Logistics and Finance

Logistics managers with operations backgrounds and responsibilities typically leave finance to the accountants. Consider 3 logistics tracks of material, information, and financial. These different tracks often result in silos. When I taught International Supply Chain courses, I was very confident in the material and information flows and less so in the financial area. Fortunately, I was able to gain some knowledge and pass it along to my students through the text Global Logistics & Supply Chain Management published by John Wiley and Sons.

It has been said that accountants look back while managers must look forward. This article will identify basic financial terms and measurements relevant to logistics. The information is likely common knowledge for accountants and finance professionals.

Balance Sheet- snapshot of assets and liabilities at a particular point in time.

Income Statement- profit and loss for a defined period of time.

Cash Flow- where the money comes from and where it goes.

Obvious implications for logistics are that time is money, so shortening the supply chain or eliminating delays results in greater profit. High working capital (inventory) reduces profit. Efficient resource utilization (labor, real estate, equipment) increases profit. Cash to cash cycle is key.

Debt financing can be described as gearing. Low gearing means little or no debt. High gearing means the firm has a large proportion of debt to assets. This presents high risk for investors. It also may preclude opportunities to expand or improve operations and debt service (interest) will constrain cash flow.

International logistics involves greater risk which may include uncertain demand, unstable infrastructure and services, political instability, or currency fluctuations. Cost accounting for logistics companies is not as straightforward as for manufacturers. Services are intangible, quality can be difficult to measure, they cannot be stored (perishable), and may involve more that one provider.

More Basics

Order Cycle- Short order cycle leads to reduced inventory; Long order cycle leads to increased inventory.

Cost of Lost Sales- High inventory results in lower lost sales; Lower inventory results in higher lost sales.

Transportation costs- similar tradeoffs as lost sales. Mode shifts from slower to faster (ground to air) can reduce inventory. Shifts from faster to slower (air to ocean) will increase inventory.

Commodity dollar value- High value commodities lead to high inventory, transportation, and packaging costs.

Density- High density commodities lead to reduced transportation and inventory (warehousing) costs.

Loss/Damage- commodities with high susceptibility to loss/damage result in higher costs of transportation and warehousing.

Location decision- Plant or distribution center proximity from materials sources or markets can mean relative advantage or disadvantage vs competitors. These are C- level decisions.