The importance of logistics

It is that time of year again when I have to explain to family members what I do. I usually say that I work in either Logistics or Supply Chain and give a brief description of what this involves. Usually that ends the conversation but occasionally I am asked for more details. I usually respond by taking them through the vital role of supply chain / logistics in modern business and illustrate it by demonstrating their importance to financial performance (we have some really dull Christmas Conversations!).

The first lesson of a MBA finance class is that cash is king and it is in this area that effective SCM can really improve performance. It does this by its ;impact on the cash to cash cycle which is the time it takes from when money is spent with suppliers to when it is collected from a customer therefore:-

Cash to Cash = Days of inventory + Days of accounts receivable + days of accounts payable

SCM has a huge effect on this calculation as appropriate strategy and operations can significantly reduce the amount of inventory that a company carries, whilst the accurate fulfilment of orders will reduce the ‘days of accounts receivable’ due to the reduction of queries whilst the accounts payable can be reduced by reducing the lead times from suppliers.

If said relative is still interested I then go onto explain the influence of logistics on the main financial statements – the P&L and the balance sheet

P&L

• Sales is influenced by the level of customer service. If customers do not receive their orders in an appropriate time the company will get a bad reputation and this will influence future sales
• Cost of goods sold is influenced by purchasing strategy
• Selling and admin expense is influenced by warehousing, administration, transport, and inventory control

Balance Sheet

• Cash & receivables are influenced by order cycle time, order accuracy and invoice accuracy
• Inventories are influenced by inventory
• Property, plant and equipment influenced by distribution facilities, plant and equipment
• Debt and equity influenced by financing options for inventory, plant and equipment

By the end of this conversation the relative either understands why logistics and SCM are important or has fallen asleep or is nodding politely having stopped listening 40 minutes ago