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Received September 1997 Revised June 1998, November 1998

The implications of shareholder value planning and management for logistics decision making
Department of Business, Macquarie University, Ryde, New South Wales, Australia
Keywords Decision making, Logistics, Shareholder value analysis, Value analysis Abstract Much of the literature in the field of logistics and supply management is concerned with the role that should be taken by business activities to add value for the customer and the shareholder. One of the problems currently under discussion is how this may be achieved. Discusses the issues underlying shareholder value management and planning. It proposes that value drivers are identified and examined in the context of both value and cost implications when related to the broader objectives of delivering shareholder value. A model is proposed which links EVA criteria, operating management criteria and logistics options. The model offers managers the opportunity to explore operational options and their impact on shareholder value criteria.

David Walters

Introduction The attention given by many large companies to shareholder value planning and management in recent months has been noticeably significant. In July 1997 the UK clothing multiple/department store group, Burton announced it was demerging the Debenham department store activity from the group to increase shareholder value. The ``City'' response was one of surprise and delight. A number of large US companies have been pursuing shareholder value-based strategies. For some it works well for others there are problems. A major problem occurs as the concept is introduced and implemented at operating levels of the business. The lack of financial knowledge at operating management level, combined with poor communication has resulted in many companies abandoning the concept or undertaking significant educational programs. Jones (1997) describes the problems confronting his own company during the process. This article discusses the concept and introduces relevant contributions from the literature. However, the literature is very weak concerning implementation applications and this article is an approach at developing a structure for discussing and implementing shareholder value planning and management within the logistics organisation and explores the issues confronting managers.
International Journal of Physical Distribution & Logistics Management, Vol. 29 No. 4, 1999, pp. 240-258. # MCB University Press, 0960-0035

Shareholder value planning The view that the shareholder is the owner of the company and is therefore the ``corporate person'' to whom a business is ultimately responsible is not new. Nor is the notion that business performance should be managed in order to

maximise the return to the shareholders' investment in the business. What is new is the way in which the large organisations view this responsibility. There are a number of alternative methods for measuring shareholder value. Our purpose is not to review their various advantages and disadvantages but to introduce the topic and to illustrate how logistics can create shareholder value. Essentially shareholder value planning tasks management with making decisions which have the primary objective of increasing returns to shareholders' investment: these are, capital appreciation of share price, dividend growth and a positive NPV for future income streams. Two approaches are discernable; that of the financial manager and that of the economist. We will consider both briefly. Measures of shareholder value A number of variants of shareholder value management have been developed during the past decade. As Wood (1996) suggests these have been widely accepted by some businesses (e.g. US companies) and have been accepted more slowly elsewhere (eg; Australian companies). Wood reviews and compares two methods. Economic value added (EVA), pioneered in New York by Stern Stewart measures the residual income generated by a company by comparing the return on equity (EBIT) with (WACC) the weighted average cost of capital. A positive EVA implies that shareholder value has been created while a negative EVA suggests prompt action is required. It also suggests that any prospective asset purchases that will return less than the weighted average cost of capital should not proceed. Critics of EVA comment from two aspects. It is based upon accounting criteria and not economic method (i.e. ignores future economic cash flow) and secondly it does not consider depreciation, as such, EVA `` ... operates as a disincentive to expansion, particularly if executive remuneration is linked to it''. The Boston Consulting Group (of corporate zoo fame) address this issue with a modification. CFROI (cash flow return on investment, or cashflow return on gross assets is determined by subtracting debt but adding back sufficient depreciation to record assets at current value). As Wood comments, ``This goes to the heart of what impresses the stock market: free cash flow, not reported profit, which is distorted by the regulation, compliance nature of accounting''. One other measure (and there are others) is MVA market value added. MVA combines a company's debt with the market value of its stock and subtracts the capital that has been invested in the company. A positive result shows how much wealth the company has created. A negative value reports value destroyed and consequently a need for management action. Critics suggest MVA has an advantage over EVA in that; `` ... EVA measures a company's success over the past year, while MVA is forward looking, reflecting the market's assessment of a company's prospects''. Walbert (1993) comments, ``Because MVA and EVA focus attention on capital, they sometimes make managers wary of employing it. That's the wrong attitude: managers should employ as much capital as they can as long as it earns more than it costs''.

