCH_C03.QXD 12/11/04 12:04 pm Page 82
LOGISTICS AND SUPPLY CHAIN MANAGEMENT
This chapter: Outlines the many ways in which logistics management can impact on overall return on investment and, ultimately, shareholder value.
●
Explains the rationale behind total cost analysis, a systematic logistics-oriented cost accounting system and the principal requirements for an effective logistics costing system.
●
Emphasizes the importance of customer profitability analysis based upon an understanding of the ‘cost-toserve’.
●
Introduces the concept of direct product profitability and underlines the need to understand the customers’ logistics costs.
●
Highlights the need to identify the cost drivers in the logistics pipeline and to replace traditional forms of cost allocation with more appropriate methods.
82
LSCH_C03.QXD 12/11/04 12:04 pm Page 83
3 MEASURING LOGISTICS COSTS AND PERFORMANCE
T
he costs of satisfying customer demand can be significant and yet, surprisingly, they are not always fully understood by organizations. One reason for this is that traditional accounting systems tend to be focused around understanding product costs rather than customer costs. Whilst logistics costs will vary by company and by industry, across the economy as a whole that total cost of logistics as a percentage of gross domestic product is estimated to be close to 10 per cent in the US1 and in other countries costs of similar magnitudes will be encountered. However, logistics activity does not just generate cost, it also generates revenue through the provision of
Cha pter
Measuring logistics costs and performance
Logistics and the bottom line 83 Logistics and shareholder value 88 Logistics cost analysis 95 The concept of total cost analysis 96 Principles of logistics costing 99 Customer profitability analysis 103 Direct product profitability 109 Cost drivers and activity-based costing 111
3
81
LSCH_C03.QXD 12/11/04 12:04 pm Page 82
LOGISTICS AND SUPPLY CHAIN MANAGEMENT
This chapter: Outlines the many ways in which logistics management can impact on overall return on investment and, ultimately, shareholder value.
●
Explains the rationale behind total cost analysis, a systematic logistics-oriented cost accounting system and the principal requirements for an effective logistics costing system.
●
Emphasizes the importance of customer profitability analysis based upon an understanding of the ‘cost-toserve’.
●
Introduces the concept of direct product profitability and underlines the need to understand the customers’ logistics costs.
●
Highlights the need to identify the cost drivers in the logistics pipeline and to replace traditional forms of cost allocation with more appropriate methods.
82
LSCH_C03.QXD 12/11/04 12:04 pm Page 83
3 MEASURING LOGISTICS COSTS AND PERFORMANCE
T
he costs of satisfying customer demand can be significant and yet, surprisingly, they are not always fully understood by organizations. One reason for this is that traditional accounting systems tend to be focused around understanding product costs rather than customer costs. Whilst logistics costs will vary by company and by industry, across the economy as a whole that total cost of logistics as a percentage of gross domestic product is estimated to be close to 10 per cent in the US1 and in other countries costs of similar magnitudes will be encountered. However, logistics activity does not just generate cost, it also generates revenue through the provision of
References: 1. State of Logistics Report, Council for Logistics Management, 2004. 2. Stewart, G.B., The Quest for Value, Harper Business, 1991 (EVA is a registered trademark of Stern Stewart & Co). 3. Buffet, W., Annual Report, Berkshire Hathaway Corporation, 1994. 4. Srivastava, R. et al., ‘Market-Based Assets and Shareholder Value: A Framework for Analysis’, Journal of Marketing, Vol. 62, No. 1, January 1998, pp. 2–18. 5. Ibid. 6. Johnson, H.T. and Kaplan, R.S., Relevance Lost: The Rise and Fall of Management Accounting, Harvard Business School Press, 1987. 7. Barrett, T., ‘Mission Costing: A New Approach to Logistics Analysis’, International Journal of Physical Distribution and Materials Management, Vol. 12, No. 7, 1982. 8. Shillinglow, G., ‘The Concept of Attributable Cost’, Journal of Accounting Research, Vol. 1, No. 1, Spring 1963. 9. Cooper, R. and Kaplan, R.S., ‘Profit Priorities from Activity-Based Costing’, Harvard Business Review, May–June 1991. 114