Making Better supply chain decision through total delivered cost management.pdf

8/9/2019 Making Better supply chain decision through total delivered cost management.pdf

1/37

Making better supplychain decisions throughtotal delivered costmanagement


2/37

HPCLC Fall Educational EventConfidential – 2012 Ernst & Young

Page 11210-1397979

Agenda

► Introductions► Who we are

► Session objectives

► 21st annual trends in logistics and transportation study

► Total delivered cost

► Questions


3/37


Page 21210-1397979

Introductions

► Gary Allen► North America – Logistics Practice Leader

► Tony Ross

► North America – Healthcare Supply Chain Leader


4/37


Page 31210-1397979

Agenda





► Questions


5/37


Page 41210-1397979

Ernst & Young has a strong global presencein Supply Chain and Operations

Americas

300 Supply Chainprofessionals

8,200 Advisory

professionals

► Supply chain strategy and Operating modeltransformation (including TESCM)

► Total delivered cost optimization► Supply chain network and global trade flow

optimization► Transportation and logistics optimization► Improving supply chain responsiveness and agility► Improving cash to cash cycle and working capital (incl.

inventory optimization)► Supply chain functional performance improvement –

S&OP, Planning, Manufacturing, Logistics, Service► Order to cash performance improvement

► Improving supply chain risk management► Improving supply chain sustainability

► Procurement strategy and operating modeltransformation

► Advanced strategic sourcing and spend categorymanagement approaches (incl. demandmanagement)

► Procurement advanced hedging and risk

management strategies► Complex commercial contracting and outsourcing

reviews and implementation► Driving improved supplier relationship management

including innovation and development► Procure to pay performance improvement► Improved supplier risk management► Advanced procurement analytics incl. landed cost

models► Procurement performance management and benefits

tracking

Supply Chain Transformation

Procurement Transformation

EMEIA

450 Supply Chain

professionals

11,200 Advisoryprofessionals

Asia Pacific

250 Supply Chainprofessionals

3,600 Advisoryprofessionals

Global SC&O & Advisory Footprint

$22.9b revenue ($4.3b Advisory)

140 countries

152,000 professionals

Global

Advisory Assurance Tax Transaction


6/37


Page 51210-1397979

Agenda





► Questions


7/37


Page 61210-1397979

Session objectives

► Major trends affecting logistics and how they affect supplychain decisions

► Perspective on total delivered cost, how companies areusing it today and a road map for you to apply it within

your organization


8/37


Page 71210-1397979

Agenda





► Questions


9/37


Page 81210-1397979

2012 trends in transportation and logistics studyBackground

► 21st year of the study► Joint research with Dr. Karl Manrodt, Georgia

Southern University; Dr. Mary Holcomb,University of Tennessee; Ernst & Young;and Con-way

$50.6 billion is approximately6.7% of total domestic

transportation spend

The 2012 study sample representsmore than

► $30.1 billion domestic

► $20.5 billion international in logisticsexpenditures

1,370 respondents from 16 industry sectorsrepresented this study


10/37


Page 91210-1397979

2012 study – top five megatrends

These top five trends were consistent across all sectors:

Companies are not maximizing their potentialto differentiate service.

Increased visibility is needed to build the needed levelof flexibility and to enable differentiation of service.

Business analytics capabilities need further developmentto enable differentiation capabilities.

Closer collaboration with key supply chain membersis needed to increase flexibility.

A deeper understanding of indirect costs are neededto achieve the desired level of efficiency.


11/37


Page 101210-1397979

2012 study – top five megatrendsDifferentiated service

► Survey participants overwhelmingly agreed that “being better than our competitors in terms of service would

significantly improve our competitive position.”

► While “best” customers do receive better service, the difference in service levels between this group and “average”

customers is fairly low.

► “Average” customers reported more service improvements from the previous year than “best” customers.

Companies are not maximizing their potentialto differentiate service.

3.96

3.85

3.12

2.59

2.58

1.94

0 1 2 3 4 5

6. Our logistics / transportation service allows us tocharge a premium / prestige price to our customers.

5. The logistics / transportation service offered byour company is a barrier to new competition.

4. Increasing costs are often used to moderatelogistics / transportation service differentiation.

3. Our customers consider logistics / transportationservice an important differentiating characteristic that

is just as important as our products.

