PERFORMANCE BASED CONTRACTING AS SEEN … · PERFORMANCE BASED CONTRACTING AS SEEN FROM ... •...
Transcript of PERFORMANCE BASED CONTRACTING AS SEEN … · PERFORMANCE BASED CONTRACTING AS SEEN FROM ... •...
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PERFORMANCE BASED CONTRACTING AS SEEN FROM THE LSP’S PERSPECTIVE
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ESCF WorkshopEindhoven, 11 June 2014
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DHL at a Glance – “A Test”
1. Do you know the mother company of DHL
2. What size is the company
3. What are the main services offered by DHL
4. DHL is market leader in contract logistics, what is the market share
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DHL Supply Chain is part of the DPDHL group with a global network and an extensive logistics portfolio
GLOBAL FORWARDING & FREIGHT
Employees: ~ 475,000/Revenue: EUR 55.5bn1)
Employees: ~ 285,000/Revenue: EUR 42.8bn
The logistics company for the world
Employees: ~ 175,000/Revenue: EUR 13.9bn
The postal service for Germany
SUPPLY CHAINEXPRESS
Contract Logistics & Business Process Outsourcing
InternationalExpress
Air and Ocean Freight
RoadFreight
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DHL at a Glance
DHL Revenues: 42.8 bn€(2012)
DHL’s customer base includes 50% of Forbes
top 500 companies
DHL hasa global presence within over 220 countries and territories
DHL employsapprox. 285,000 people
8.4 %~37%
2.3%European
MarketShare 2009
Global Market Leader
One of the world's leading courierand express service providers
World's largest
contract logistics service
provider
World'slargest airfreight forwarder
World'slargest ocean
freight forwarder (in both FCL & LCL1))
One of Europe's leading
road freight forwarders
Global Market Share 2008
Global MarketShare 2009
European International ExpressMarket Share 2009
1) Full-container load; Less-than-container load ; 2) All Market Share Data and revenue figures as per DP DHL Media Mail 2011
12.9%Global Market Share 20089.1%
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Varied Value Propositions to suit our Customers DemandsCustomer value propositions of LSPs beyond lower freight rates
Customer value proposition Key levers
4.
Lower lost sales/additional revenues • Increased delivery accuracy and quality• SC reconfiguration (e.g., postponement)• Inventory optimization
2.
Lower inventory carrying cost • Inventory optimization/stockholding location optimization• SC transparency• SC reconfiguration (e.g., postponement)• Warehousing process optimization • Customs process streamlining
3.
Lower obsolescence cost • Mode switch (e.g., move from OFR to AFR)• Direct transportation• Reduction of warehousing steps• Warehousing process optimization• SC reconfiguration (e.g., postponement)• Inventory optimization• Customs process streamlining
1.
Lower direct logistics cost (beyond lower rates) • Mode switch• Direct transportation• Reduction of warehousing legs, lean warehousing• SC reconfiguration (e.g., postponement)• Backhaul optimization
Direct logistics cost
Indirect logistics cost
5.
Reducing asset/resource intensity of shipper's business, variablising fix cost, reducing complexity for shipper
• Taking assets/resources of shipper's balance sheet/payroll, charging variable fee
• Reducing complexity for shipper
Operating resources/complexity
6.
Reducing shipper's SC risk • Reducing SC risk (e.g., through better transparency)• Transforming/carrying part of SC risk for which LSP is
better ownerSC risk
Trans-parency
Transparency on direct and indirect logistics cost as well as on current SC setup
7.
• Rapid SC mapping and analysis capabilities
Integrated SC optimization
Integrated optimization of direct and indirect logistics cost(also on global level)
8.
• Holistic analysis of SC setup options
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DHL can take on different roles in customers' supply chains, offering different value propositions
Value propositionPotential SC roles
The SC Manager – get management fees for serviceD
• Manage parts of customers' SC to improve efficiency and effectiveness(for longer period of time/ongoing)
Contract types used
The SCM consultant – get consulting fees for serviceC
• Consult customers to improve efficiency and effectiveness of their SC setup(project based)
• Consulting fee
The end-to-end SC solution provider – deliver an integrated/end-to-end service and bear cost and/or performance risk
F• Take over and guarantee service level
and cost reductions for parts of customer's SC
• Closed book/unit rates for integrated logistics services
The commodity service provider –get a big share of wallet for executional services
A/B• Provide high-quality executional
logistics services at a competitive price (e.g., FF, EXP business, warehousing)
• Unit rates for standard services (fix or quoted)
• Open book cost plus
The gain sharer – get part of the impact achievedE
• Take over and optimize parts of the SC • Open book gain share– Reward/penalty– Gain share– Value share
• Enhanced unit rates/closed book (value/gain sharing component)
• Commercial JV
Examples provided on next page
• Management fee
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Multiple Case Studies for Each Value Proposition (1/2)
The SC Manager – get management fees for serviceD
The gain sharer – get part of the impact achievedE
• Open book gain share
– Gain share • DESC Ford LLP contract– Redesign the inbound flow into 12 plants from 1,500 suppliers, including
return flows of packaging– Open book contract with shared savings; Each gain share was timebound
so that all of the saving would be retained by Ford after 3 years.
