Financial aspects of the supply chain: cost-orientation vs. value-orientation in logistics

The paper was presented at the Polish Logistics Congress “Logistics 2006 – Best Practices in Logistics”. Poznań, May 10-12, 2006.

I. Value-orientation in logistics

From the very beginning of the development of the logistics concept, both costs and customer service were focused on and set as goals. The financial aspect of logistics has always been part of a comprehensive approach to costs. Accordingly, logistics decision-makers must take into account all significant costs generated by logistics processes, including the investment cost of inventory, which can affect overall logistics costs [1].

Consequently, logistics and logistics management have focused in recent years on cost reduction and programs introducing innovations to processes. Logistics managers have focused their attention on costs, which is why reporting systems were created whose main goal was to report costs and numerical operational data to senior management. As a result of these actions, from the perspective of management, logistics and logistics processes began to be perceived as cost centers rather than profit centers. However, for senior management, the latter aspect is of greater importance, as most of the enterprise’s goals formulated in their vision and mission serve its development, profit achievement, and customer acquisition [2].

The question now facing logistics management is to determine the role that logistics plays in supporting the goals defined by senior management as priorities. Logistics management, as a cross-functional function that connects and optimizes all logistics-related activities and coordinates logistics activities with other functions, including marketing, sales, production, finance, and IT, plays a key role in achieving the goals set by senior management. The strategic role of logistics is a major part of Supply Chain Management as a strategic concept of supply chain management (Demand and Supply Chain) based on an interfunctional and interorganizational approach that goes beyond the boundaries of the enterprise. Due to the interfunctional and interorganizational nature of logistics, there are strong interdependencies affecting not only the effectiveness and efficiency of the flows of materials, goods, information, and rights, but also having a major impact on financial flows within and between enterprises. These enterprises assume an increasing impact of logistics activities on the development of the enterprise and cash flow, and thus on the value of the enterprise. However, many enterprises do not have clearly defined financial goals for logistics and do not measure the impact of logistics on the profitability of the enterprise and its shareholder value. The current task of logistics managers is to make senior management aware of the financial significance of logistics so that managers can take it into account in their decisions, paying closer attention to logistics activities. To achieve this goal, logistics managers must think, act, and report with value in mind more and more efficiently, which will lead to changes in logistics management from a cost-only approach to a more value-oriented approach [3].

How to subordinate daily work and tasks to the enterprise’s goal of increasing value? – this question is becoming increasingly important for logistics managers. Therefore, taking into account the flow of finances along the supply chain is attracting more and more attention. While most companies focus on analyzing and coordinating the flow of materials, goods, and information in the context of Supply Chain Management (SCM), the “reverse flow” in relation to the physical movement of goods – i.e., the financial flow – is taken into account only by some enterprises [4]. The difference in the ways of thinking about the supply chain by “traditional” enterprises and “modern” innovative enterprises is shown in Figure 1.

Figure 1. Supply chains according to traditional and modern enterprises
Source: Anderson/Delattre, 2002.

Traditional enterprises perceive the costs of their supply chains as a key standard for measuring business performance, focusing on operational cost control and cost reduction. Such an approach is manifested by the continuous application of efficiency improvement programs aimed at further streamlining the operational process by “leaning” it. The intention of modern enterprises is to position the supply chain as a key element during the creation and execution of new business strategies. This includes activities searching for opportunities to introduce new value-added services, investments in the development of specific competencies, and improving customer relations. The goal is to increase the enterprise’s value-orientation in order to achieve steady revenue growth, increase market share, and gain an advantage over competing enterprises. Nevertheless, the transformation from the old way to the new one should not disregard important facts, such as cost consideration and customer service. It is equally important to find a balance between cost control and supply chain capabilities, aiming to further foster the value creation process in the enterprise [5].

In the further part of this study, we want to focus on the development of logistics costs in the future within the framework of the traditional view, while the final part of the work deals with the value-orientation of logistics, which we call Supply Chain Finance. The second part of the study focuses on new ways of dealing with the supply chain and, consequently, presents a modern approach.