The Logistics Salesperson

A Generalized Specialist

Does that sound like a contradiction? Even though logistics program development and sales involve teams of people, usually there is one individual who acts as the "account manager" in the relationship. That person must be the "point" person for the entire customer organization. The customers' marketing, finance, logistics, sales, accounting and production departments turn to this person for support.

How does the 3PL salesperson become an "expert" in all these functional areas? Simple: they don’t. They don’t have to – that’s not their job. However, they do need to be conversant in the terminology or technology of the various disciplines. They need to be able to ask the right questions, and understand the answers they get back. Yet overall, their job is to be an interface between the customers' organization and the logistics provider.

This requires talents as a "generalized specialist".

How does one become a generalist? Well, it's an ongoing process, almost the opposite of becoming a lawyer, doctor, or other degreed professional where there is a set standard to meet, and a bar you much reach. A generalist needs to be exposed to as many functional areas as possible that relate to her customer's business. As we've discussed in previous articles and in the TDG training classes, the other functional areas that are concerned with logistics outsourcing are:

	Finance / Accounting
	Purchasing
	Production / Manufacturing
	Logistics / Distribution / Transportation
	Information Systems
	Sales and Marketing
	Other areas such as Human Resources, Legal, Quality, etc.

Over the next few issues we're going to discuss some of the key concepts and terms that are related to some of these functions.

There is not enough space in this newsletter to really delve deeply into the concepts, but by bringing them up here, we can encourage further research and inspection of these issues. In our Introduction to Logistics Sales training seminar we discuss these issues in more depth, but even then, there's no substitute for learning from your customer, about how these issues effect their business.

For example, here are some of the terms and concepts that are vital in understanding the relationship between finance and logistics. This list is not intended to be all inclusive, if there are other terms, you would like explained, please e-mail me at jpowell@ix.netcom.com and we'll put them up on our web site at www.logisticstraining.com.

Finance Terms / Concepts (Part 1)

Inventory

Probably the most important idea in logistics that a transportation salesperson has to understand is the concept of inventory. We tend to think of inventory in terms of "things" – boxes, widgets, raw materials.

Yet to a company, inventory represents cash in a non-liquid form (unlike some other investments, you cannot immediately convert it into money). It also represents a potential liability if the items become obsolete before they are sold (just think how marketable a 486 computer is today).

Inventory Turnover

This is the way you turn inventory into cash – in the case of FGI (Finished Goods Inventory) you sell the goods and collect money from your customer. The more often you do this, the better your cash flow.

Technical note

Inventory turns can be computed by taking the annual "cost of goods sold" and dividing it by the average inventory. For example, if the cost of goods sold is $1,000,000 dollars for your model "A" computer and your average inventory is $100,000 , you have 10 turns a year.

Days of Inventory

Companies look to logistics providers to help then reduce the number of days of inventory on hand. This is a crucial "metric" for companies, because while this number represents product availability for customers, it also means increase inventory carrying costs and risk.

Technical note

Days of inventory can be calculated by taking the number of days in a year (365) and dividing by the number of inventory turns in that period.

Cost of Inventory

This is one of the biggest "drivers" of logistics outsourcing. Companies are trying to reduce the costs of inventory by reducing the amount they hold at any given time. This applies to raw materials as well as finished goods inventory.

The cost varies but an average such as 25% a year is commonly quoted in the high-tech industry.

Inventory costs consist of the following components:

Cost of Capital

This is the cost of money. To buy raw materials needed to make things, you obviously have to spend money. This figure will depend on things like the company’s credit rating and general economic conditions. However, for the sake of illustration, let’s say the going interest rate is 6%, and we’ll add this to the other inventory costs listed below.

Inventory service costs

This is the ongoing cost of holding inventory. It includes insurance and storage costs among others. Again, for the sake of illustration, let’s assume this is 10%.

Inventory risk costs

Theft, damage and one of the most important aspects – product obsolescence risks go into computing this figure. This will vary greatly depending upon the nature of the product, but let’s assume a 8-10% figure for this as well.

So, when you add it all up, you’re looking at about 25% of the value of the inventory on an annual basis. That’s roughly 2% a month, so if you’re a computer manufacturer carrying 100 million dollars in inventory at any given time, it costs you $2,000,000 a month just to hold the inventory. You can see that the ability to use logistics to reduce days of inventory can significantly improve your finances.

Using the above scenario, if a company that can reduce days of inventory from 20 to 15 by switching from sea freight to air freight, they can save over $300,000 in carrying costs. That would pay for a lot of air freight!

Cash Flow

This is the lifeblood of a business. Companies are looking to third party logistics to improve cash flow by increasing inventory turns (this is a way a business converts inventory into cash), as well as speed delivery to the customer, enabling quicker billing.

Net Present Value (NPV)

This is the value of an investment in constant dollars, adjusted for time and opportunity loss.

This type of analysis allows a financial manager to evaluate a capital expense that may not generate positive returns for a couple of years, and to weigh those future earnings against the results of just doing "nothing" and investing the money elsewhere. Another example of "present value" might be a $1,000,000 winning lottery ticket that pays $50,000 a year over the next 20 years. People will buy that ticket from you for a lump sum, but not before calculating the present value of the winnings.

Fixed Assets

These can also be referred to as long term assets – ones that are not easily converted into cash. They include the "bricks and mortar" of a business such as office buildings, warehouses, plant and equipment.

Through 3PL outsourcing a company can change fixed expenses to variable by using someone else’s warehouse or by creating a direct to store distribution program that eliminates the need for distribution centers. All of these things can greatly increase a company's flexibility and response to the marketplace, as well as improving their financial position.

The CFO's Role in Logistics

Many surveys done by logistics groups over the last ten years have shown consistently that the Chief Financial Officer (CFO) is the most prominently involved top executive participating in logistics decisions (outside the CEO or VP of Logistics). In fact, if any of you have been reading "CFO Magazine" over the years you will have seen numerous articles with titles like The Role of the CFO in Logistics. As we discuss in our Logistics Sales training class, the principal motivations of a CFO involved in logistics are in these areas:

	Reduced capital expense (i.e. bricks & mortar, systems)
	Reduced inventory expense / liability
	Increased inventory turnover and cash flow
	Reducing fixed assets (i.e. turning over a private warehouse or fleet to a 3PL provider)
	Changing fixed to variable expenses
	Reduced long term liability (including employees)
	Better perception of their business on Wall Street.

A good source of info on the world of the CFO can be found on the internet at: http://www.cfonet.com You can search past issues of CFO Magazine for articles on Logistics. There are a couple of good ones. In the next issue we will cover a few more finance terms and then cover concepts and terms from Marketing, Production, Purchasing and Systems.

Back

---

Transportation Development Group

Toll Free at: 800-949-4834

Telephone 310-302-0808

Fax 310-302-0809

E-mail: Info@logisticstraining.com

Home | Services | Products | About TDG | Schedule | Training Registration | Contact Us