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There are other measures used and these are based upon estimates of the economic value of an investment derived by estimating the present value of that investment by discounting forecasted cash flows by the cost of capital (or by some other appropriate value). Rappaport's value return on investment is a typical example. Rappaport (1986) proposed an incremental value contribution approach, the VROI (value return on investment). This approach measures the value created per discounted dollar of investment. Thus it offers management the means by which it is possible to identify which alternative offers the largest benefit in terms of net present value (economic cash flow). DCF techniques are applied to the cash flows of the existing business, to determine the pre-strategy NPV of the business (its current after tax earnings) and to the predicted cash flows of the alternative strategies to determine likely NPVs. The present value of projected incremental changes in fixed and working capital investment required by each alternative provides the investment base for evaluation. The discount rate(s) used are risk adjusted (such as those derived in the capital asset pricing model). Clearly VROI > 0 if shareholder value is to be created. Given a number of competing projects, those with the largest VROI values would warrant further investigation. This would require managerial experience and introduces a necessary qualitative aspect to the exercise. Each of the measures has merits and consequently each has its supporters. Table I identifies the differences, it also identifies a major problem area: while it is relatively simple to apply the financial management based measures to corporate aggregate performance, it is by no means simple to apply shareholder value planning at operational levels of the business. Copacino (1997) comments, ``These approaches are based on the idea that projecting the `future free cash flows' that a company generates and then discounting those cash flows can provide an estimate of that company's value. Furthermore, dividing that value by the number of shares outstanding can provide an estimate of future stock prices''. Copacino (1997) is commenting on the role of logistics management in creating shareholder value. He identifies three elements as important: (1) cash; (2) invested capital; and (3) the cost of capital. He suggests: ``It's critical that logistics managers understand what drives these determinants ... Cash is driven by revenues, costs and depreciation and other non cash expenses. Invested capital depends on current assets, current liabilities, net property/plant/equipment, and deferred charges''. These suggestions become a little more ``applied'' when expanded to consider, `` ... [a] few ways in which logistics initiatives may affect overall value and share price''. These ``ways'' include; inventory management, customer service, cost

Economic value added (EVA) Cash flow return on investment (CFROI) Note: ROGI Market value added (MVA)

Net profit (after tax) less the weighted cost of total capital Return on gross investment (ROGI) adjusted for inflation, assest life and salvage value Net income + interest + depreciation Capital employed + accumulated depreciation Debt + markert value of issued shares less the sum of the capital invested in the business

Shareholder value is created when EVA > 0 and destroyed when EVA <0 =

Implications of shareholder value planning 243

= =

Shareholder value is created when MVA > 0 and destroyed when MVA < 0 Note: It is argued that EVA emphasises current (and past) performance being based on current profits and capital structure. MVA, being based partly upon current share prices, is future orientated in that share price indicates investors' anticipated returns. Economic cash flow The net present value of cash flows projected along a viable planning horizon which recognises demand technology and technology application life cycles and is discounted at a risk related interest rate (Beta values from the capital asset pricing model). Value return on investment VROI = Post strategy value Prestrategy value Present value of projected investments (The incremental investment required to undertake the strategy alternative under evaluation). Table I. Shareholder value performance measures

management, facility utilisation and third party outsourcing. Copacino concludes with: ``By becoming conversant in the emerging language of finance and shareholder value, logistics managers can have greater influence in their companies, can communicate more effectively with top management, and can be more effective in securing support for logistics initiatives''. While there is logic in this conclusion it lacks realism. For the majority of companies logistics remains an operational activity tasked with implementing strategy rather than formulating it. If an awareness of the role of logistics in creating shareholder value is to be successfully pursued it should offer operational managers an opportunity to understand fully the implications. Cooke (1995) concurs with this view. In a discussion which considers the role (or perhaps the efficacy) of EVA in an analytical function within logistics decisions he suggests:
Proponents of this new approach to finance say that for too long, logistics managers haven't had to look at the overall financial picture. Instead they've merely managed expenses and ignore the real cost of borrowed and stockholder capital in their operations.

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As margins get thinner corporations have begun scrutinizing distribution for ways to increase profits.

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Cooke's (1997) argument is similar to Copacino: where once it was sufficient to prune costs in order to maintain a satisfactory return on assets dedicated to logistics activities the extent of the assets are now questioned. Clearly within the context of EVA it is the productivity of the assets that is being questioned. Cooke (1995) introduces the approach taken by Timme, whose company Finlistics, has developed two EVA based models which evaluate the role of logistics in creating shareholder value. Timme's approach considers the areas of inventory and accounts receivable and their response to improvement in order cycle time. It also considers the pros and cons of leasing vs owning and of third party distribution. Timme also considers the issue of differentiation and market positioning through the selective use of logistics service. His argument is that the use of EVA (or for that matter any other shareholder value planning model) enables the value impact of logistics services to be evaluated for both customers and shareholders. This is a relevant issue in the competitive context of the late 1990s. Figure 1 suggests that for many product-service offers the costs of delivering customer service typically exceed those of manufacture. Furthermore, as Figure 1 also suggests, if logistics services are used to differentiate a product-service this cost difference will become larger.