2. Innovation in logistics / transportation servicewould significantly improve our competitive edge.

1. Being better than our competitors in terms ofservice would significantly improve our competitive

position.

Scale: 1 = Strongly agree; 7 = Strongly disagree

“Best” customers receive better service


12/37


Page 111210-1397979

2012 study – top five megatrendsBusiness intelligence

Business intelligence (analytics) capabilities need furtherdevelopment to enable dif ferent iat ion capabilities.

► Most commonly shared data withkey customers and suppliersprimarily involves operations.

► Business intelligence is not yet astrategic imperative but drivenprimarily by customer contractrequirements.

► The top five impediments todeveloping robust businessintelligence capabilities are:

► Lack of integrated processes► Objectives that vary across

business units

► Cost of implementation

► Lack of standardized data

► Lack of organizational strategy

26.4%

19.4%

57.9%

37.1%

58.9%

38.8%

19.5%

20.3%

18.2%

27.1%

15.9%

25.7%

24.5%

22.0%

12.6%

14.5%

10.6%

15.9%

29.5%

38.3%

11.2%

21.3%

14.5%

19.6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%

Data mining

Dashboards

Interactive visualization

Advanced analytics(including on-line analytical

processing)

Meta data management

Predictive modeling anddata mining

Not Planned

Planned

Implemented

Completed


13/37


Page 121210-1397979

2012 study – top five megatrendsIncreased visibility

► Domestic visibility of the physical flow of goods and products on both the inbound and outboundsides increased.

► Visibility for the remaining points in the supply chain reported no improvement.

► International visibility also improved for inbound and outbound transportation. Other parts of thesupply chain halted previous years progress.

Increased visibility is needed to build the needed levelof f lex ibi l i ty and to enable dif ferent iat ion of service.

20125.2 3.8 3.0 2.7 1.9 3.6

NOTE: 1 = very visible; 7 = no t very visible

Supplier Supplier’s

Supplier Company Customer Outbound Inbound


14/37


Page 131210-1397979

2012 study – top five megatrendsCollaboration with suppliers

► The results show that companies have placed much more effort in sharing information andcollaborating with key customers than they have with key suppliers.

► Capacity forecast sharing was near the bottom of the list of primary actions taken bycompanies to offset rising transportation costs.

► Improved integration of information systems with external supplychain partners was also one of the least likely initiatives to be taken.

Closer collaboration with key supply chain membersis needed to increase flexibility.

Shipmentstatus70%

Commonly shared dataWith key customers

Customerdelivery

requirements

63%

Orderstatus68%

Demandforecasts

62%

Productionschedules

37%

Advancedship notice

49%

Commonly shared data withkey suppliers

► Sharing data (as a collaborationinitiative) has focused on operationsand tactics

► If we continue to focus at these

levels, how and when willcollaboration become strategic?


15/37


Page 141210-1397979

2012 study – top five megatrendsCost to serve

► Most companies tend to focus on cost of good sold, few companies have the capability to understand their true cost to

serve (CTS).

► CTS is often averaged across customers and products in a profitability review. Disaggregating these CTS averages

highlights opportunities to reduce value leakage.

► Leading class companies segment CTS at a customer, product, brand or company level and complete the picture byproviding end-to-end supply chain costs.

► CTS has recently become an area of focus, and many companies plan to launch CTS initiatives.

A deeper understanding of indirect costs isneeded to achieve the desired level of efficiency.


16/37


Page 151210-1397979

Poll question #1: 21st annual trends inlogistics and transportation


17/37


Page 161210-1397979

Agenda





► Questions


18/37


Page 171210-1397979

Companies must respond to meet increasing customer* and internal expectations withoutincreasing their costs

Current business environment

Understand the end-to-end supply chain costsand the impact ofchanges to the currentnetwork

“Leverage global sourcing as a major sourceof cost reduction for the company in years tocome”

“Focus on the product needs of customersand reduce inventory that is not in highdemand”

Pressures from various commercial strategies Enterprise-wide imperative

“Monitor inventory movement and receiveautomatic alerts to proactively managesupply chain events and prevent order

failures”

(*Customer in this narrative is another company or entity buying from a company; customer does not represent the end consumer.)

