Asset Management
Utilization of capital investments in facilities and equipment as well as working capital invested in inventory is the concern of asset management. Logistics facilities, equipment, and inventory can represent a substantial segment of a firm’s assets. For example, in the case of wholesalers, inventory frequently exceeds 80 percent of total capital. Asset management metrics focus on how well logistics managers utilize the capital invested in operations.
Facilities and equipment are frequently measured in terms of capacity utilization, or the percentage of total capacity used. For example, if a warehouse is capable of shipping 10,000 cases per day, but ships only 8,000, capacity utilization is only 80 percent. It is also common to measure equipment utilization in terms of time. Logistics managers are typically concerned with the number or percentage of hours that equipment is not utilized, which is measured as equipment downtime. Downtime can be applied to transportation, warehouse, and materials handling equipment. These measures indicate the effective or ineffective utilization of capital asset investment.
Asset management measurement also focuses on inventory. Inventory turnover rate is the most common measure of performance. Throughout the text, improved inventory turnover has been stressed as a critical focus of logistical management. It is important to understand how firms specifically measure inventory turnover rate. In fact, three specific metrics exist, each of which is used by different types of firms:
Inventory turnover = Cost of goods sold during a time period_______
Average inventory valued at cost during the time period
Inventory turnover = ___ _ Sales revenue during a time period__________
Average inventory valued at selling price during time period
Inventory turnover = __Units sold during a time period______
Average unit inventory during the time period
The vast majority of firms use the first to calculate inventory turnover rate. However, some retail organizations use the second. In fact, either of the two ratios should yield approximately the same result. Any difference in the two calculations would result from changes in the amount of gross margin (the difference between sales and cost of goods sold) during the time period.
The third approach, using units rather than dollars, is particularly applicable to products whose cost or selling prices change significantly during a relatively short time. For example, inventory turnover of gasoline, which changes in cost and price almost daily, would most appropriately be measured by computing units of gasoline sold and units of inventory rather than dollars of any kind.
As a final note on computation of turnover, it is critical that average inventory be determined by using as may data points as possible. For example, suppose a company had no inventory at the beginning of the year, bought and held a large quantity for 11 months, then sold all inventory before end of year. Using only the beginning and ending inventory positions, average inventory would be zero and turnover infinite. Clearly, this would be misleading to management.
Inventory investment can also be tracked in terms of the amount that is available to meet forecasted sales volume and is expressed as the days of supply. For example, if sales are forecast at 100 units per day and 5,000 units are in inventory, the firm has 50 days of supply on hand.
Of major interest to senior executives is return on assets and return on investment. Rate of return is of such importance that it is discussed in considerable detail later in this chapter.
Most organizations have substantially improved their functional measurement systems over the past 10 years. The number of specific metrics has increased, and the quality of information has improved. Much of the improvement in information quality can be attributed to improved technology. Years ago measurement of on-time delivery typically did not actually monitor delivery receipt by the customer. Most firms had no mechanism to capture information concerning when customers received orders. Instead, they typically measured on-time shipment by discerning if the order was shipped on time. It was assumed that if shipments left the supplier’s facility “on time,” then they also arrived at customer facilities “on time.” Thus, the transportation delivery aspect of the order cycle was ignored. Today, using EDI linkages, satellite, and Internet tracking, many organizations monitor whether orders actually arrive at the customer location on time.
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