Customer-service related costs

order processing and communications packaging/unitisation stockholding storage back orders redeliveries

Figure 1. The majority of costs occur during the delivery process: i.e. after manufacturing processes have added form value (utility)

Product related costs

materials labour manufacturing

Product-service differential

An omission from Cooke's (1995) article is the process by which EVA can be linked to the logistics decision making process. An effective way of achieving this is to identify value drivers. A value driver is a feature or characteristic which influences the performance of the organisation in such a way that shareholder value will be enhanced. We discuss value drivers in the following section. Identifying value drivers Rappaport (1986) made one of the first attempts at identifying value drivers. He used Porter's (1985) work on competitive advantage and value chain analysis to develop a model through which management decisions could be introduced through value drivers and valuation components to influence corporate objectives of creating shareholder value. Initially Rappaport (1986) favoured an economic cashflow approach (the value return on investment VROI) but this was superceded by a model in which shareholder return was based upon dividends and capital gains. In this model Rappaport proposes that the primary corporate objective is to create shareholder value which is a function of valuation components, considered to be; cash flow from operations, the discount rate and corporate debt. In turn these are influenced by value drivers, described as; sales growth rate, operating profit margin, income tax rate, working capital investment, fixed capital investment, cost of capital and value growth duration. These comprise: Sales growth rate (and growth forecasts) should be based upon an analysis of product-market attractiveness and should be influenced by the company's capabilities (actual or estimated) to participate within the market. As sales growth is logically the first ``driver'' of any business some care should be taken in developing a growth rate forecast with sales sensitivity analysis being conducted using pricing policy, competitive activities and perhaps resource prices as variables. Operating profit margins result from sales activities and the costs of producing and delivering value to customers. Costs which will have an impact on operating margins are: raw materials, labour and components. Other important areas of cost include selling and promotion activities (this should include distributor margins) and logistics. Finally customer service is an important activity and cost. Fixed and working capital investment may be considered together. Mills (1994) suggests three aspects. Replacement fixed capital investment maintains the level of productive facilities. Incremental fixed capital investment is investment in new assets to provide additional facilities to support growth. Similarly incremental working capital investment is required to support planned growth. The cost of capital is a function of the capital structure and the risk implied by the company's product-market involvements. The combination of equity and debt in the capital structure which is the financial risk, can be calculated. The cost of debt is relatively straightforward, i.e. what the company will be

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required to pay for additional debt to satisfy investors. The cost of equity is more difficult, particularly as here we are concerned with future income streams. The capital asset pricing model is often used for this purpose as the ``beta'' factor offers a specific consideration of the exposure to risk across a wide range of industrial activities. Value growth duration is management's best estimate of the number of years that an investment can be expected to yield rates of return greater than the cost of capital. Rappaport (1986) also considers value sustainability, a concept which includes the sales growth rate, the threshold spread (i.e. the amount by which the forecasted margins exceed the threshold margin), and the duration over which the investments are expected to yield returns greater than the cost of capital (i.e. value growth duration). We can consider this to be related to the profitability span of product market strategies, a topic dealt with later. Income tax rate is also considered by Mills (1994). He suggests that an organisation considers both tax payable on profit and deferred tax. Tax payable on profit has an influence on free cash flow whereas deferred tax is irrelevant in this context. However, it is important to consider the tax payment date when budgeting for future free cash flows. Of particular importance in this regard is tax liable on capital gains etc. which may be significant in major strategy shifts involving asset disposals. Having calculated sales projections, operating profit margin and cash tax flows operating cash flow may then be estimated. Value drivers are influenced by management decisions: ``Operating decisions such as product mix, pricing, promotion, advertising, distribution and customer service level are impounded primarily in three value drivers sales growth rate, operating profit margin, and income tax rate. Investment decisions such as, for example, increasing inventory levels and capacity expansion are reflected in the two investment value drivers working capital and fixed capital investment. The cost of capital value driver is governed not only by business risk but also by management's financing decisions; that is ... the proper proportions of debt and equity to use in funding the business as well as appropriate financing instruments. The final value driver, value growth duration, is management's best estimate of the number of years that investments can be expected to yield rates of return greater than the cost of capital''. Rappaport (1986, pp. 76-77). The recent and increasing literature on customer service, customer valuation and customer retention for example; Simonson (1993), Pine et al. (1995), Jones (1997), Reichheld (1996), Hagel and Rayport (1997), suggests additional customer oriented value drivers. Customer loyalty management and Coproductivity are suggested: Customer loyalty management comprises: Average order/purchase value and particularly the distribution of order/purchase value sizes is an important issue. The reason for this is simply that the costs of order management and handling (including delivery to customers) is not usually size related. Consequently a profile of order size across the current and potential customer base is an indicator of value creation. The average period of customer loyalty

