4.5 Communicating Value via Measurement

If your goal is to demonstrate logistics' value to senior managers, you need to directly link logistics operating metrics to the financial metrics for which they are held accountable: bottom-line, revenue, cash flow, and asset utilization. The good news: Everything we do and measure in logistics influences, directly or indirectly, critical financial statements (i.e., income statement and balance sheet) and Table 4-4 shows how.

Let's focus briefly on logistics' impact on the income statement. Your company's revenue is directly affected by your order-fill rate, order cycle time and perfect-order delivery performance. Better service means more sales and, more orders completely filled the first time means fewer lost sales. Positive word of mouth from satisfied customers will drive revenue growth. Likewise, reduced inventory obsolescence and damage combined with lower inbound transportation costs will boost the bottom line. We will walk through some of these calculations below.

Now, let's turn to the balance sheet. The inventory on your balance sheet directly reflects the days of inventory that you carry to meet customer service requirements. Better delivery capabilities mean less inventory—and better asset utilization. Your fixed assets reflect the decisions that you make regarding how much logistics to provide in-house compared to what you outsource to a third-party logistics company (3PL). These decisions affect investments in transportation equipment, warehouses, cross-docks, storage & handling equipment, and information technology (IT). If you have your own assets and excel at logistics, like Walmart, you can improve your revenue and profit enough to pay for the investment. Consider Amazon.com. For years, Amazon has been losing money on shipping orders to customers through 3PLs. 1 Amazon is now experimenting with providing its own deliveries in major markets like New York, Los Angeles and San Francisco. The goal is to reduce delivery costs and make home delivery profitable. Don't be surprised when you place an order with Amazon.com in the near future and you see an Amazon.com delivery truck pull up to your door! 2 Who knows, Amazon might even start to compete with UPS and FedEx.