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Industrial Overview

Breaking down the pharmaceutical R&D expenditure structure

As mentioned in the previous article, increased R&D investments improves the sales and production of existing and new drugs of a company. Pharmaceutical R&D expenditures comprises

  • drug filing,
  • improved quality control,
  • drug clinical tests,
  • packaging,
  • export charges and,
  • inspection costs (Li & Hall, 2016).

According to a report by STATISTA, (2017), pharmaceutical R&D expenditures was valued at USD 159 billion globally in 2016.

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Concerns and measures to help combat unemployment in South Africa

Concerns and measures to help combat unemployment in South AfricaSouth Africa prides itself for having the strongest and most stable economy in Africa.  Industry, manufacturing, mining, agriculture and tourism all play an important role towards the countries’ economies growth and creation of jobs. Continue »

 
Recently on Knowledge Tank

Impact of cross-country M&A on operating profit margin

The aim of this article is to check the impact of cross-country mergers and acquisitions (M&A) on the operating profit margin. The previous article explained the methodology followed in order to achieve the objectives of this research.

  1. Compare the pre and post-merger performance of selected cross-country mergers and acquisitions (M&A) deals.
  2. Examine the impact of the announcement of mergers and acquisitions (M&A) on the excess returns on the shares.

To achieve these objectives, quantitative analysis was carried in a series of articles. The present article deals with the analysis of the first objective.

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Impact of personal characteristics on online purchase decision

This article focuses on the thematic analysis of interviews about personal characteristics affecting the online purchase decision of the Millennials and Generation Z in India. As summarized in a previous article, the interviews were conducted with 7 representatives of different mid-sized eCommerce companies based in Delhi-NCR. The aim of the interviews was to understand how eCommerce businesses identify the factors and then strategies to influence the online shopping behaviour of Generation Z and Millennials.

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Interview & survey method to understand the factors affecting online shopping behaviour

The previous article discussed the conceptual framework for factors affecting the online shopping behaviour of generation Z and millennial consumers. The conceptual framework showed the important variables of the study. It also presented the research questions and the hypotheses to be tested. The aim of this study is to determine the factors affecting the buying behaviour of generation Z and millennials. Furthermore, this study will also identify the strategies adopted by e-commerce businesses to influence them. For this purpose, the study adopts a multi-dimensional research approach that includes interview and survey methods.

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Order fulfilment strategies in supply chain management

Order fulfilment is an integral part of the Supply Chain Management (SCM) process. It works towards fulfilling the requirements of the consumers in the process (Wu et al., 2016). However, even though fulfilling orders is cardinal in setting a supply chain in motion, the order fulfilment process of SCM involves other activities. It is a composite process that involves designing a framework or a process to reduce costs. Furthermore, it requires the establishment of a cross-functional network with all SCM stakeholders and coordination between them, along with sound logistics management (Croxton, 2003). A perfectly implemented order fulfilment procedure helps improve the overall SCM quality (Mishra and Sharma, 2014).

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Methodology to establish the impact of FDI inflows on water pollution in India

The aim of this study is to determine the impact of Foreign Direct Investment (FDI) inflows on environmental pollution in India for the time period 2002-2017. To this effect, ‘environmental pollution’ has been split into two types; water and air pollution. A previous article of this study established that FDI inflows have a significant positive impact on air pollution in the form of greenhouse gas emissions. This article establishes the methodology adopted for empirically testing the impact of FDI inflows on water pollution of India.

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Impact of inter-industry mergers and acquisitions on the profitability

Inter-industry mergers and acquisitions have become common in today’s business world due to the benefits associated with them. The effect of mergers and acquisitions manifests in many ways determining a firm’s financial performance.

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Activity-based costing or ABC model in logistics

The Activity-based Costing (ABC) model is one of the many approaches to estimate logistics costs. The term was coined in the late 1980s by Robert Cooper and Robert Kaplan in their article titled, “Measure Costs Right: Make the Right Decisions.” ABC model is defined as a management accounting technique which allocates costs to different activities that consume organizational resources thereby identifying the costs per product or service or customer (Themido et al., 2000). Conventionally, logistics costs were determined as a gross figure, but later on, it was realized that such measures usually present a fallacious account of the logistics costs. This is because logistics functions take place in a dynamic environment.

