Early views
•Despite its obvious importance, logisticshas notalways receivedits fair share of attention.
•Historically, organisations put all their effort into making products and gave little thought to the associated movement of materials.
•However, logistics had been identified as a high cost function, and one where organisations can make significant savings.
Worked Example
•JL Francisco & Partners run a wholesale fruit business around Rio del Plata. In normal circumstances the company makes a gross profit of 5% of sales. A consultant’s report has recently suggested that 22% of their operating costs are due to logistics, and that improved efficiency mightreduce this by 10%.
Questions:
1.How much extra profit would this generate?
2.If they do not improve logistics, how muchwould saleshave to rise to get the same increase in profit?
Solution
•Gross profit is 5% of sales, so if we take sales of $100, operating costs amount to $95. At present, 22% of this, or 95 ×0.22 = $20.90, is due to logistics.
•If the company reduces the cost of logistics by 10%, it would save 20.90 ×0.1 = $2.09. Assuming that there are no changes to the selling price or other costs, this is a direct contribution to profit. A 10% reduction in logistics costs raises profit from $5 to $7.09, or an increase of 42%.
•Without the reduction in logistics costs, the company would have toincrease sales by 42% to get the same increase in profit.
Early views•Despite its obvious importance, logisticshas notalways receivedits fair share of attention.•Historically, organisations put all their effort into making products and gave little thought to the associated movement of materials.•However, logistics had been identified as a high cost function, and one where organisations can make significant savings.Worked Example•JL Francisco & Partners run a wholesale fruit business around Rio del Plata. In normal circumstances the company makes a gross profit of 5% of sales. A consultant’s report has recently suggested that 22% of their operating costs are due to logistics, and that improved efficiency mightreduce this by 10%.Questions:1.How much extra profit would this generate?2.If they do not improve logistics, how muchwould saleshave to rise to get the same increase in profit?Solution•Gross profit is 5% of sales, so if we take sales of $100, operating costs amount to $95. At present, 22% of this, or 95 ×0.22 = $20.90, is due to logistics.•If the company reduces the cost of logistics by 10%, it would save 20.90 ×0.1 = $2.09. Assuming that there are no changes to the selling price or other costs, this is a direct contribution to profit. A 10% reduction in logistics costs raises profit from $5 to $7.09, or an increase of 42%.•Without the reduction in logistics costs, the company would have toincrease sales by 42% to get the same increase in profit.
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