MRS.V.

MADHU LATHA
ASSISTANT PROFESSOR
DEPARTMENT OF BUSINESS MANAGEMENT
VR SIDDHARTHA ENGINEERING COLLEGE
Logistics costs are incurred by logistics activities such as customer service,
transportation, warehousing, order Processing and information, inventory carrying.
Customer service level costs

Transportation costs

Warehousing costs

Order processing/ Information

systems costs

Lot quantity costs

Inventory Carrying costs

 Total Cost analysis:
 Organization should have goal of reducing the total cost of logistics
activities
 Total cost analysis is the key to manage the logistics function.

At a given level of customer service,

the total logistics costs must be
minimised rather than an attempt
to minimise the cost of individual
activities.
 Logistics Costing:

Logistics Accounting Statements

Are Not Standardised
Like Financial accounting
Statements
 Principles of Logistics Costing:

Attributable
Logistics Mission
costs
Costing Costing
BARRET

Financial Accounting Managerial

system Accounting system
Logistics and the Bottom Line:
Margin = Profit Capital Turnover = Sales
Sales Capital Employed
ROI = Profit

Capital Employed

= Margin x Capital Turnover

= Profit Sales
Sales Capital Employed
Impact of Logistics on ROI:

Customer Increases Sales

Service Revenue
Profit
Logistics Decreases Costs
Efficiency (Cost minimization)
Plus ROI
Inventory

Plus

Accounts
Asset Receivable Capital
Deployment and Employed
Plus
Utilization
Cash
(Use Effectively)
Plus

Fixed
assests
 Impact of Logistics on Share holder value:
Share holder value is a key measure of corporate performance. The Shareholder value is
calculated by determining the Net present value of future cash flows

Net Cash flow = (Net operating income) – (Taxes + WC investment + Fixed capital investment)

A recent concept developed by sten stewart & Co of New york is “ Economic value added”

EVA = (Profit after tax ) – (True cost of capital Employed)

(Market value added)

MVA = (stock price 8 issued shares) – (Book value of total capital employed)
Creation of Value:
Integrated Logistics and SCM helps in creating three perspectives of values which in turn
helps the share holder value

Economic Value

Market Value

Relevancy Value
 Gross Sales
Value
Trade
Discounts
Net Sales
Value Direct Costs
Production
Indirect Costs
Costs
Customer related costs (Direct)
Production Sales calls
Contributions Instore and cooperative
promotions
Marketing Bonuses
Costs (Sales) Merchandising

Marketing Overhead costs) (Indirect)

Contribution Salesforce management
National Advertising
Campaign
Distribution
Customer Service Costs Customer related costs (Direct)
Gross
Transportation
Profitability
Warehousing
Packaging
Customer Inventory holding
Contribution to Order processing
Firm profit Trade credit
For various reasons some customers are less profitable than others

 Customers make frequent order changes

 Customer needs special parts
 Customer is difficult to please

Once we know which customers are least profitable , we can modify our relationship to improve
Profitability.

There are two primary steps:

1. Identify effective and ineffective customer related activities
2. Measure customer profitability
Customer Profitability analysis identifies customer service activities, cost drivers and the profitability of an
Individual customers or customers group.
Activity Based Costing:
Activity based costing is a costing approach that assigns resource costs to cost objects such as
products, services, or customers based on activities performed for the cost objects.
Cost Drivers:
A cost driver is a factor that causes or relates to a change in the cost of an activity .
Because cost drivers cause or relate to cost changes, measured or quantified amounts of
Cost drivers are excellent for assigning resource costs to activities and for assigning the cost
Of activities to cost objects.

A cost driver is either a

 Resource consumption cost Driver

 Activity consumption cost Driver