SECTION 4

CHAPTER 3: STRATEGIC AND FINANCIAL LOGISTICS

(Continued)

1. What are the key components of the Strategic Profit Model? How can it be used
to examine the effect of logistics decisions?

Briefly, the Strategic Profit Model can be drilled down to Net Profit Margin times
Asset Turnover = Return on Assets. Return on assets indicates what percentage of
every dollar invested in the business is ultimately returned to the organization as
profit. Net profit margin measures the proportion of each sales dollar that is kept
as profit, while asset turnover measures the efficiency of the capital employed to
generate sales. The Strategic Profit Model has the advantage of assisting logistics
managers in the evaluation of cash flows and asset utilization decisions. Suppose,
for example, that a logistics manager is able to eliminate some unnecessary
inventory; this would reduce the value of current assets as well as total asset
value. As a result, sales divided by total assetsasset turnoverwould be higher,
as would the organizations return on assets.

2. Discuss how logistics decisions affect net profit margin in an organization.

The most relevant net profit margin considerations for logistics managers are
sales, costs of goods sold, and total expenses. A primary influence of logistics
activities on sales would be through the improvement of customer service.
Logistics can impact costs of goods sold through procurement activities or
through any logistics-related efficiency improvement that enables labor to be
more productive. Expenses can include logistics-related activities such as
transportation, warehousing, and inventory. A logistics decision to reduce the
number of less-than-truckload shipments through a consolidation strategy would
show up in the transportation costs category that is part of variable expenses.

3. Discuss how logistics decisions affect asset turnover in an organization.

Two examples involve inventory and accounts receivable. With respect to

inventory, a decision by a retailer to move to a system of vendor-managed
inventory where a supplier of a product maintains control and ownership of an
inventory item can result in a significant reduction of the amount of inventory on
an organizations balance sheet. As for accounts receivable, a decision to invest in
an EDI system that would increase invoice accuracy should enable customer
payments to be received in a more timely fashion.

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4. Discuss some of the ways that inventory costs can be reduced in order to affect
an organizations financial performance.

There are several ways in which inventory costs could be reduced in order to
positively affect an organizations financial performance. Some potential
methods include: 1) minimizing the amount of safety stock kept on hand subject
to the desired in-stock availability; 2) eliminating obsolete inventory through
SKU rationalization efforts; 3) improving information systems in order to better
monitor inventory levels, production runs, and inbound materials purchasing
required to meet current demand; and 4) optimizing inventory location in
response to sales patterns. These methods as well as others should help reduce
inventory and therefore improve ROA as demonstrated by the strategic profit
model.

5. How does logistics strategy connect to overall corporate strategy? Is it a one-

way or two-way connection?

While the corporate level strategy ultimately sets the goals for the logistics
strategy, the functional expertise that exists in the organization will necessarily
influence the corporate strategy formulation. The strategic issues at this level are
related to business activities that support the achievement of the higher-level goals
set by the business unit and corporation. This hierarch of strategy entails the
functional units of an organization providing input into the other levels of strategy
formulation. This input could take the form of information on the resources and
capabilities available to the organization. After the corporate level and business
unit strategies are developed, the functional units must translate these strategies
into discrete action plans they must accomplish for the higher-level strategies to
succeed.

Logistics strategy decisions involve issues such as the number and location of
warehouses, the selection of appropriate transportation modes, the deployment of
inventory, and investments in technology that support logistics activities. In
addition to being influenced by the goals of the corporate and business unit
strategies, logistics strategy is directly influenced by strategic decisions in the
functional areas of marketing and manufacturing. 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. An appreciation for this
interconnectedness and need for alignment of strategies is important for every
logistics manager.

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6. Discuss the common logistics measures in transportation, warehousing, and
inventory management.

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 Management:
Inventory management measures tend to relate to the inventory service levels to
customers as well as controlling inventory investment across an organizations
logistics system. Some common performance measures include obsolete
inventory, inventory carrying cost, inventory turnover, and information
availability.

