Logistics and Shareholder Value Quiz

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47 Questions

What proportion of gross domestic product is the total cost of logistics estimated to be close to in the USA?

10%

What is the main focus of traditional accounting systems in terms of cost understanding?

Product costs

What does logistics activity not just generate, but also revenue through?

Profit

What form of resources does logistics activity require?

Fixed capital and working capital

What is the primary focus for companies, potentially leading to a short-term view and limited investment in brands, R&D, and capacity?

Maximizing the bottom line

What is the main objective of mission costing?

Determining the total systems cost of meeting desired mission objectives and the costs of the various inputs involved

What has become as important as profit for management decision-making?

Cash flow

How does customer profitability analysis measure customer profitability?

By identifying avoidable costs and incremental revenue

What is a key metric for evaluating the productivity of capital and assets?

Return on investment (ROI)

What does the basic model for customer profitability analysis involve?

Categorizing customers based on their net sales value and cost-to-serve

How can logistics management impact ROI?

Through various elements, including profit/sales margin and capital turnover

How are customers categorized in customer profitability analysis?

"Build," "Danger zone," "Cost engineer," and "Protect" based on their profitability and cost of service

What is capital employed, or funds employed?

The total capital used for acquiring profits by a firm or project

What is the purpose of direct product profitability (DPP)?

To identify all costs attached to a product or order as it moves through the distribution channel

How can logistics influence the balance sheet?

Through better use of assets and resources, impacting operating income and overall performance

Why is direct product profitability (DPP) important for suppliers to understand?

It influences their ability to be a low-cost supplier

What do logistics variables directly impact, affecting the liquidity of the business?

Cash and receivables

What do cost drivers and activity-based costing involve?

Defining customer service requirements and attributing activity costs by customer type or segment

What role does logistics play in inventory management?

Influencing inventory levels, stock locations, and minimizing the need for inventory

What is the purpose of logistics cost analysis?

To provide managers with reliable information for better resource allocation to meet customer service requirements at the lowest cost

What does the logistics system heavily use, impacting the total capacity employed?

Fixed assets such as warehouses, storage, and transport equipment

How can integration of purchasing with operations management optimize accounts payable and bought-in materials?

By reducing excessive levels of raw materials inventory

How do alternative logistics strategies, such as leasing and using third-party suppliers for warehousing and transport, impact the balance between debt and equity and affect funding requirements?

They affect the balance between debt and equity and affect funding requirements

In crucial financial areas, including ROI, balance sheet shape, and funding requirements, logistics management has the potential to:

Transform performance

What is Economic Value Added (EVA)?

The difference between operating income after taxes and the true cost of capital employed

How can a company generate a negative EVA?

If the cost of capital employed is greater than the profit after tax

What is Market Value Added (MVA) a measure of?

Wealth calculated as the net present value of expected future EVAs

How can logistics performance impact shareholder value?

By affecting net operating income and capital efficiency

What are the five drivers of enhanced shareholder value?

Revenue growth, operating cost reduction, fixed capital efficiency, working capital efficiency, and tax minimization

How can logistics service impact sales volume and customer retention?

By positively influencing sales volume and customer retention

Why can logistics and supply chain management offer potential for significant operating cost reduction?

Due to their impact on a large proportion of business costs

Why does logistics tend to be fixed asset 'intensive'?

Involving considerable investment and potentially depressing return on investment

How are supply chain strategy and logistics management linked to working capital requirements?

Affecting inventory, order fill, invoice accuracy, and cash flow

How can time compression in the pipeline and reduced order-to-cash cycle times impact working capital requirements?

By dramatically reducing working capital requirements

What can eliminating non-value-adding time in the supply chain lead to?

A significant reduction in working capital and inventory turns

What is the primary determinant of a business's value according to Warren Buffet's view?

Net present value of free cash flow

What is the main challenge for many companies in integrating logistics management?

Obtaining appropriate cost information

What does the total cost analysis in logistics involve?

Various cost elements in the complete order processing cycle

What is included in the cost of holding inventory?