and the expected value of the loyalty transaction may be a significant value driver. Blattburg and Deighton (1996) have attempted to quantify customer value to the business by calculating the net present values of costs of acquiring and retaining customers. Such analysis is an important consideration in shareholder value creation; there can be quite different value results from similar levels of revenue. Normann and Ramirez (1993) identify the importance of customer and supplier involvement in the ``value creating system''. They use the example of IKEA to illustrate the role which the customer may take in creating value. The authors identify a number of tasks assumed by customers that were (and are for conventional retailers) traditionally undertaken by the retailer. They term this coproductivity. Clearly the approach can be used with suppliers and distributors using transaction cost analysis. Hence, customers, suppliers and distributors, become involved in value creation (actual or potential) and this is, therefore, an important value driver. Rappaport's (1986) model is a helpful contribution and offers a point for departure. However, it does not directly address the operational needs of the firm if they (the operational activities) are to be seen to participate effectively in creating shareholder value. Rappaport does attempt to address the problem at arm's length by using Porter's cost leadership-differentiation strategy model. He identifies ``tactics'' supporting cost leadership and differentiation strategies which, when interpreted through the value drivers support these strategies, ``... collectively yield the best value creation prospects''. Two issues arise. One issue concerns the lack of a means by which Rappaport's ``tactics'' can be implemented. The other is concerned with time. Views concerning Porter's ``either or'' approach to differentiation have changed, process technology (manufacturing and distribution) has evolved and the differentiation options confronting the firm are more continuous than polarised as was the choice suggested by Porter (1985). Indeed more recently Porter (1996) has proposed a productivity frontier that is pursued by firms seeking to achieve efficiency increases. The essence of strategy is choosing to perform activities (based upon the productivity frontier) ensures they are performed cost-effectively. This proposal is clearly related to the production possibility frontier concept espoused by micro-economic theory and based upon the costs of factor inputs. If we consider production to be an input/output decision and include the role of alternative process technology options we have compatible concepts. This is useful from a marketing point of view as it adds value preference to the dimensions possible when considering segmentation options. Returning to the operational-implementation aspect of shareholder value management identifies a requirement, for a more detailed approach to the implementation process. It also suggests that capacity management (the extent to which management optimises the use of the capacities of operating systems) is a factor to be considered as is working capital management (the optimal use

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of working capital invested in the business). Both topics, if added to the list of value drivers raises yet another issue: the difference between the role of strategic and operational value drivers. Strategic and operational value drivers It may be argued that as they stand the value drivers are somewhat unwieldy and it is difficult to see how they may be used, particularly at an operational level, without further consideration or even refinement. The notion of cost drivers was introduced by Porter (1985) and these were subsequently refined. Riley (1987) proposed two categories of cost drivers. Structural cost drivers which identified economic structural choices confronting the firm such as: scale, scope, experience, technology and complexity were choices that drive product costs but are ``macro'' or strategic in their influence. Executional drivers were seen by Riley as determinants of a firm's cost position that reflect its ability to implement strategy. Shank and Govindavajan (1988) comment that: ``Whereas structural cost drivers are not monotonically scaled with performance, executional drivers are ... for each of the structural drivers, more is not always better. There are diseconomies of scale, or scope, as well as economies ... (For) executional drivers more is always better''. Riley proposed a number of executional drivers including: . work force involvement (participation); . total quality management; . capacity utilisation; . plant layout efficiency; and . exploiting linkages with suppliers and/or customers across value chains. Shank and Govindarajan may have been a little too forceful with their assertion that ``more is always better'', and the quality debate is an example of this doubt. There is a useful direction in which their discussion leads: value drivers (like cost drivers) have both structural and executional applications. Executional drivers would appear to have useful characteristics for operational or implementation decisions. Revisiting the value drivers previously discussed suggests that a similar approach would be helpful and likely to result in more effective planning decisions and implementation. Structural or strategic value drivers should be regarded as those having a long term, directional influence on strategy and having direct links with shareholder drivers ie, share price growth, dividend growth and economic cash flow. Executional or operational value drivers are those which may be managed by the operating management group responsible for implementing strategy. There is likely to be some overlap, indeed this is desirable for effective planning and control. The linkages between shareholder drivers and these will operate through margin management, asset base management and operational cash flow. Value drivers serve no purpose unless they are allocated specific value creation targets which may be used by operating management to formulate plans which when implemented will contribute to the aggregate value creation targets.

