management of financial resources in logistics, The

Journal of Business Logistics, 1995 by Speh, Thomas W, Novack, Robert A

The framework of the reconceptualization of logistics as presented by Novack, Rinehart, and Wells stated that strategic logistics decisions allow for decisions concerning the logistics infrastructure.(1) This framework can be seen in Exhibit 1. (Exhibit 1 omitted) Once these decisions are made, it is necessary to determine the resource requirements necessary to "build" the infrastructure that will implement the strategic logistics decisions. The resources available to the logistics executive are facilities, people, and money.

Financial decisions provide the means for logistics executives to make decisions concerning people and facilities. Financial decisions provide the source of investment, while people and facilities are the reasons for investment. As such, decisions in all three resource areas must be coordinated. Although logistics executives many times possess knowledge of people and facilities investment, they sometimes have difficulty communicating with the firm's Chief Financial Officer (CFO) concerning financial decisions. This article will address the financial resource section of the framework in Exhibit 1 by concentrating on the types of financial decisions facing logistics managers and will offer suggestions concerning their representation to the CFO.

BACKGROUND

The logistics executive often has responsibility for a sizeable array of assets--transportation equipment, facilities, computers, inventories, handling equipment, and people. Effective management of these logistics assets usually requires that decisions be made about both the initial investment in the assets and their eventual disposal or deletion; about replacing the assets; about expanding their use; and about their return to the firm in the form of increased revenue, decreased costs, or both. Analysis of these logistics investments requires an understanding of financial analysis techniques as well as a good working knowledge of the nature and type of information necessary to make the decisions. In effect, these logistics financial resource decisions are an exercise in logistics value quantification--analyzing logistics investment opportunities and deciding which to undertake and how to "sell" their benefits to the CFO. These decisions will also have impacts on the capital structure of the firm and logistics channel and on the pricing relationships the firm has with its customers. (The term "logistics channel" is the preferred term as depicted in the framework; this term accurately reflects the interrelationships among various firms. However, a popular term consistently found in publications to describe the concept of a logistics channel is "supply chain." This term will be used from this point in this manuscript to mean logistics channel.) The underlying goal of logistics investments is to maximize "value" or "return" to the firm and to the supply chain. That is, investments should be made in logistics assets that enhance the company's and supply chain's overall rate of return on investment. Although sometimes difficult to perform, financial analysis for logistics decisions is critical to be able to compete for funds and add value to the firm and supply chain. The purpose of this article, then, is twofold. First, the discussion will focus on the asset implications of logistics financial decisions on the firm and on the supply chain. Second, the market, or transaction, implications of logistics financial decisions will be examined.

THE CAPITAL EVALUATION PROCESS

Logistics operations use a wide array of equipment, systems, and facilities that can consume huge amounts of capital. While some firms choose to outsource much of the logistics process and avoid these logistics investments, others opt to own and operate the entire system. In the middle ground are companies that own some elements (private fleet) and outsource others (warehouses). In any case, most companies, at some point in their history, will face a decision regarding the investment of capital in some aspect of their logistics operation. This is where the capital evaluation and value quantification processes become important. The next section will briefly identify some investment areas in logistics.

Capital Applications in Logistics

The major capital-using areas of logistics include:

1. Movement

Transportation: Movement Between Facilities. The obvious recipient of capital funds would be a private fleet. Associated with investments in a private fleet are funds required for maintenance and repair facilities. Some firms will be involved in questions of whether to invest in rail cars or various types of multimodal containers. For example, J.B. Hunt recently decided to replace its entire fleet of trailers with containers. Ongoing analyses and capital decisions will be required for such things as fleet modernization, expansion, and replacement. What must be remembered here, as with all investments, is that the analysis contain not only cost data but also service/revenue data. This is necessary to complete the ROI calculation.