Don’t Get Caught in the “Jaws of Death”! 
Logistics Management from the Financial Perspective

By Peter Canellis

The first article in this series provided an overview of five major logistics cost drivers and four perspectives from which to view them in order to reduce costs.  This second article focuses on the financial perspective.

What can professional logistics managers do to help their clients become more successful and profitable?  In order to answer this question, we must first understand a client’s financial position.   

First, we want to know our client’s operating profit margin.  This is the difference between sales revenue and expenses incurred for purchased goods and services, sales force operations, administrative expenses, and other general expenses.  Higher revenue and lower expenses yield higher margins. 

Trend is also important.  By viewing the changes in these financial variables over time, we can see whether or not margins are improving or eroding.  This is important because, while revenue may be rising, gross margin and profitability will be lower if expenses are increasing at a faster rate than revenue.  An accountant with poetry in his soul called this trend “The Jaws of Death.” 

With  this overview, we can identify the areas in which logistics services can help to reduce costs.  Details of inbound logistics costs are typically found within ‘Cost of Goods Sold’ (‘COGS’ to the accounting types).  Details of outbound logistics costs are typically found within ‘Sales, General, and Administrative Expense’.  In these two categories, we will find costs incurred for transportation, packaging, cargo handling, distribution, and other costs related to moving and storing material.

Inventory is a major cost factor in logistics operations.  The amount of inventory that a company holds is found in another important source of financial information: the balance sheet.    

Using information from the income statement and balance sheet together, we calculate three critical supply chain metrics:

·          Days of Inventory:  The fewer days the better, because this means that less inventory is being carried (and purchased) at any given time. 

·          Days Sales Outstanding (DSO):  the number of days’ sales that have not been collected.  DSO that exceeds a company’s payment terms means that the company is financing its customers’ purchases. 

·          Days Payables Outstanding (DPO):  the number of days’ payables that have not been paid to a company’s suppliers.  DPO reduces the effective number of days that inventory is held; because what really matters is how long inventory is held after suppliers have been paid.  

These three metrics are input to the calculation of cash-to-cash cycle; the amount of time required to convert a dollar of expense to a dollar of revenue. 

The effective number of days of inventory (i.e. the amount for which suppliers have been paid) is the actual number of days of inventory reduced by the lag in time required for a supplier to create an invoice and by DPO.  In other words, slow invoicing and slow payments mitigate the effects of carrying inventory.

Conversely, the cash-to-cash cycle is lengthened by the time it takes to sell and deliver goods, cut an invoice for those goods, and collect payments.   

Each day that can be removed from the cycle by some combination of lowering inventories, making quicker deliveries, billing faster after products are sold and deliveries made, and shortening collection time contributes to widening profit margins.      

Logistics cost data, extracted from the details of the income statement and balance sheet, allow us to focus on clients’ needs.  Providing cost-effective solutions for the planning, scheduling, and execution of cargo transport and storage, helps clients to widen their margins.  This contributes directly to their success and profitability.   

The financial perspective is both primary and critical to understanding a company’s strengths and weaknesses.  However, it only provides the overview: the ‘what’, so to speak, of the company’s condition.   

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Three Westchester Organizations
Receive 2006 Averell Harriman International Trade Awards

The 11^th Annual Averell Harriman International Trade Awards Dinner was held on May 23, 2006.  The purpose of the event is to highlight the importance of international trade to the economic vitality of the Hudson Valley and to honor those companies who have made significant contributions in that arena.  The dinner is hosted on a rotating basis each year by one of seven counties within the lower Hudson Valley.  This year’s host was the Rockland Business Association.

Awards were given out in several different categories of international business activity.  In the category of Exporter of the Year for a company with sales between $10 and 50 million, the award went to Oxygen Electronics located in White Plains.  Oxygen, which was founded in 1995, sells components that go into high tech products such as chips, memory circuits and connectors for the defense, aerospace and technology industries.  By creating fully automated and efficient data and order entry systems, and through superior Customer Service, Oxygen has been able to increase its annual transactions from 3500 in 2003 to more than double that in 2004.  By the end of this year, that number should approach 11,000.  And because of their efficient technology, Oxygen accomplishes all of this with a staff of just 9 in White Plains, 3 in CT, 8 in France and 4 in the UK.