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An overall approach Before an operational model for shareholder value planning and management can be constructed an overall view must first be considered. Figure 2 proposes a model which incorporates both strategic and operational perspectives. Given the shareholder value criteria (capital gain, dividends, and optimal economic cash flow), strategic management activities should be
Shareholder Value Criteria Dividends Optimal economic cash flow

Implications of shareholder value planning 249

Capital gain

Profitability

Strategic Management Value Criteria Productivity Strategic Financial and cash flow investment management

Value growth duration Strategic cash flow

Strategic Value Drivers Cost of capital Working capital investment Fixed capital investment

Net profit margins

Income tax rate

Operating Management Value Criteria Margin management Operational cash flow Asset base management Logistics investment management

Operational Value Drivers Sales growth rate Capacity management Operating profit margins Coproductivity Working capital management Customer loyalty management: relationships and transactions values

Figure 2. Shareholder value management: strategic and operational perspectives

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planned against the background of strategic management value criteria. These are suggested as profitability, productivity, strategic cash flow (explained below) and financial and investment management. Profitability should be measured net of all charges as it is strategic management's task to maximise net profits. Productivity implies the optimal use of the production resources of the business so as to ensure the maximum return to the shareholders (and to discourage predator bids). Financial and investment management requires senior management, through the structuring of debt and equity and asset financing (or leasing) to achieve a target return on shareholders' equity funds. This activity will largely determine not only ROE but also the discount (or hurdle) rate at which project incomes are appraised and thus the net present value of future income streams[1]. Operating management value criteria includes margin management, a measure of the efficiency of the operating management in generating sales and managing the costs of so doing. Asset base management measures the ability of management's use of the assets for which it is responsible, these may be fixed capital such as plant and equipment (in manufacturing and logistics management) or inventory and customer credit. Operational cash flow management is measured by the ability of operating managers to meet budgeted cash disbursements without resorting to additional sources of cash, such as overdrafts. Figure 2 shows a linkage between strategic and operational value drivers. This is explained by the logic of all planning activities: if strategy is to be successfully implemented it is essential to involve operational management in the planning activities. This ensures ownership. To do so involves operating managers in developing value drivers and value performance requirements. Not to do so may result in unrealistic criteria and performance expectations. Towards a planning approach Given the requirement to create value for both shareholders and customers an approach which links both is sought. A prime consideration should be that it is proactive rather than reactive, as such it will be able to be used to probe ``what if?'' scenarios. Typically, logistics systems are reactive; resources are allocated such that a sufficient service response is made. We might call this a ``qualifying level'' of service, a level which matches that of competitors and meets customer basic requirements. By contrast a ``determining level'' of service identifies customer needs and delivers them and in so doing creates competitive advantage. For a more detailed discussion on this aspect of customer service see Gattorna and Walters (1996). If we assume that customer satisfaction will result in the growth of profits, the productive use of assets and positive cash flow we can move on to discuss other relevant issues concerning the relationship between logistics decisions and shareholder value. In Figure 3 we can identify the interrelationships between shareholder value planning and four strategic decision considerations. Also suggested by Figure 4 is the overlap between logistics concerns and the strategic decision considerations. Clearly, if we are to be concerned with achieving acceptable

 Accounts receivable Inventory levels

Strategic cashflow management

Order cycle management times Use third party service companies to increase profitability from low volume customers Increase revenue/profit/cash flow from service responsive customers

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Productivity management

Shareholder value planning

Profitability management

Capacity requirements/utilisation Systems: EDI, QR

Increase capital equipment applications to enhance capital utilisation and customer service and customer response

Financial and investment management

Figure 3. The elements of shareholder value planning

performance levels for profitability, productivity etc. the implications for logistics management decisions should be explored. For example, if profitability objectives are to be met the organisation should ensure that order cycle times meet customer expectations. If these are realised customer loyalty will build (and with it the level of business); but so too will our cash flow objectives and these will be reinforced by prudent management of inventory levels and accounts receivable (customer credit). Another overlap is the influence of financial management who will evaluate the impact of capital expenditure on equipment and systems designed to improve productivity and profitability. Logistics planning options If logistics is to support the strategic direction of the business it will be in the use of customer service characteristics. For example, a company offering a strongly differentiated product to a service sensitive customer segment is likely to offer high levels of customer service to reinforce this positioning. The corporate expectations of the logistics function will be for high levels of customer service and for a contribution towards shareholder value. It could be argued that these are incompatible unless the two expectations are coordinated. This is the essence of shareholder value planning: it will be successful only if customer value expectations are also delivered. Customer value is delivered as customer service. The logistics management task is twofold: to identify customer satisfaction drivers, i.e., those elements of customer service which are important to the supplier/customer relationship and the impact of customer service costs on shareholder value i.e.; the impact of customer service expenditures on the shareholder value drivers.