Cost of capital

What do principles of logistics costing involve?

Mirroring the materials flow and enabling separate cost and revenue analyses

What are missions in the context of logistics and supply chain management?

Sets of customer service goals achieved by the system within specific product/market contexts

What does the complexity of generating appropriate cost information for logistics decisions arise from?

The background of an existing system

What is the focus of traditional company lines in the context of missions in logistics and supply chain management?

Achieving customer service goals

What does the cost of holding inventory include?

Cost of capital

What is the purpose of logistics cost analysis?

Identifying the change in costs brought about by logistics decisions

What do principles of logistics costing aim to enable?

Separate cost and revenue analyses by customer type and market segment

What is the primary factor impacting after-tax free cash flow in a global economy?

Different tax regimes

Study Notes

Logistics and Shareholder Value

  • Shareholder value is a critical measure of corporate performance, determined by the net present value of future cash flows.
  • Economic Value Added (EVA) is the difference between operating income after taxes and the true cost of capital employed.
  • A company can generate a negative EVA if the cost of capital employed is greater than the profit after tax, leading to an erosion of shareholder value.
  • Market Value Added (MVA) is a measure of wealth calculated as the net present value of expected future EVAs.
  • Logistics performance can impact net operating income and capital efficiency, affecting shareholder value.
  • The five drivers of enhanced shareholder value are revenue growth, operating cost reduction, fixed capital efficiency, working capital efficiency, and tax minimization.
  • Logistics service can positively impact sales volume and customer retention, enhancing revenue growth.
  • Logistics and supply chain management offer potential for significant operating cost reduction due to their impact on a large proportion of business costs.
  • Logistics tends to be fixed asset 'intensive', involving considerable investment and potentially depressing return on investment.
  • Supply chain strategy and logistics management are linked to working capital requirements, affecting inventory, order fill, invoice accuracy, and cash flow.
  • Time compression in the pipeline and reduced order-to-cash cycle times can dramatically reduce working capital requirements.
  • Eliminating non-value-adding time in the supply chain can lead to a significant reduction in working capital and inventory turns.

Tax Minimization and Cash Flow in Global Economy

  • Location decisions in a global economy impact after-tax free cash flow due to different tax regimes, including corporate taxes, property tax, and excise duty on fuel.
  • Supply chain decisions of large global companies significantly affect the total tax bill and shareholder value, as production facilities and distribution centers are dispersed across different countries.
  • The value of a business is determined by the net present value of free cash flow occurring from its operations over its lifetime, according to Warren Buffet's view.
  • Strategies to enhance shareholder value involve accelerating cash flows, reducing risk, and increasing the long-term value of the business, such as by growing the customer base.
  • Integrating logistics management requires appropriate cost information, which has been a challenge for many companies, impacting the total distribution activity and cost accounting systems.
  • Total cost analysis involves various cost elements in the complete order processing cycle, with fixed and variable cost components leading to different total costs for specific orders.
  • Logistics decisions are usually taken against an existing system, and total cost analysis identifies the change in costs brought about by these decisions.
  • The cost of holding inventory includes the cost of capital, comprising the cost of debt and the cost of equity, reflected in the weighted cost of capital.
  • Principles of logistics costing include mirroring the materials flow, enabling separate cost and revenue analyses by customer type and market segment, and defining the desired outputs of the logistics system based on missions.
  • Missions in the context of logistics and supply chain management are sets of customer service goals achieved by the system within specific product/market contexts, cutting across traditional company lines.
  • Defined mission goals involve inputs from various functional areas and activity centers within the firm, contributing to the successful achievement of these goals.
  • The complexity of generating appropriate cost information for logistics decisions arises from the background of an existing system, leading to the need to view costs in incremental terms and identify relevant accounting information for decision making.

Test your knowledge on the critical link between logistics and shareholder value in this quiz. Explore the impact of logistics performance on revenue growth, operating cost reduction, fixed capital efficiency, working capital efficiency, and tax minimization, and understand the potential for supply chain management to enhance shareholder value.

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