“Understanding impact of supply chainchanges on our bottom line and financialreports”


19/37


Page 181210-1397979

Business complexities require a newsolution

Companies are being squeezed from all sides:► Commercial – demanding increased promotional support and

sales incentives

► Manufacturing and logistics – Increasing service levels whilereducing manufacturing and logistics costs (e.g., delivery, make toorder)

► Purchasing – internal cost of supply reduction pressures balancedagainst increased logistics costs and manufacturing flexibility

Customer behavior directly affects cost andprofitability:

► Up to 20% of cost of goods sold (COGS) can be directly affectedby customer behavior (i.e., ordering, planning, logistics).

► Connecting customer demands all the way back throughmanufacturing and cost of supply is often not well understood.

Commercial and supply chain often have misalignedobjectives:

► Supply chain aims to minimize costs by eliminating non-valueadding activities and is frustrated when commercial overcommits.

► Commercial looks to build volume through differentiated customerofferings and is frustrated when supply chain fails to deliver orders.

Inefficient behavior is rewarded:

► Companies often return 1.5% to 2% off list price to customers in

efficiency terms that are not conditional and founded on totaldelivered cost.

► Purchasing is rewarded on material pricing reductions,manufacturing on production rates and quality, and logistics oncost and delivery.

Without an understanding of total delivered costs, companies cannot reward efficient behavior ordefend against changes that drive cost.

Internal and external demands Misaligned internal objectives

► Enables a fact-based dialogue

► Facilitates communications between commercial and supply chain

► Requires a detailed understanding of total supply chain costs and profitability to uncover the next generation of cost savings


20/37


Page 191210-1397979

What are companies doing?

Examples

Transportationoptimization

Order management

Networkoptimization

Potential activities

► Increase transport efficiency ratios via customer price negotiations and introductionof logistics terms

► Identify inefficient order demands and associated costs to drive fact-basedcustomer discussions

► Use spare capacity in distribution centers and consider shared warehousingarrangements

Total deliveredcosts

► Leading companies integrate all factors across supply chain and commercialorganizations to reward efficient behavior and defend against cost increases.

► Efficiency investments conditional and based on a total delivered cost viewpoint.

► Use outside expertise and capabilities to help flex with market and customerdemands

Logisticsoutsourcing

► Reduce freight, broker, duty and compliance costsGlobal trademanagement

While most companies have attempted various total cost management initiatives, they tendto be disparate supply chain activities


21/37


Page 201210-1397979

Three components of total delivered costs

Supplier Manufacturer

Retailer/Distributor/Customer

Total landed cost Cost to serve

Total delivered cost

Customers continue to struggle to understand profitability and the related impact of balancingsupply chain cost trade-offs and consumer needs across these components.

Total delivered costs encompasses the entire supply chain from source of supply through deliveryto customer.

Conversion cost


22/37


Page 211210-1397979

Understanding the challenges and insightsfor each component is critical

S t r a

t e g

i c

Regional/

local

How do I optimize my supplychain costs while balancinginternal and external needs?

How do I optimize my globalsourcing and logisticsnetwork across regions?

How do I balancemanufacturing performanceand demand variability?

Total delivered cost

Landed costs

Conversion cost

Global

Regional/

local

Global/regional

S t r a

t e g

i c / t

a c

t i c a

l

T a c

t i c a

l /

o p e r a

t i o n a

l

Cost to serveHow do I optimize myexecutional flows?

Understand and model operatingscenarios that meet needs whileoptimizing supply chain costs

Sourcing strategies shouldproperly account for all indirectand direct costs

Small improvements in processreliability can produce significantresults that make the differencebetween profit or loss

Help sales teams understanddelivery cost economics to buildefficiency into trade terms

T a c

t i c a

l /

o p e r a

t i o n a

l

Component Challenge Insight


23/37


Page 221210-1397979

Total delivered cost framework

Models tend to be unique by industry or customer but extend the focus from gross profit toeconomic profit, taking into account all the cost elements.

