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Logistics Overview
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C o n c e p t O f To t a l C o s t A n a l y s i sL o g i s t i c s & B o t t o m L i n e
Logistics Overview
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C o n c e p t O f To t a l C o s t A n a l y s i s
Logistics Overview
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To t a l C o s t A n a l y s i s
I m p a c t s – D i r e c t & I n d i r e c t
D e c i s i o n s i n o n e a r e a l e a d t o u n f o r e s e e n c h a n g e s i n t h e o t h e r
E x a m p l e s• Minimum Order Value – Customer Ordering Patterns – Additional Costs• Production Schedule Changes – Improve Production Efficiency – Fluctuations Finished Stock Availability – Customer Service
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To t a l C o s t A n a l y s i sC o s t o f P r o c e s s i n g O r d e r s
C o s t s i n v o l v e d i n d i ff e r e n t f u n c t i o n a l a r e a s – d i ffi c u l t t o p u t t o g e t h e r C o n v e n t i o n a l a c c o u n t i n g s y s t e m s l a c k e ff e c t i v e n e s s t o i d e n t i f y t h e s e c o s t s
E x a m p l e : S t a g e s i n O r d e r t o C o l l e c t i o n C y c l e
Order placement & communication – Order Entry – Credit Check – Documentation – Order Picking – Delivery – Invoicing & Collection
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To t a l C o s t A n a l y s i sC o s t o f P r o c e s s i n g O r d e r s
Logistics Overview
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Like a stone thrown into a pond, the effects of specific policies spread beyond their immediate area of impact.
T o t a l C o s t A n a l y s i sC o s t o f P r o c e s s i n g O r d e r s
C o s t s s h o u l d b e v i e w e d i n i n c r e m e n t a l t e r m s – c h a n g e i n t o t a l c o s t s c a u s e d b y t h e c h a n g e i n s y s t e m
E x a m p l e : A d d i t i o n o f e x t r a w a r e h o u s e
• Transportation• Inventory Investment• Communications
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To t a l C o s t A n a l y s i sC o s t o f P r o c e s s i n g O r d e r s
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It is the incremental cost difference between the two options that is the relevant accounting information for decision making
To t a l C o s t A n a l y s i sC o s t o f P r o c e s s i n g O r d e r s
C o s t o f h o l d i n g i n v e n t o r y
Largest cost element Managers unaware of all costs involved 25% P.A. of Book Value of Inventory
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T o t a l C o s t A n a l y s i sC o s t o f P r o c e s s i n g O r d e r s
C o s t o f h o l d i n g i n v e n t o r y
C o s t O f C a p i t a l – D e b t & E q u i t y – W e i g h t e d A v e r a g e S t o r a g e A n d H a n d l i n g O b s o l e s c e n c e D a m a g e A n d D e t e r i o r a t i o n P i l f e r a g e / S h r i n k a g e I n s u r a n c e M a n a g e m e n t C o s t s
Logistics Overview
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L o g i s t i c s & B o t t o m L i n e
Logistics Overview
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L o g i s t i c s & B o t t o m L i n e
B o t t o m L i n e – T h e D r i v i n g F o r c e• Limiting Factor – Short Term Focus• Investment in Brands• R & D• Capacity
C a s h F l o w R e s o u r c e U t i l i z a t i o n – F i x e d & W o r k i n g C a p i t a l
• Improve Productivity of Capital - Make the ‘Assets Sweat’
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L o g i s t i c s & B o t t o m L i n e
I m p r o v e d P r o d u c t i v i t y o f C a p i t a l
P r o fi t R O I = - - - - - - - - - - - - - - - - - - - - C a p i t a l E m p l o y e d
R O I = P r o fi t S a l e s - - - - - - - - - - - X - - - - - - - - - - - - - - - - - - - - - - - -
S a l e s C a p i t a l E m p l o y e d
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L o g i s t i c s & B o t t o m L i n e
I m p r o v e d P r o d u c t i v i t y o f C a p i t a l
• Example: Retailers• Small net margins & high productivity of capital• Limited inventory• High sales per square foot• Leased premises as opposed to owned
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L o g i s t i c s & B o t t o m L i n e
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ROI can be improved by increasing the margins or higher capital turnover or both
L o g i s t i c s & B a l a n c e S h e e t
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L o g i s t i c s & B a l a n c e S h e e t
C a s h & R e c e i v a b l e s
C o m p o n e n t o f C u r r e n t A s s e t s
E x a m p l e s :
• Shorter order time• Order completion rate – Invoice not raised• Invoice Accuracy
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L o g i s t i c s & B a l a n c e S h e e t
I n v e n t o r i e s
5 0 % o f c u r r e n t a s s e t s t i e d u p i n i n v e n t o r y A l l i n v e n t o r y – R a w m a t e r i a l s – B o u g h t i n c o m p o n e n t s - w o r k i n p r o g r e s s – fi n i s h e d g o o d s C o m p a n y p o l i c i e s o n i n v e n t o r y l e v e l s & s t o c k l o c a t i o n s M o n i t o r i n g & m a n a g i n g t h e m S t r a t e g i e s – m i n i m i z e t h e n e e d
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L o g i s t i c s & B a l a n c e S h e e t
P r o p e r t y , P l a n t & E q u i p m e n t
S u b s t a n t i a l p a r t o f t o t a l c a p i t a l e m p l o y e d – A s s u m e d o w n e d M a t e r i a l h a n d l i n g e q u i p m e n t , v e h i c l e s , e q u i p m e n t i n v o l v e d i n s t o r a g e W a r e h o u s e s
Outsourcing physical distribution
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L o g i s t i c s & B a l a n c e S h e e t
Logistics Overview
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Question – Is it the most effective way to deploy assets ??
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