Reverse Logistics - Logistics Quarterly

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Return Net Net profit ( Net worth) = Financial Leverage x Total assets ( Net worth) firm’s profitability, and also a key contributor to shareholder value. Effective returns management can contribute to improved ROA in several ways. First, reclaiming products/parts that can be reutilized in the forward supply chain can dramatically reduce a firm’s cost of goods sold. Even if refurbishment or remanufacturing is required, revenues can ultimately be gained from essentially ‘free’ inputs where a refund is not required.The firm has already paid for the raw materials once, and doesn’t have to re-procure or totally transform them again in order to gain additional revenue. Appliance and electronic goods manufacturers are prime examples of organizations that are taking advantage of this type of non-traditional supply. Firms that lease their products, such as office equipment and computer manufacturers,also focus on asset recovery initiatives to reclaim their end-of-lease products. Many of these products (or at least their parts) still have useful life that can be offered to other customers at very little up-front cost. Second, operating expenses can be reduced through effective and innovative returns management programs. In addition to minimizing costs relative to returns processing, 22 LQ winter 2003/2004 Return on Assets Net profit ( Total assets) Net Profit Margin Net profit ( Net sales) Asset Turnover Net sales ( Total assets) Source: Lambert, Douglas M. and Renan Burduroglu (2000). “Measuring and Selling the Value of Logistics” The International Journal of Logistics Management, 11(1), 1-17. Figure 1. The General Strategic Profit Model Net Profit $ Sales $ Sales $ Total Assets $– Gross Margin $ Total Expenses $ Current Assets $ Fixed Assets $ Sales $ Cost of Godds Sold $ Variable Expenses Inventory $ + Accounts Receivable $ + Other Current Assets $– Lot Quantity Costs Transportation Costs Inventory Carrying Costs Warehousing Costs Information Systems General and Administrative Logistics’ Impact • Sales increase due to better customer service • Lower cost due to new or more efficient manufacturing facilities • Lower cost of purchased materials • Reduced order management costs • Fewer last minute production changes • Fewer LTL shipments • Fewer freight claims • Lower freight costs • Lower costs for: Insurance • Taxes Variable Storage costs Inventory risk costs • Fewer employees required • Lower third-party warehousing Reduced IS costs Reduced cost of supervision Reduced inventory investment Reduced due to more promptly paying customers (reduced errors) Less warehouse space required Increase investment in modernized production facilities customer service costs can be reduced if the return process is streamlined from a customer’s perspective. Additionally, capturing information about the reasons for returns being made can be leveraged to further improve the product, thus reducing future returns. Effective returns management and processing can also reduce a firm’s environmental compliance or waste disposal costs. Third, assets in the form of obsolete inventories can be reduced if returns are managed efficiently. This means getting merchandise returns from dealers in a timely manner so that alternative uses can be made of the inventory before the only option is to write it off, and then dispose of the product.Managing the timing of returns is especially critical for seasonal or short life-cycle products. Merchandise returned at the end of a season has little potential for alternative use. Making earlier decisions about stock disposition in the field can provide many opportunities to reuse inventory before it becomes obsolete.This means implementing channel-cleaning policies with dealers and retailers to manage not only the quantity of returned products, but also the timing. LogisticsQuarterly.com
RETURN ON ASSETS % net profit ( total ) The ROA Approach Profitability analysis is an important means of assessing logistics activities and proposed changes to a firm’s logistical systems. Profitability analysis goes beyond total cost analysis by incorporating the revenue impact of logistical activities. For example, an improved level of service may bring about increased revenue as your customers respond to your higher levels of service. Such changes must be built into logistical system analysis. Additionally, the impact of assets such as inventory levels, accounts receivable and fixed logistical assets should be incorporated into a comprehensive profitability analysis approach. A critical measure of strategic success is Return on Investment, which can typically be measured by Return on Net Worth (RONW), or by Return on Assets (ROA). RONW measures the profitability of the funds that owners have invested in the business, and is most likely of interest to shareholders and investors. ROA provides a more operational perspective by providing a view of how well managers utilize operational assets to generate profits. Thus, ROA becomes a key managerial tool for logistics profitability analysis. The Strategic Profit Model provides the framework for ROA analysis by incorporating revenues and expenses to generate net profit margin, as well as an inclusion of assets to measure asset turnover. Net profit margin measures the proportion of each sales dollar that is kept as profit, while asset turnover measures the efficiency with which assets are used to generate sales. Together, they form the basis for ROA. Figure 1 provides the general framework for understanding how logistical decisions can impact net profit margin, asset turnover, and ultimately, ROA. In using the ROA approach to better understand the impact of reverse logistics decisions, Figure 2 illustrates that the impact of reverse logistics goes beyond cost reductions. In fact, the impact can be broadly described in terms of: • Cost reductions that come through reduced cost of goods sold and operating expenses; • Improved asset turnover through better inventory management; and • Increased revenues in both the short and long terms through additional sales and full-price maintenance due to newer stock being offered. LogisticsQuarterly.com NET PROFIT MARGIN net profit ( net sales) ASSET TURNOVER net profit ( total assets) NET PROFIT $ ÷ SALES $ SALES $ ÷ TOTAL ASSETS Figure 2. The Impact of Reverse Logistics Activities on ROA $ GROSS $ - TOTAL $ CURRENT ASSETS $ + FIXED ASSETS $ SALES $ COST OF GOODS SOLD $ VARIABLE $ FIXED EXPENSES $ INVENTORY $ ACCOUNTS RECEIVABLE $ + OTHER CURRENT ASSETS $ 6. Increase brand equity long-term revenues increased customer based on environmentally responsible logistics activities 4. Increase revenues selling recovered in existing or new channels 1. Reduce COGS by reclaiming reusable products/parts that re-inserted into the forward supply chain 2. Reduce operating returns management, disposal/compliance minimize future 5. Increase revenues channel cleaning; inventories and eliminates the need for markdowns old stock 3. Reduce inventories channel cleaning also reduces inventory carrying costs LQ winter 2003/2004 23
Page 1: Ideas for Leadership in Logistics L
Page 4 and 5: You progress a lot faster when you
Page 6 and 7: One America, One Vision Changing co
Page 9 and 10: JIM ELLIS B.Sc., P.Log., FCAM, CM i
Page 11 and 12: New Members of LQ’s 2004 Editoria
Page 13 and 14: LogisticsQuarterly.com LQ winter 2
Page 15 and 16: Mobile or Field Inventory “means
Page 17 and 18: Making Sense of the New Hours of Se
Page 20 and 21: CreatingValue ThroughReverse Logist
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Page 27 and 28: Introduction Traditionally, supply
Page 29 and 30: Focus on Supply Chain Management La
Page 31 and 32: CONQUER NEW MARKETS WITH ONE CALL.
Page 33 and 34: LogisticsQuarterly.com This account
Page 35 and 36: S P E C I A L • T E A M S Third a
Page 37 and 38: Leadership in Logistics How does an
Page 39 and 40: What Every CFO Should Know The 80 y
Page 41 and 42: Supply Chain Analyses Versus Synthe
Page 43 and 44: Making An Investment in Learning Th
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