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Understanding the value of logistical cost in a business

Often the efficiency of the logistics function of a business is estimated in terms of value. But there is no concrete definition of the term ‘value’ in logistics (Francis et al., 2014). The need for defining value did not arise in the past because earlier, logistics was considered to be a cost. Since two decades emphasis over recognizing logistics as a value-adding function was made (Rutner and Langley, 2000; Kilibarda, Andrejić and Popović, 2013). Value is created in the logistics when the capabilities of the elements of the supply chain are combined in a way that it leads to the improvement of competitive advantage of all parties (Hammervoll, 2009). Conventionally value in logistics denoted cost efficiency but now variables like mutual learning, customer satisfaction and agility in the supply chain have also gained significance.

Different methods of value measurement in logistics

Measuring logistics performance implies quantification of the current state of logistics and identifying the improvement potentials (Dörnhöfer, Schröder and Günthner, 2016). Like the concept of value, there exist several financial and non-financial value measurement metrics in logistics. Some authors relate value to the timeliness of logistics operations and calculate it by taking the total time taken to complete the logistics process.

Another common value measurement metric in logistics is Customer Value Added (CVA) which denotes the customers’ perception of value-added from logistics. It is measured as the comparison of total costs in relation to the perceived benefits of the customer. Furthermore, the logistics value can also be measured as total revenue generated, profitability, and shareholder value (Kilibarda, Andrejić and Popović, 2013). The selection of a specific performance measurement indicator depends upon multiple factors such as the:

  • type of industry,
  • overall organizational goal and
  • organizational goal of the organization (Dörnhöfer, Schröder and Günthner, 2016).

However, there is no precise value measure in logistics. While financial measures overlook other aspects of value, the measures relating to customer satisfaction and customer value-added are inconsistent in nature because the notion of value may keep changing for the customers over time (Lambert, 2014).

Value metrics Advantages Disadvantages
Customer satisfaction Improves revenues, logistics costs, market share, and customer experience. Too much reliance on customers for making logistics-related decisions, in spite of high costs.
Customer value-added Also leads to higher revenues, profit margins and shareholder value Fails to measure the financial impact of focusing on customer value-added.
Total cost analysis Focus is on costs. Makes it easy for managers to reduce logistics costs. It is more time-consuming as each customer’s evaluation has to be assessed. Does not study logistics costs in a standalone manner. It is also expensive to obtain information from every customer.
Strategic profit model Measures net profit, return on assets and return on net worth. Helps managers make better investment decisions. Does not take into consideration the timing of cash flows.
Shareholder value Values money in terms of time. Considers the risk of investment. It is challenging to implement in areas such as discount rates, projected cash flows, planning etc. due to a missing link between business strategy and shareholder value. Moreover, it is time-consuming, expensive and requires a vast amount of data.

Figure 1: Comparative advantages and disadvantages of value metrics in logistics (Lambert, 2014)

An example of time value in logistics

In February 2018, almost two-thirds of the UK outlets of the renowned global fast-food chain KFC had to close their operations for a day because of their new logistics partner, DHL had delayed the supply of raw material. As the company sells perishable food items, timeliness represents the value in KFC’s logistics system. This not only caused financial damage to the company but also a reputational setback for the brand KFC (Pooley, 2018).

An example of cost-efficiency in logistics

IKEA, the world’s largest retailer of home furnishing operates in over 29 nations. Its reputation precedes with not only its high-quality products but also the affordability. A massive share of this success has been contributed by the company’s well-designed logistics. IKEA focuses on reducing the costs so that its products can be afforded by the masses. To that purpose, IKEA manufactures most of its products from recycled products and uses comparatively lesser material in the production. This not only reduces the inventory of raw materials but also the transportation costs. Furthermore, the integrated supplier network and the selling of unassembled products saves costs. This way IKEA creates value in logistics through cost-cutting.

An overview of different logistical costs

The essence of calculating logistical costs lies in the fact that logistics while creating value is also a cost incurring function. The estimation of costs incurred for the logistics functions is important to enabling better decision-making. But, logistics involves several processes hence the assessment of logistical costs is usually complicated as they are fragmented around several processes (Halinen, 2015). The logistical costs can be fixed and variable or planned and unplanned.

