Value-based Enterprise Logistics Cost Management Mode
WANG Bo1, LI Xiran2
1. School of Economics and Management, Heilongjiang Institute of Science and Technology, P.R. China,
2. The pilot college, Beijing University of Technology, P.R. China, 101101
[email protected]
Abstract Based on the analysis of the research progress and problems of logistics cost management
both at home and abroad, the Value-based enterprise logistics cost management framework is
established, and the E-A total factors logistics costs and enterprise value computing model is proposed.
Keywords: Value, Logistics cost management, Enterprise strategy, Eonomic value added (EVA)
1 Introduction
As the third source of profits, logistics plays the vital role in enterprise core competitiveness
improvement, and therefore attracts increasing concerns from Chinese enterprises. The logistics cost
management is the key to developing enterprise logistics business, and creating new profit growth
sectors. The logistics cost management theories and practice are advanced in the western countries of
Europe, USA, and Japan, where the logistics cost theories of dark continent (Peter Drucker, 1962),
iceberg and the third source of profits (Professor Nishizawa Osamu of Waseda University, Japan), and
trade-off were proposed sequentially. Since management master Peter Drucker first proposed that the
enterprise logistics management is “a virgin land uncultivated yet”, the enterprise micro logistics cost
accounting and management optimization have been so far as the key topics in the highly developed
countries in the logistics research and practice of USA and Japan.
Chinese logistics cost management research and practice lags relatively behind. When the logistics
management was early introduced into China, research focuses were laid on the macro logistics cost
management and micro logistics cost accounting methods. In recent years, based on the experience
drawn and summarized from the western countries, relatively extensive researches are undertaken in
Chinese theory circle and practice circle, including the concept definition of enterprise logistics costs,
logistics cost forming mechanism and the components, accounting logistics costs by employing
activity-based cost (ABC) method, the value chain analysis of logistics costs, integration between the
strategy and logistics cost management, and the logistics cost management in the supply chain
perspective. However, due to the relative lag of Chinese logistics industry development and the existing
difficulty in implementation of logistics cost management, these research and practice are not in-depth,
with many problems, which show as follows:
(1) The researches are diversified in arguments, which fail yet to form a uniform framework of
Chinese logistics cost management and accounting;
(2) Most subjects of the researches fall only within the cost perspective, unable to integrate
organically logistics costs and the performance evaluation, and unable to reflect the drivers of logistics
costs to enterprise value creation, which makes the logistics cost management fail to play the essential
role in the management decision-making and the value creation objective realization;
(3) Not in light of the contemporary supply chain environment, the integrated enterprise value
system is ignored in the logistics cost management;
(4) The research on the logistics costs virtually rest on the level of tactics, which fails to relate
closely the cost management to the enterprise strategic objectives, and to make in-depth research on the
logistics cost management from the strategic perspective for the enterprise competitive demand;
(5) In the components of the logistics costs, only resource-consumed costs are taken into
consideration, while the resource-occupied costs (i.e. capital costs) are ignored. The non-total cost factor
accounting leads to the inaccurate cost data, unable to reflecting real value creation and damage
Based on the problems above, and from the perspective of the enterprise value increasing, the
brand-new enterprise logistics cost management mode is established herein, expecting to provide an
advanced blueprint and scheme more close to the management practice for Chinese enterprise logistics
cost management.
2 Value-based Enterprise Logistics Cost Management Framework
A structure diagram (Shown Fig.1) herein illustrates the value-based logistics cost management
framework: value increasing is the logistics cost management objective, oriented by the enterprise
strategy, the two-dimension space and time framework consisting of the supply chain and time series is
the management scope, ABC and EVA methods are integrated, activity-based total factors logistics costs
and enterprise value computing model is established, ABC method and costs budgeting are integrated,
and activity-based budgets are prepared, which all provide standards and methods to the logistics cost
Fig.1 The framework diagram of Value-based logistics cost management
(1) Value increasing is the objective. The lower cost priority is not the orientation of the enterprise
logistics cost management, while seeking and creating enterprise value is the starting point and the end
result. The logistics cost management objective is always locked on the value increasing in each step of
the supply chain, realizing value added through the logistics cost management, and creating maximal
value for enterprises.