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Figure 4. Exploring the efficacy of logistics decisions on EVA performance

Operating Management Criteria Operating profit margins Margin management Coproductivity Customer loyalty management Value drivers Logistics Decisions Options Ensure that customer service offered is commensurate with business generated: install CAP to evaluate customised, selective exclusivity and price leadership product-service strategy options Eliminate unprofitable customer calls: evaluate outsourcing (the use of intermediaries) Identify activities which can be performed more cost-efficiently by suppliers and distributors for company customers Identify (segment) customers by size and growth rate: adjust service to meet the service responsive customers with real development potential Develop flexibility in service capacity to meet growth opportunities Sales growth rate Expand service offer to customers whose response will also expand the companys sales growth rate Increase those service characteristics which enhance growth and competitive advantage Capacity management Asset base management Working capital management Coproductivity Capacity management Customer loyalty management Operating profit margin Working capital management Coproductivity Identify trade-off situations which offer greater total operating systems utilisation Install systems (QR, EDI) which reduce the need for large facility investments Offer non-competing organisations partnership/outsourcing services Identify opportunities (systems) which can reduce inventory holding and receivables Install EDI systems to increase accuracy of documentation and therefore decrease delays in customer payments Identify operations and activities that can be better managed elsewhere within the supply chain, thereby increasing supply chain utilisation and efficiency Evaluate ROI of logistics assets; divest activity if ROI < core business Evaluate lease or buy options Invest in assets which increase customer loyalty and dependency: contribute to customer investment programs to reinforce relationships Incremental ROI can be significant if additional investment supplements existing fixed costs Decrease order cycle times and increase order communications accuracy to reduce receivables collection period Introduce systems that reduce inventory holding requirements: reduce working capital requirements Distributors and customers may carry inventory and/or contribute to value process, thereby reducing inventory requirements and delay the addition of full value to the product, resulting in lower working capital requirements and increased cash flow Logistics Investment management Cashflow management

EVA/Strategic Management Value Criteria

EVA Criteria

Sale revenue

Profitability

less

Operating costs

less

Indirect costs

less

Taxation

equals

NOPAT

less

Productivity

Capital employed to produce NOPAT

multiplied by

Economic cash flow

Weighed average cost of capital equals Economic Value Added

The key elements of customer service are well known and require nothing more than a reference here. We are considering the cost of providing: product availability; post sale customer support; efficient handling of order processing and progressing; ordering convenience; competent customer liaison; order cycle delivery time; reliability and frequency; order completeness (and back order notification); information on order status and availability; and service flexibility and responsiveness. Thus the concern of both logistics management and the board of directors is one of balance, or customer service optimisation: it is an attempt to optimise customer and shareholder satisfaction concurrently. Table I identified the structure and relationships of shareholder value planning, suggesting the first step is to identify strategic and operational value creation performance criteria and value drivers. If we are successful in this it facilitates the optimisation process. We explore this approach in Figure 4 which identifies strategic and operating management value criteria and proposes value drivers which will have an influence on value creation through the value criteria. For each of the value drivers a number of logistics planning options are suggested. Clearly individual company/customer situations differ, as do their views on shareholder value expectations. However, the options suggested are indicative of those typically considered in this context. Exploring the links Figure 4 illustrates the linkages between each activity. Margin management is a key EVA characteristic in creating positive EVA. Four value drivers can have strong influence on margins. EVA can only be positive if margins are robust. The role of the value drivers is to maintain, preferably expand, strong margins by focussing resources on the most profitable customers, by outsourcing logistics activities performed more costefficiently by partners and by encouraging both customers and suppliers to add value to the product-service offer where they have the capabilities and capacities and can do so more efficiently than we can. Asset base management provides a productivity base for the organisation. Logistics management should seek options which improve value driver performance without resulting in a damaging effect on the customer service levels offered. Capacity utilisation may be improved by identifying trade-off possibilities elsewhere in the logistics system. Working capital management requirements can be reduced by introducing inventory management systems and efficiency improvements (EDI systems) together with financial incentives to accelerate payment of accounts from customers. Coproductivity approaches include an investigation of alternative manufacturing (IKEA philosophy), inventory holding and customer payment systems within the supply chain. Logistics ``investment'' management activities are mostly of an advisory or monitoring nature. Capacity management changes and fixed cost recovery are closely linked and have implications for ROI performance. The lease or buy option is one which should be considered at any time when expansion of facilities is under consideration but particularly when volume throughput