For example; warehouse costs are a planned cost but, due to adverse weather conditions, the business might maintain excess inventory. The additional warehousing and inventory management costs are unplanned costs.

Similarly, the costs incurred on wastages can be divided by:

  • their nature,
  • cost centre,
  • the relationship with other processes and
  • on the basis of volatility (Stępień et al., 2016).

Another recent approach to classify logistics costs includes categorizing the costs on the basis of functional areas of the business processes. This has been depicted through the below diagram (Chukurna, 2016).

Classification of logistical costs by functional areas

Figure 2: Classification of logistical costs by functional areas. (Chukurna, 2016)
Classification of logistical costs by business processes

Figure 3: Classification of logistical costs by business processes (Chukarna, 2016)

Why it is important to balance logistical costs and value?

Businesses need to have a clear perspective on how they define value and what methods to use to estimate the logistical costs. The logistics function can create value for the customers and the business. This can be explained through the example of Tesla Incorporation which is known for its innovative electric cars. Tesla cars are embedded with Artificial Intelligence (AI) and thus considered as a premium name in the technologically-driven car market. In fact, with its high paced innovation ability, Tesla often threatens its competitors to become obsolete soon. But, the company struggles to satiate its target audience due to its:

  • poor logistics functions,
  • poor quality control,
  • the timelines are missed and,
  • the supplier network is narrow and insufficient.

The outcome is that the company often delivers cars with defects thus inviting a refund or exchange. Tesla also misses the production and delivery schedules and ultimately faces customer dissatisfaction (Lambert, 2017; Boudette, 2018; Jurvetson, 2018). Tesla is probably unclear about what value it wants to achieve through its logistics function and is letting its endeavours go in vain.

References

  • Boudette, N. (2018) What Tesla’s ‘Delivery Logistics Hell’ Is Like for Model 3 Buyers, The New York Times.
  • Chukurna, O. P. (2016) ‘NEW APPROACHES TO THE CLASSIFICATION OF LOGISTICS COSTS OF INDUSTRIAL ENTERPRISES IN THE CONDITIONS OF GLOBALIZATION’, Economics: time realities, 3(25), pp. 105–112.
  • Dörnhöfer, M., Schröder, F. and Günthner, W. A. (2016) ‘Logistics performance measurement system for the automotive industry’, Logistics Research. Springer Berlin Heidelberg, 9(1), p. 11. doi: 10.1007/s12159-016-0138-7.
  • Francis, M. et al. (2014) ‘The meaning of “value” in purchasing, logistics and operations management’, International Journal of Production Research, 52(22), pp. 6576–6589. doi: 10.1080/00207543.2014.903349.
  • Halinen, H.-M. (2015) Understanding the Concept of Logistics Cost in Manufacturing.
  • Hammervoll, T. (2009) ‘Value-Creation Logic in Supply Chain Relationships’, Journal of Business-to-Business Marketing.  Taylor & Francis Group , 16(3), pp. 220–241. doi: 10.1080/10517120802484577.
  • Jurvetson, S. (2018) Case study: How Tesla changed the auto industry, Supply Chain Dive.
  • Kilibarda, M. J., Andrejić, M. M. and Popović, V. J. (2013) ‘CREATING AND MEASURING LOGISTICS VALUE’, in 1st Logistics International Conference. Belgrade: LOGIC, pp. 197–202.
  • Lambert, D. M. (2014) ‘Measuring and Selling the Value of Logistics’, The International Journal of Logistics Management, 11(1), pp. 1–17. doi: 10.1108/09574090010806038.
  • Lambert, F. (2017) Tesla’s over-the-air software updates make other vehicles ‘highly vulnerable to obsolescence’, says analyst, Electrek.
  • Pooley, C. R. (2018) KFC runs out of chicken in logistics fiasco, Financial Times.
  • Rutner, S. M. and Langley, C. J. (2000) ‘Logistics Value: Definition, Process and Measurement’, The International Journal of Logistics Management. MCB UP Ltd, 11(2), pp. 73–82. doi: 10.1108/09574090010806173.
  • Stępień, M. et al. (2016) ‘Identification and Measurement of Logistics Cost Parameters in the Company’, Transportation Research Procedia, 16, pp. 490–497. doi: 10.1016/j.trpro.2016.11.046.

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