(2) Enterprise strategy is the guideline. Modern logistics cost management has exceeded the
traditional logistics cost scope of control or saving, with obvious strategic trend as follows. On one hand,
logistics is not taken as the assistant content for operational activities, but as major component of the
enterprise operation strategy, and the logistics cost management plays the strategic role in the enterprise
management. On the other hand, the logistics cost management is related to the enterprise competitive
strategy. It means that based on the thorough analysis on the enterprise external environment and
internal conditions, in the light of the overall view, and through the logistics strategy mix selection and
analysis on the basis of the integrated enterprise competitive strategy, the logistics cost control is
characterized by strategy, long-term, and adaptability to environment. Therefore, the issue of matching
to the integrated enterprise competitive strategy must be taken into consideration.
(3) The two dimension space and time framework consisting of the supply chain and time series is
the management scope. From the perspective of the space dimension, logistics is the client
demand-oriented flowing process of goods, services, and related information from the supplying place
to the receiving place in the supply chain operation. Due to the cross-boundary and open characteristics
of the logistics management operation, the total logistics costs deriving from a series of mutually related
logistics activities are distributed not only among different departments inside the enterprise, but also
among different partners outside the enterprise. It is the enterprise logistics cost management that will
control the total logistics costs under the condition of reasonable determining the service level and client
demand in the total supply chain. As for an enterprise, the logistics cost control does not seek for the
lowest partial costs in some section, but for the optimal total costs and comprehensive benefits in the
total supply chain. From the perspective of the time dimension, the enterprise logistics runs through the
whole process firstly from the materials supply, then goods production, and finally to the delivery to
customers. The logistics cost management is an activity-based cost management involving the whole
process from the pre-event cost budget control in the framework of the enterprise strategy, amid-event
Real-time cost control, to the post-event cost analysis and performance evaluation, which necessitates
the overall work in the levels of strategy, tactics, and activities.
(4) ABC and EVA methods are integrated, and Activity-based total factors logistics cost and value
computing model is established. The logistics system consists of several subsystems, meanwhile each
subsystem consists of several activities. The activities and subsystems are mutually related, interacted,
and independent as well. Therefore, the cost management of the enterprise logistics system should be
deepen into the activity level: one is that activities run through the total process of the time series
dimension of the cost management; the other is that the activity management is employed to optimize
the supply chain. Then based on that, ABC method and EVA are integrated, and the E-A total factors
(operation cost factors and capital cost factors) logistics cost and value computing model is established,
uniforming the enterprise cost accounting to the objective of the enterprise value creation.
(5) ABC method and cost budget are integrated, and activity-based budget is made, providing the
standard and methods for the logistics cost control. In order to make the cost budget standard more
scientific, reasonable, and precise, the budgeting is based on the activities, leading the management to
pay focus on activities and the resource consumed by the activities, not the cost itself, and control the
logistics cost accrued.
3 E-A Logistics Cost and Enterprise Value Computing Model
3.1 Integrated Cost computing Framework
Integrated cost computing (i.e. computing the total factors costs) involves two phase cost
distribution process (shown in Fig.2): in the first phase, operation resource costs and capital resource
costs are traced back and allocated to each activity, direct costs are traced back to products through
fictitious activities, and indirect costs are allocated to corresponding activities; in the second phase, the
costs in the activity cost pools are allocated to cost objects. Because of the same property of direct costs
of the operation and capital resources and the unit-level costs of ABC method, the “fictitious activities”
are added into the path from direct resource costs to cost objects, so as to uniform the consumed
resource distribution into two phases, facilitating the modeling and computing.
