Unit 3 - Logistics Costs
Unit 3 - Logistics Costs
Unit 3 - Logistics Costs
Logistics plays vital role in maximizing shareholder value. explain in context of logistics management
Short notes:
Activity based costing
Bottom Line
Logistics costs
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.
Total cost analysis concept:
It is the analysis of the different cost incurred in entire stages of
supply chain/pipeline to create customer value and deliver goods
and services to ultimate consumers.
Total Logistics Cost= Warehousing cost +Inventory cost+
Transportation costs +Material handling cost + Customer
cost
The basic purpose of logistics total cost analysis is to provide managers with
Customer Service
functions.
Cost must be viewed in incremental terms.
For example, The addition of an extra warehouse to the distribution network
will bring about cost changes in transport, inventory, and communications.
Define the customer service segment This is required as all customers do not
have the same service requirements
Identify factors that produce variations in the cost of service: for example
reducing the frequency of delivery .will reduce the costs.
Identify the specifies specific resources used to support customer segments.
Attribute activity cost by customer type or segment.
An effective costing system must seek to determine the total systems cost of meeting
desired mission objectives (the output of the system) and the costs of the various
inputs involved in meeting these outputs.
ROI
Profit
Costs
Inventory
Return on
capital
employed
Working
capital
Cash and
debtors
Capital
employed
Creditors
Fixed
assets
Cost minimisation
Total delivered cost
Process cost reductions
Outsourcing
Shared services
Improved
shareholder
value
Tax minimization
Assets and sales locations
Transfer prices
Customs
Fuel and property taxes
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Revenues
Less
M Net sales value
Costs
(attributable costs only)
M Cost of sales (actual product mix)
M Commissions
M Sales calls
M Key account management time
M Trade bonuses and special discount
M Order processing costs
M Promotional costs (visible and hidden)
M Merchandising costs
M Non-standard packaging
M Dedicated inventory holding costs
M Dedicated warehouse space
M Materials handling costs
M Transport costs
M Documentation/communications costs
M Returns/refusals
M Trade credit (actual payment period)
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High
PROTECT
COST
ENGINEER
BUILD
DANGER
ZONE
NET SALES
VALUE OF
CUSTOMER
ACCOUNT
Low
Low
High
COST OF SERVICE
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Build
These customers are relatively cheap to service but their net sales value is low. Can volume be increased without
a proportionate increase in the costs of service? Can our sales team be directed to seek to influence these
customers purchases towards a more profitable sales mix?
Danger zone
These customers should be looked at very carefully. Is there any medium- to long-term prospect either of
improving net sales value or of reducing the costs of service? Is there a strategic reason for keeping them? Do
we need them for their volume even if their profit contribution is low?
Cost engineer
These customers could be more profitable if the costs of servicing them could be reduced. Is there any scope
for increasing drop sizes? Can deliveries be consolidated? If new accounts in the same geographic area were
developed would it make delivery more economic? Is there a cheaper way of gathering orders from these
customers, e.g. the Internet?
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Protect
The high net sales value customers who are relatively cheap to service are worth their weight in
gold. The strategy for these customers should be to seek relationships which make the customer
less likely to want to look for alternative suppliers. At the same time we should constantly seek
opportunities to develop the volume of business that we do with them whilst keeping strict
control of costs.
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Sourcing costs
Operations support
Fixed-assets financing
Warehousing and
distribution
Inventory financing
Order, invoice and
collection processing
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Activity-based accounting (ABC) seeks out the cost drivers along the logistics
pipeline that cause cost because they consume resources. For example invoice
items costs instead of invoice costs
ABC Costing approach is a management accounting method that has helped
many companies to improve their profitability and cost structure. ABC identifies
opportunities for management to improve pricing, products, services, operations
and key business processes in order to improve competitiveness.
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Activity-based costing
Products
Costs
Traditional Costing
Activities
Costs
First stage
Products
Second stage
Activities of ABC
Identification of organizational
activities
Assigning cost to each activity
Identifying Outputs
Assigning costs traced for each
activity to products
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Cost Drivers
A cost driver is the unit of an activity that causes the change of an activity cost.
Cost Drivers are the structural determinants of the cost of an activity, reflecting
any linkages or interrelationships that affect it.- M. Porter
Each activity has cost drivers which are used to calculate or estimate the cost of
Drivers :
activities.
Activities:
Purchasing
Product Design
Sales Calls
Product Delivery
Receiving
Stocking
Order Processing
Number of Calls
Percent of time spent on stocking each product
Square feet
Labor Hours per Product
Machine Hours per Product
Number of Shipments per product
Receiving Hours per product
Stocking Hours Per product
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