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fluctuates. Coproductivity suggests an ongoing review of the cost efficiencies of alternative supply chain formats. Customer loyalty management may be increased by dedicated investment in customer activities. For example, the installation of ``track and trace'' hardware in customer locations by DHL has resulted in strengthening customer loyalty and commitment. It is also an example of coproductivity with customers undertaking track and trace tasks rather than requesting information form DHL. Operating profit margins should be compared against logistics in investment: overall ROI performance may be improved substantially by making incremental investments in existing facilities. It may also increase utilisation throughputs and offer amortisation of fixed costs over a larger revenue base. Cashflow management has two primary value drivers. Working capital management resulting in the lowering of inventories and/or accounts receivable will increase cash flow (clearly an increase in either, or both, may unnecessarily increase the use of cash). Coproductivity opportunities offer management an opportunity to influence cash flow by delaying the addition of value to a product by relocating inventory holding and ownership or by changing the patterns of added value in the supply chain. An example The example which follows is hypothetical, however it has been developed using an actual company. The company remains anonymous but cooperated with the author in developing a method by which logistics options might be evaluated using their impact on EVA as one criterion. The other criterion used was the assumption that customer service levels would remain unaltered during an evaluation of alternative supply chain formats. The company manufactures industrial durable products and distributes through a dealer network. Sales to the dealers are made by a national sales force, organised on a regional basis. Performance figures are shown for 1996 and estimated for the full year 1997. The company has not, hitherto, considered the impact of its logistics decisions on shareholder value. However, the approach from the author raised shareholder value planning as an issue and the approach coincided with a review of both transaction and physical distribution channels within the supply chain. It was decided to use EVA as a model for investigating shareholder value due to its prominence. The 1996 performance shows a positive EVA but by 1997 this was expected to fall and was cause for concern. A major cause for the decline in performance can be seen to be the increases in both marketing and logistics services costs. The company's view at the time was that its costs had increased due, in part, to the 10 percent growth in business but more because of competitive pressures in the market. The company was aware of the fact that the increase in business had led to a decrease in profitability and in the returns on both capital employed and shareholder equity (see Table II for detail). During 1997 a review of the structure of the company's involvement in the supply chain was conducted. It was assumed that service to distributors would

$ million Sales (net of 30 per cent discounts) COGS Manufacturing costs (including O/H) Marketing costs (customer related direct): 10 per cent Sales calls Promotions Bonuses Marketing costs (overheads) Logistics services (customer related direct) Order assembly Stockholding Warehousing Transportation Redeliveries Backorders Logistics services (customer related indirect) Order communications Stockholding Warehousing Corporate overhead Depreciation NET PROFIT Taxation at 40 percent NOPAT Capital employed: Capital employed: manufacturing Fixed assets Working capital Capital employed: logistics Fixed assets Facilities Transportation Working capital Inventories Accounts receivable Cash flow Weighted average cost of capital (per cent) Cost of capital to generate NOPAT EVA 275 75

1996 5,000.0 1,500.0 200.0 175.0 125.0 500.0 37.0 10 10 20 30 20 10 100.0 100.0 200.0 300.0 200.0 100.0 1,000.0 10 10 30 30 15 10

1997 5,500.0 1,650.0 275.0 420.0 172.5 687.5 412.5 62.0 124.0 350.0 392.5 186.0 124.0 1,237.5

Implications of shareholder value planning 255

250.0 325.0 125.0 925.0 370.0 555.0 2,450.0 1,850.0 2,50.0 2,100.0 200.0 75.0 50.0 25.0 350.0 1,050.0 15.0 367.5 187.5 275 75

375.5 385.0 137.5 632.5 253.0 379.5 2,450.0 1,850.0 250.0 2,100.0 200.0 75.0 50.0 25.0 350.0 7,690.0 15.0 367.5 12.0

Table II. 1996/1997 performance

remain at its existing level but two alternative formats would be evaluated. The first 1988 (a) largely maintained the existing format; some tidying up of small inefficient dealers was conducted but by and large there were no other changes. The alternative, 1998 (b), was quite different. It involved a move to a

