CHAPTER 17

Measuring and Selling

the Value of Logistics
 Options for Measuring Value 17-2

1. Customer satisfaction
2. Customer value-added (CVA)
3. Total cost analysis
4. Profitability analysis (includes
considerations)
5. Strategic profit model
6. Shareholder value

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Components of Customer Value 17-3

Product
attributes

Service
attributes
Perceived benefit Expected
customer
Perceived sacrifice value
Transaction
cost

Life cycle
cost

Risk

Source: Earl Naumann, Creating Customer Value: The Path to Sustainable Competitive Advantage
McGraw-Hill/Irwin Copyright
(Cincinnati, OH: Thomson©Executive
2001 by The McGraw-Hill
Press, 1995), p. 103.Companies, Inc. All rights reserved.
 How Customers Select Among 17-4

Competitive Suppliers
• Customer buys on value
• Value equals quality relative to price
• Quality includes all nonprice attributes
-- Product -- Customer Service
• Quality, price, and value are relative
Product
Quality
Value Customer
Price service
McGraw-Hill/Irwin Copyright
Source:Bradley © 2001 byCustomer
T. Gale, Managing The McGraw-Hill
Value (NewCompanies, Inc.Press,
York: The Free All rights
1994),reserved.
p. 29.
 Creating Value 17-5

That Customers Can See

Understanding
Effective design and
customer needs in a Superior quality in quality control
well-defined market areas that matter to
customers

Advertising and Low “cost of

other marketing quality” and overall
Market-perceived
communications cost leadership
quality

Exceptional customer
value

Business results
Profitability, growth,
and shareholder value
McGraw-Hill/Irwin Copyright
Source:Bradley T. Gale, © 2001 by Customer
Managing The McGraw-Hill Companies,
Value (New Inc. Press,
York: The Free All rights reserved.
1994), p. 19.
 Customer Value Added 17-6

Provide products and services

to customers that are a better
value than those they could
purchase from competitive
companies in similar markets

Customer Satisfaction Market Share

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Distribution of CVA Levels 17-7

Calibration Category CVA Levels # of Businesses by Category

World class >110 15%

Above parity 103-110 25
Parity 98-102 20
Below parity <98 40

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies,

Source: PIMS Database. Inc. All rights reserved.
 Calculating CVA 17-8

THE VALUE QUESTION

– Considering the products and services that
you purchased. How would you rate them as
being worth what you paid for them?

Perceived Value of Company’s Offer

CVA =
Perceived Value of Competitive Offers

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Order Fulfillment Customer 17-9

Satisfaction Survey Results Delivering Material

Performance
(1 poor…5 excellent) Ratio
Best Other Company/best
Questions Attributes Company Vendor Other Vendor
Delivering Material When You Wanted It 3.35 3.32 1.01
Having the Necessary Info on All Shipping
Documentation 3.67 NA
Having the Correct Materials Delivered Relative
to What You Ordered 4.00 3.76 1.05

Overall Quality of Delivery of Materials 3.89 3.74 1.04

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Total Cost Analysis 17-10

Purchase Price
plus
 Transportation costs

 Inventory turns

 Terms of sale

 Ordering costs

 Receiving costs

 _______________

 _______________

 _______________

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 Segment Profitability Analysis: 17-11

A CONTRIBUTION APPROACH WITH

CHARGE FOR ASSETS EMPLOYED
SUPPLIER A SUPPLIER B SUPPLIER C SUPPLIER D

SALES
COST OF GOODS SOLD
GROSS MARGIN
PLUS: DISCOUNTS AND ALLOWANCES
MARKET DEVELOPMENT FUNDS
SLOTTING ALLOWANCES
CO-OP ADVERTISING
NET MARGIN
VARIABLE MARKETING & LOGISTICS COSTS:
TRANSPORTATION
RECEIVING
ORDER PROCESSING
_____________
_____________

CONTRIBUTION MARGIN

ASSIGNABLE NONVARIBLE COSTS:

SALARIES
ADVERTISING
INVENTORY CARRYING COSTS LESS:
CHARGE FOR ACCOUNTS PAYABLE
_____________
_____________
SEGMENT CONTROLLABLE MARGIN
McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 IMPACT OF LOGISTICS ON RETURN ON NET WORTH 17-12

Logistics’ Impact
Sales
- Sales increase due to better
$
STRATEGIC PROFIT MODEL Gross Margin
_ customer service

$ Cost of
Goods Sold - Lower cost due to new or more
efficient manufacturing facilities
Net Profit $ - Lower cost of purchased materials

Net Profit $ _ Variable

Margin Expenses
- Reduced order management costs
% ÷ Lot Quantity
- Fewer last minute production changes
Costs
Sales
- Fewer LTL shipments
net profit Total Expenses Transportation - Fewer freight claims
net sales $ Costs - Lower freight costs
$ Inventory - Insurance
Carrying - Taxes
Costs - Variable Storage costs
- Inventory risk costs

Warehousing - Fewer employees required

Return on Financial Return on Costs - Lower third-party warehousing costs
Net Worth Leverage Assets
Information
Reduced IS costs
= X % X Systems

Net profit Total assets Net profit General and

net worth
= net worth
X total assets Administrative Reduced cost of supervision

Inventory

$ Reduced inventory investment

Sales
+
$ Accounts
Current Assets Receivable
Asset
Reduced due to more prompt
Turnover ÷ $ $ paying customers (reduced errors)
Total Assets
+
$ Other
Current Assets
net sales +
total assets
$ Less warehouse space required
Fixed Assets

Increase investment in modernized

production facilities

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
 How Logistics Affects EVA 17-13

Revenue Customer Service Levels

Transportation Costs
Net Operating
Profit After Taxes Warehousing Costs
(NOPAT)
Lot Quantity Costs
Expenses Information System Costs

Non Cost of Money Components

of Inventory Carrying Cost

EVA

Working Inventory
Capital
Accounts Receivable

Capital Cost of
x +
Charge = Capital Equipment/Vehicles

Fixed Land/Facilities (owned)

Assets

Equipment/Facilities (leased)
McGraw-Hill/Irwin Copyright
Source: Douglas M. Lambert and Renan Burduroglu, "Measuring and Selling the Value of© 2001 byThe
Logistics," The McGraw-Hill
International Companies,
Journal of Inc. AllVol.11,
Logistics Management, rights reserved.
No.1 (2000),
 Selling the Value Advantage 17-14

• Who is the customer?

• Must measure value from the

customer’s perspective

• Market segmentation based on value

• Value is a moving target

• Changing role of the sales force

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.