Fictitious activities
Capital resource
Operation resource
Fig.2 The flow chart of E-A integrated logistics cost model
3.2 E-A Logistics Cost and Enterprise Value Computing Model
Assume an enterprise produces n products (or services) within a period of time, consumes s
resources and p capitals, and m activities (including fictitious activities) in all are involved in the whole
activity chain. Let the output of the product i is Qi i=1, 2,…, n , the sales amount of the product i is Si
i=1, 2, …,n , the amount of activity units of the activity j consumed by the product i is qij j=1, 2, …,
m , the costs of the resource k consumed by the activity j is Vjk k=1, 2, …, s , the amount of the capital
l consumed by the activity j is Wjl l=1, 2, …, p , and the total of the activity drivers of the activity j is
Aj , then:
The activity driver distribution ratio of the activity j:
 s
R j =  ∑ V jk +
 k =1
l =1
× W ACC  / A j
The total cost of the product i:
C i = ∑ q ij × R j =
j =1
∑ q
j =1
 s
×  ∑ V jk + ∑ W jl × WACC  / A j 
The unit cost of the product i:
m 
 s
ci = ∑  qij ×  ∑ V jk + ∑ W jl × WACC  / A j  / Qi
j =1 
l =1
 k =1
The value realized of product I : EVAi = Si − Ci
Where if the proportion of m activities consumed by n products is easily acquirable, the model
facilitate the computing in the form of matrix, shown in Formula 5, 6, and 7.
Product total costs: C = AE
 C1   a11
C   a
 2  =  21
M   M
  
Cn   an1
an 2
L a1m   e1 + e1′ 
L a2 m   e2 + e2′ 
M  M 
L anm  em + em′ 
Where the matrix A = ( aij ) m × n denotes the proportion of m activities consumed by n products,
aij denotes the proportion of the activity j consumed by the product i, and
= 1 ; e j denotes
i =1
the operation resource expense consumed by the activity j, e′j denotes the capital resource expense
consumed by the activity j, and the column matrix E = e1 + e1′
e2 + e2′ L em + em′ ] denotes
the sum matrix of the operation resource and the capital resource expense consumed by m activities.
Unit product cost:
 c1   C1 / Q1 
 c  C / Q 
 2 =  2 2
M  M 
  
 cn  Cn / Qn 
( 6)
Value realized by product (product EVA):
 EVA1   S1   C1 
 EVA   S  C 
=  −  .
 M  M M 
    
 EVAn   S n  Cn 
4 Conclusions
Enterprise value maximization is the orientation of the enterprise objective function with foresights,
complexity, and substantiality, which is turning to be a global criteria to evaluate enterprises. It is the
baton of all the enterprise businesses, and therefore enterprise logistics cost management is also subject
to the objective. Hence, the value-based enterprise logistics cost management mode is established herein,
with following main conclusions:
(1) The enterprise logistics cost management objective is value increasing, which defines the
orientation of the logistics cost management;
(2) Modern enterprise logistics cost management must step out of the only cost perspective, and
integrate itself into the total process of strategy management, which requires the management schemes
not only adaptive to the integrated strategy, but also defined clearly the key factors to facilitate strategic
objective realization. The organic integration of the logistics cost management and the enterprise
strategy is important to ensure the enterprise long-term value added realization;
(3) The logistics cost management must extend vertically to the supply chain, and horizontally to
the total time series, to carry out the all-round and total process system management. In this way, it is
possible to identify the value added activities, eliminate non-value added activities, optimize the
logistics process, control logistics costs, and realize the value maximization of logistics activities;
(4) The advanced methods of ABC, EVA, and Master budget management, are integrated and
applied to the logistics cost management, so as to deepen management to the activity level, provide cost
control standards and methods, accurately compute logistics costs, and correctly reflect the value added
derived from the logistics management.
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Value-based Enterprise Logistics Cost Management Mode