IJPDLM 29,4

distributor/wholesaler network. The distributor/wholesalers would be responsible for selling, inventory management, delivery and account collection. Territorial guarantees and additional margins would be agreed. See Table III for the impact on marketing and logistics service operations costs.
$ million Sales Sales (net) (a: 30 per cent) (b: 35 per cent) COGS: manufacturing Manufacturing costs (including O/H) (30 per cent) Marketing costs (customer related) Sales Promotions Bonuses Marketing costs (overheads) Logistics services (customer related) direct Order assembly Stockholding Warehousing Transportation Redeliveries Backorders Logistics services (customer related) indirect Order communications Stock holding Warehousing Corporate overhead Depreciation NET PROFIT Taxation at 40 percent NOPAT Capital employed: Capital employed: manufacturing Fixed assets Working capital Capital employed: logistics Fixed assets Facilities Transportation Working capital Inventories Accounts receivable 1998(a) 8,400 6,000 1,800 1,500 250 200 150 75 150 75 1998(b) 8,400.0 5,500.0 1,800.0 1,650.0

256

600 450 120 130 350 400 200 150 1,350 150 125 115 390 390 150 870 348 522 2,700 1,900 2,200

300.0 250.0 60.0 50.0 100.0 200.0 90.0 80.0 580.0 75.0 80.0 95.0 250.0 360.0 150.0 1,810.0 724.0 1,086.0 2,350.0 1,900.0 2,200.0

350 150

200 150 100 50 500 770 20 450 (18)

100 50

70.0 30.0 30.0 20.0 150.0 2,055.0 15.0 352.5 733.5

Table III. Forecast performance options for 1998

Cash flow Weighted average cost of capital (per cent) Cost of capital to generate NOPAT EVA

For the company a number of benefits were obvious. Marketing and logistics costs were clearly less and the impact on profitability very apparent. Some funds would be available from the sale of fixed assets and these were expected to be greater over the ensuing years. The impact on EVA of the two alternatives can be seen. The ``new'' format clearly favours the shareholders' interests. Indeed the existing format, if left as it is, will create problems for the company: the 1998 forecast is for value to be destroyed rather than created. While shareholder interests may be increased by adopting the new supply chain format it is not without risk. One obvious problem concerns the lack of control the company will exercise over dealers this now being the province of the distributor/wholesalers. Control in this context is twofold; control over marketing and of the logistics service offer. One adjustment for the increase in risk would be to increase the WACC to 20 per cent. In the calculations of the 1998 (b) system performance the WACC was maintained to 15 per cent; the assumption being that the company would begin to relieve some of its long term debt and would not require to borrow additional capital. Concluding remarks This article has identified the implications of shareholder value planning for logistics decisions. The notion that shareholders' returns are important has always been an implicit objective manifested through financial objectives. However, what is new is the move towards integrating business decisions towards an overall goal of creating shareholder value. Sustainable shareholder wealth is now, for many organisations, the focus of the activities of the business, and decisions are evaluated within the context of creating or destroying value. A problem that has emerged is the difficulty of implementing value based management at operational levels of the organisation. This article has provided a framework for discussion on how the concept might be implemented into logistics decisions.
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Mills, R.W. (1994), Finance, Strategy and Strategic Value Analysis, Mars Business Associates, UK. Norman, R. and Ramirez, R. (1993), ``From value given to value constellation: designing interactive strategy'', Harvard Business Review, July/August. Pine, B.J. Peppers, D. and Rogers, M. (1995), ``Do you want to keep your customers forever?'', Harvard Business Review, March/April. Porter, M. (1985), Competitive Advantage, The Free Press, New York, NY. Porter, M. (1996), ``What is strategy?'', Harvard Business Review, November/December. Rappaport, A. (1986), Creating Shareholder Value, The Free Press, New York, NY. Reichheld, F.F. (1996), ``Learning from customer defections'', Harvard Business Review, March/ April. Riley, D. (1987), ``Competitive cost based investment strategies for industrial companies'', Manufacturing Issues, Booz, Allen and Hamilton, New York, NY. Shank, J.K. and Govindarajan, V. (1988), ``Transaction-based costing for the complex product line: a field study'', Journal of Cost Management, Vol. 2 No. 2, Summer. Simonson, I. (1993), ``Get closer to your customers by understanding how they make choices'', California Management Review, Summer. Walbert, L. (1993), ``America's best wealth creators'', Fortune, 27 December. Wood, C. (1996), ``Value-based management tools gain some leverage'', Business Review Weekly, 16 December.