Gr o s s S al e s

D e al s &

A l l ow an c e s

N e t S al e s

V al u e

Gr o s s P r of i t

E c on omi c

P r of i t

Landed and conversion costs► Standard COGS:

– Raw/purchased materials – Packaging materials – Variable conversion costs – Fixed conversion costs – Primary logistics – Customs fees, duty, tax

► COGS variances: – Purchase price variance – Materials usage variance – Conversion cost variance

Costs to serve►Secondary warehousing and distribution:

– Inbound material handling – Materials storage

– Order assembly – Transportation

► Order-to-cash processing costs

► Selling costs

► Customer working capital costs

Total delivered cost Illustrative


24/37


Page 231210-1397979

Poll question #2: Total delivered cost framework


25/37


Page 241210-1397979

Cost-to-serve capabilities allow companies to balance customerservice improvement with supply chain efficiencies

Helps inform any joint customerinitiative so that both parties benefitfrom changes

Understanding cost to serve on acustomer-by-customer basis canallow more specific promotionpricing to deliver higher returns

Tracking and controlling customercost drivers in daily operations candrive incremental cost and effortbenefits such as:► Working with customers to order

full pallets/full trucks► Increasing percentage of no-

touch transactions

Helps to understand and control thetrue cost of service offerings suchas:► Seven-day delivery► Custom pallet requirements► Electronic B2B utilization

Cost-to-serve analytics can identifyunprofitable customer trade lanes,allowing interventions to be made

Defining efficient trade terms makescertain that both the supplier andcustomer benefit from

improvements in efficient behavior

CTS provides transparency of thetrue profitability of customers andproducts and enables visibility intosupply chain costs across thebusiness through a variety of lenses – product, customer, brand andproduct group

Along with sales and operationsplanning (S&OP), cost-to-serveprovides the basis on which supply

chain and commercial interact. Itenables supply chain to make themove to become more customercentric

There can be a 10x cost differential in serving “efficient” customers versus “inefficient” customers

Efficiencytrade terms

Promotionpricing and

performance

Operationalcontinual

improvement

Customer joint value

creation

Customerserviceoffering

Go-to-market

distribution

strategy Costto

serve

Customerand product

profitability

Supply chainand

commercialinterface


26/37


Page 251210-1397979

Resulting in benefits across the supply chain and typicallygenerating upwards of 10% of total cost to serve within the region

► Increase transport efficiency ratios viacustomer price negotiations andintroduction of logistics terms

► Support transport contract renegotiation

► Increase average order sizes throughthe use of structured logistics tradeterms with tiered pricing reflectingquantities ordered, leading to reducedprocessing volumes

► Increase efficiencies in how

deliveries are made tocustomers through flexibilityin the network, e.g., peakversus off-peak

Retailer supply chain

PlantRetailer store

shelvesRetailerRDCs

Plantwarehouse

CP company supply chain

SupplierDC

► Incentivize customers to order full pallet quantities to reducecase packing ratio through structured pricing and trade terms

► Identify inefficient order demands and associated costs inorder to drive fact-based retail discussions

► Contract renegotiation with 3PL provider

► Transition customers to electronic orderplacement and eliminate inefficient behaviors,e.g., deductions and queries

► Increase average order sizes through the use ofstructured logistics trade terms with tiered pricingreflecting quantities ordered, leading to reducedprocessing volumes

► Restructure teams to focus on priority customers

10%-20% ofbudget

6%-12% ofbudget

► Put in place logistics efficiency terms

based on cost to serve to reward efficientbehavior and defend against costincreases

► Make efficiency investments conditionaland based on true cost to serve

15%-30% ofbudget

Efficient spend1%-2% off list price

6%-12% ofbudget


27/37


Page 261210-1397979

Global consumer products company – Cost to serve case study

Benefits identified

Estimated net cost reduction of 6% of total cost to serve through: Increase in direct flows

Increased vehicle fill

Cost of capital benefit from inventory reduction in supplier DCs

Additional benefits:

Reduced G&A cost and improved operational efficiency (for supplierand retailer) due to fewer orders, increased vehicle fill and thereforefewer vehicles

Using a cost to serve simulation, they conducted a thorough analysis oftheir current cost to serve.

This enabled them to understand exactly where the key cost drivers wereand identify and prioritize potential solutions for further analysis.