Daisy Yau, Director of Asia Pacific Development, County of Westchester; Amy Allen, Managing Director Advocacy and International Business, The Westchester County Association; Dr. Linda Sama, Director of the Center for International Business Development, Pace University

The award for Trade Partner of the Year was granted jointly to 2 Westchester organizations-Pace University and the County of Westchester.   Both Pace and the County of Westchester have a long history of international initiatives, most recently in establishing ties with China.  As a result of groundwork laid during trade missions led by County Executive Andy Spano, Pace was recently certified by the Chinese government to offer college degrees in China to Chinese citizens.  Only 32 institutions in the Northeastern U.S. - are currently certified and Pace is the first school in Westchester County to receive the certification.

In addition to international education relationships with China, Pace also has international business programs in Latin America and Europe and hosts many overseas students and professors annually. The year 2006 marks the centennial anniversary of Pace’s founding, which is certainly an important milestone.

The County Executive and his economic development team have led international trade delegations to Italy and Ireland, in addition to China.  Having Westchester County’s “CEO” lead these delegations carries a lot of clout and prestige in the international arena and it indicates to potential business partners that  Westchester recognizes and supports the importance of global trade.

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The picture is of Ambassador LeFleur, Deputy Secretary of Commerce Samson, other embassy officials, and trade
mission participants
 

US Department of Commerce Westchester Export Assistance Center Leads Environmental Technologies Trade Mission to Southeast Asia

The US Department of Commerce Westchester Export Assistance Center led a highly successful trade mission to Malaysia, Thailand, and the Philippines featuring 8 U.S. companies from April 24 – May 3, 2006.  Company representatives benefited from extensive market briefings in each country by embassy officials from Departments of State and Commerce, USAID, the Asian Development Bank and from private sector representatives from the American Chambers of Commerce.  Participating companies projected over $10 million in sales over the next 12 months, through a distributor network in the three markets that was newly established during the customized one on one appointments set up by embassy officials in the three markets.  Mission participants were pleasantly surprised by the speed with which the markets seem to be ready to adopt their technologies, including GIS mapping, cloud seeding, and innovative waste water and air pollution treatment systems. 

Prepared by Betsy Shieh, May 2006

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VIRTUAL WINE TASTING HOSTED BY U.S. DEPARTMENT OF COMMERCE

On April 20, 2006, the Westchester Export Assistance Center of the U.S. Department of Commerce held the first-ever Hudson Valley virtual wine tasting and tourism videoconference, intended to promote Hudson Valley wines, the wineries as destinations, and other regional tourist destinations to Korean consumers. The event featured five Hudson Valley wineries presenting three varietals of their wines to approximately 45 Korean wine importers, sommeliers, writers, and educators.  Several Hudson Valley destinations sent promotional literature and invited the Korean participants to visit.

The Commerce Department is always looking for new and innovative ways to help promote U.S. products and services around the world, and many of our offices around the country are now using videoconferencing to introduce local clients to overseas partners.  Technological advances and the expense of international travel have made this a popular option for U.S. companies looking to meet buyers, and our office is committed to providing more opportunities like this going forward.

Michael Grossman
International Trade Specialist
U.S. Department of Commerce
White Plains, NY

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WCA and Westchester Export Assistance Center Plan Regional Initiative to Recruit International Students
 

The WCA’s Westchester Higher Education Committee, chaired by Dr. David A. Caputo, President of Pace University, with the assistance of the Westchester Export Assistance Center, is exploring the idea of forming a regional consortium of colleges and universities to attract more international students to Westchester County.  Reviewing other successful regional models, the Committee will be looking at opportunities to collectively market Westchester as an education destination for international students.  Westchester has a powerful combination of geography, quality of living, and diversity of schools.  For families in other countries looking to send their children to college in the U.S., Westchester is the perfect mix: close to New York City, but not in the city – safe, but accessible, with every type of degree available.  A recent visit by the Education Sector Specialist from the Commercial Service office in Tokyo confirmed the strong opportunity this region has to increase its global profile.  

For more information, contact Amy Allen of the WCA at aallen@westchester.org or Joan Kanlian of the Westchester Export Assistance Center at Joan.Kanlian@mail.doc.gov.

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