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Multiple Choice Questions

1. The current ratio is calculated by dividing ____ by ____.

a. Total current assets; total current liabilities

b. Total current liabilities; total current assets
c. Total assets; total liabilities
d. Total liabilities; total assets
(a; p. 48)

2. Which of the following is a common measure of organizational financial success?

a. Profitability
b. The income statement
c. Current ratio
d. Return on investment
(d; p. 48)

3. What provides the framework for conducting return on assets analysis by

incorporating revenues and expenses to generate net profit margin, as well as
inclusion of assets to measure asset turnover?

a. The Balanced Scorecard

b. The Strategic Profit Model
c. Microfinancing
d. Supply Chain Operations Reference Model
(b; p. 49)

4. Return on assets equals:

a. Current assets divided by total assets

b. Return on investment divided by return on net worth
c. Net profit margin times asset turnover
d. Total assets divided by costs of goods sold
(c; p. 49)

5. Suppose that a logistics manager is able to eliminate some unnecessary inventory,

which reduces the value of current assets as well as total asset value. What is the
corresponding impact on inventory turnover and return on assets?

a. Both inventory turnover and return on assets will increase

b. Inventory turnover increases, while return on assets decreases
c. Inventory turnover decreases, while return on assets increases
d. Both inventory turnover and return on assets will decrease
(a; p. 49)

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6. Which of the following is false?

a. The Strategic Profit Model (SPM) can assist the logistics manager in the
evaluation of cash flows and asset utilization decisions
b. The SPM fails to consider the timing of cash flows
c. The SPM is subject to manipulation in the short run
d. The SPM fails to recognize assets that are dedicated to specific relationships
e. All of the above are true
(e; p. 49)

7. What is the formula for net profit margin?

a. Gross profit minus interest expenses

b. Sales divided by costs of goods sold
c. Total sales divided by total assets
d. Net profit divided by sales
(d; p. 50)

8. With respect to net profit margin, the most relevant categories for logistics managers
to consider are:

a. Sales, costs of goods sold, asset turnover

b. Accounts receivable, costs of goods sold, total expenses
c. Sales, costs of goods sold, total expenses
d. Inventory, accounts receivable, total expenses
(c; p. 50)

9. With respect to asset turnover, ____ is typically the most relevant logistics asset.

a. Warehousing
b. Inventory
c. Transportation equipment
d. Materials handling equipment
(b; p. 50)

10. The balanced scorecard approach is based on the belief that management should
evaluate their business from ____ distinct perspectives.

a. Two
b. Three
c. Four
d. Five
e. None of the above
(c; p. 50)

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11. Which of the following is not one of the perspectives evaluated in the balanced
scorecard approach?

a. Customers
b. Internal business processes
c. Learning and growth
d. Financial
e. All of the above are perspectives in the balanced scorecard approach
(e; pp. 50-51)

True-False Questions

1. The current ratio is calculated by dividing total current liabilities by total current
assets. (False; p. 48)

2. A common measure of organizational financial success is return on investment.

(True; p. 48)

3. Return on assets equals net profit margin times asset turnover. (True p. 49)

4. The balanced scorecard provides the framework for conducting return on assets
analysis by incorporating revenues and expense to generate net profit margin, as well
as inclusion of assets to measure asset turnover. (False; p. 49)

5. A reduction in inventory would increase inventory turnover, which means an increase

in that organizations return on assets (ROA). (True; p. 49)

6. Operationally, net profit margin is net profit divided by cost of goods sold. (False; p.
50)

7. With respect to net profit margin, the most relevant categories for logistics managers
to consider are sales, costs of goods sold, and asset turnover. (False; p. 50)

8. The primary influence of logistics activities on sales would be through the

improvement of customer service. (True; p. 50)

9. Asset turnover is computing by dividing return on assets by total assets. (False; p.

50)

10. With respect to asset turnover, inventory is typically the most relevant logistics asset.
(True; p. 50)

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11. A decision to invest in an electronic data interchange (EDI) system that would
increase invoice accuracy should result in a lower amount of accounts receivable.
(True; p. 50)

12. The balanced scorecard is based on the belief that management should evaluate their
business from five different perspectives. (False; p. 50)

13. According to the balanced scorecard approach, the financial perspective is considered
the best indicator of whether or not logistics strategy is being properly implemented
and executed. (False; p. 51)

14. The measures associated with the balanced scorecard can be at a strategic, tactical, or
operational level. (True; p. 51)

15. With respect to performance measures for logistics, research suggests that measuring
inventory performance is more important than measuring performance in other key
logistics activities such as transportation or warehousing. (False; pp. 51-52)

16. When applying performance measures to logistics activities, determination of the key
measures should be tailored to the individual organization and level of decision
making. (True; p. 52)