Initially focusing primarily on their two largest retailers, using the scenariosimulation they quantified the cost and service impact to create a businesscase and road map to change.

The operating company has been challenged to significantlyreduce costs during FY12.

Tasked it’s operating companies with identifying significant cost

reductions. Cost to serve identified as a key enabler to driving savings.Prior to implementation of the cost to serve solution, they understoodthat costs are high and that there is a high volume of internalmovements, but they have no means to quantify this and create abusiness case for change.

The business problem

Approach

Customer Initial hypothesis

Potential

impact(% total CTS)

Two largest retailersIncreased direct deliveriesfrom plant warehouse tocustomer

4.3%

Two largest retailers Increase vehicle fill 1%

Four small retailerswith low vehicle fill

Consolidation of volume toincrease vehicle fill

0.7%

Opportunity 6%

These opportunities were identified as relatively quick wins.

Additional opportunities identified how fast- and slow-movingSKUs are managed within the network.


28/37


Page 271210-1397979

Landed cost issues and challenges

Global sourcing presents significant challenges that can lead to value leakage,brand damage, penalties and even jail.

► Companies face growing cost, compliance and risk challenges across their global supply chains as they becomestretched in the pursuit of low-cost country sourcing and revenue growth.

► Many companies continue to address global sourcing issues in a fragmented, silo-based approach that can furthercontribute to these issues. These are just a handful of examples to illustrate why it is important to understand globaltrade in an integrated way.

Challenges of globalization Examples

► Breaking into new and emergingmarkets

► Kellogg’s Indian breakfast cereal initially failed due to price, positioning and logistics

problems.

► Margin pressure and valueleakage

► Hidden duties within delivery duty paid (DPP) contracts cost a manufacturer an additional30% on landed costs

► Need to protect brandreputation

► Recalls cost Mattel $40m in 2007 and took $612m off its market capitalization.

► Increased cash flow needs ofthe global supply chain

► A multinational’s VAT systems setup did not match its evolving supply chain, leading to

€20m of irrecoverable VAT trapped on the balance sheet.

► Excessive lead times ► Weak controls over third-party distributors led to delays of up to three months in customersgetting orders delivered for this high-tech manufacturer.


29/37


Page 281210-1397979

Landed cost optimization can enhance procurement and supplychain decision-making by taking a holistic view of the “inbound”supply chain costs

Landed costoptimization will allowprocurement, logisticsand manufacturing touncover hidden costs.

Network optimization► What is the impact on total landed

cost and total delivered cost?

Value analysis and engineering

► Do indirect tax factors trigger or

nullify cost-saving opportunities?

New product development

► Does the classification, source or

use of import material havesignificant indirect tax implications?

Materials and finished goodssourcing

► Is your supply base cost effective,

and can you take advantage of

short-term price opportunities?

Make vs. buy (life-cycle cost)

► Do the cost variables in your make-

buy analysis encompass indirect

tax cost drivers?

Capacity rebalancing

► Are you able to rebalance

production capacity while stillminimizing delivered costs

Product costing andrationalization

► Do you consider substitutes versus

original? Are your product costing

methods aligned?

Plant rationalization

► Are you considering trade and

indirect tax levers as well as

logistics and conversion costs?


30/37


Page 291210-1397979

Deploying the appropriate landed cost and network modeling toolsto analyze supply chain costs and trade agreements will helpidentify potential opportunities

► Utilizing actual ERP data

on materials purchasesand product sales,combined with logisticstransaction data

► Enables improveddecision-making for:

► Duty cost reduction

Assess use of available

duty regimes and free tradeagreements

► Sourcing decisions

Compare different sourcesin use on a total deliveredcost basis

► Plant rationalization

Assess and check whichplant should supply whichend market

► Capacity balancing

Assess and check whichplant should supply whichend market

1

2

3a

3b

Example custom er output

1

2

3

3

2


31/37


Page 301210-1397979

Diversified manufacturer – Global tradesoftware implementation case study► Trade preference determination improvement and automation projects generate duty savings between

30% and 60%

► A recently completed project yielded the following benefits:

Diversified manufacturing – $8.3B FY09 revenue

Over 600 types of products/ partstraded across NAFTA and EU

Manual origin qualification and trade

preference determination processes FY09 US imports: $706M

FY09 US import declaration filings:

6,300 lines (distinct product/

transaction)

Import FTEs: 2.5

0

1,000

2,000

3,000

4,000

5,000

6,000

Prior to GTS After GTS

Annual duties paid in thousands for comparablevolume of trade

Investment

Software cost: $2,800,000 Hardware cost: $40,000

Process improvement and software

implementation services: $600,000

Total: $3,440,000

Savings:$3Mannually

* Assumes a 4 m onths implementat ion, cost of

capital 8% and 3 years capital amort izat ion period

$5,600

$2,600

ROI*

First savingsachieved in month 5

$850K income

statement impact infirst 12 months

Cash flow paybackachieved in 20months

Other benefits

Improved workingcapital

Lower inventorylevels

Labor efficiencies

Lower brokerage fees


32/37


Page 311210-1397979

Lessons learned

Area Risk Mitigation plan

Scope of workand complexity

► Project delays through too much dataanalysis and scope of effort

► Launch an assessment to confirmbusiness case and prioritize initiatives

► Segment into logical buckets and pilotone segment in one region

► Structure around supply chainprocesses; Plan, Buy, Make, Move, Sell

BU participationand buy-in

► Depends heavily on BU levelparticipation and top-downsponsorship from BU executive

► BU participants identified at every levelwithin the project

► Initial buy-in from BU ownersrecommended prior to kick-off

Tool: scalabilityand alignment

► Tools built in this project may not bein alignment with IT systems anddirection

► Involve IT from the beginning to makesure that activities are aligned with ITsystems and IT strategy

Assignment andallocation rules:buy-in

► Assignment and allocation rules needto be defined and bought into acrossfunctions

► Participation from BU, sales, finance,supply chain and operations► Facilitated workshops for buy-in

Data availability ► Profitability dashboard and totaldelivered cost waterfall, hingesheavily on data availability

► Initial two weeks of deep-dive on dataavailability

► Leverage data warehouse if available

P ll i #3 di d l l d


33/37


Page 321210-1397979

Poll question #3: case studies and lessons learned

T t l d li d t i l t ti t


34/37


Page 331210-1397979

Total delivered cost implementation steps

1. Strategic alignment

► Understand business priorities, objectives & goals

► Get support from executive management & key functional leaders

2. Business segmentation

► Understand supply chain & customer unique characteristics

► Break it down into manageable pieces & identify a pilot to get started

► Establish clear definitions & understanding of services

3. TDC assessment and modeling

► Collect, analyze and model scenarios to help prioritize focus areas

► Focus on useful and value-driven cost data

4. Organization collaboration

► Gain alignment & proper incentives across all functional areas

► Create a cross-functional team with executive sponsorship

5. System enablement

► Evaluate which tools are right for you & will help sustain benefits

C l i


35/37


Page 341210-1397979

Conclusion

►

Key industry trends highlight theimportance of service differentiation,business analytics, visibility,collaboration and understanding totalcosts.

► Customer behaviors and

organization factors directly affectsupply chain costs.

► TDC encompasses the entiresupply chain from source of supplythrough delivery to customer.

► Without understanding TDC,companies cannot reward the rightbehavior that drive efficiencies.

►

TDC is complex and must be brokendown into “bite-size” chunks.

► Cost-to-serve capabilities allowcompanies to balance customerservice improvement with supplychain efficiencies.

► Landed cost optimization allowsprocurement, logistics andmanufacturing to uncover hiddencosts.

► Successful projects require executive

sponsorship and cross-functionalinvolvement.

► When launching a TDC project, makesure your strategy is clear and that aproper assessment is conducted.

A d


36/37


Page 351210-1397979

Agenda





► Questions

Th k !


37/37

HPCLC Fall Educational EventPage 36

Thank you!

Gary AllenExecutive Director, Logistics Leader

[email protected]

+1 313 628 8639

Tony Ross

Senior Manager, Logistics Practice

[email protected]

+1 214 969 8846

Making Better supply chain decision through total delivered cost management.pdf

Documents

Transcript of Making Better supply chain decision through total delivered cost management.pdf