– Reward/penalty • DESC Reckitt Benckiser contract– Warehousing and value added activites (e.g., co-packing)– Open book with reward/penalty scheme based on service level; significant
proportion of management fee offered as incentive for ongoing improved service, no reward/penalty for average service
• E.g., Jaguar , Erricson , Unilever, Airbus– SCM related services (e.g., transport planning, customer service, control tower
management, material call off management, inventory management)– Compensation via open book plus management fee (esp. for transport related services)
or variabilized in service rate (esp. for warehousing related services, e.g., per order-line)
• Management fee
– Value share • DESC PDO contract– Managing movements of oil rig derricks for drilling– Compensation based on management fee plus value share based on
equipment uptime if outperformance of uptime targets
For reference only
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DHL has ample experience with advanced value propositions and suitable contract types (2/2)
• Commercial JV • DESC Goodyear SCM partnership– SC partnership including warehousing, transport management and value
added activities– DHL formed a JV with Goodyear and is rewarded with a share of the entire
value created through the SCM partnership
• Enhanced unit rates/closed book (value/gain sharing component)
• DESC Intel contract– AFR shipping of semiconductors from Hong Kong with additional end-to-
end service to reduce damages– AFR rates plus cargo packing charge based on improvement of damage
rate– Open book with reward/penalty scheme based on service level; significant
proportion of management fee offered as incentive for ongoing improved service, no reward/penalty for average service
The end-to-end SC solution provider – deliver an integrated/end-to-end service and bear cost and/or performance riskF
• DESC Sun SPL– E2E SC mgt for service logistics (call centre order management,
warehousing, transport management, forward inventory positioning , reverse logistics incl. parts screening, testing)
– Unit rate depending on service level (e.g., 2h, 24h, …) covering cost of all services
• Closed book/unit rates for integrated logistics services
For reference only
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DHL is not Risk Adverse! …but the returns have to be propotionateRisk type
Utilization risk
Shipper's business risk
Cost risk
Performance risk
Compensation logic risk
Description
Risk of underutilizing logistics infrastructure
Risk of customer's business, e.g., declining prices/margins
Risk of incurring higher cost than expected to achieve an agreed service level
Risk of not delivering the expected performance
Risk of overlooking a key determinant
• LSP best owner if assets can be utilized for other customers as well (portfolio effect)
• Shipper best owner if assets are dedicated/specific to customer
• Shipper best owner
• LSP in general best owner as higher expertise than shipper
• Shipper best owner for risk of fluctuation of inputs (e.g., fuel cost)
• LSP best owner for part under his control
• Shipper best owner for aspects beyond LSPs control (e.g., force majeure)
• To be minimized
Best ownership
LSP potential to take on risk not fully leveraged in most contracts today
For reference only
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There are suitable contract types for all value propositions,implying different levels of risk
* Beyond risk of losing contract/damaging other business ** Performance incentives as gain share on indirect cost savings
Source: DHL SCO team
Value propositionsSuitable contract types (not comprehensive)
Risk by exposure*Cost risk (e.g., overshooting cost in high-season)
Performance risk Utilization risk
If performance penalties agreed
Commodity service providerB
• Unit rates/closed book
• Open book cost plus
If performance penalties agreed
-
SCM consultantC
• Consulting fee
SC ManagerD
• Management fee If performance penalties agreed
-
Gain sharerE
• Open book gain share/JV with perfor-mance penalties
• Unit rates/closed book plus performance incentives/penalties**
Not realizing gains/incurring penalties
-
- -
End-to-end SC solution provider
F -Not realizing gains/incurring penalties
-• Closed book/unit rates for integrated
logistics services combined with strong bonus/malus system
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A careful assessment is required before taking risks on
Decide on viability of proposal
Assess …
Implement ability of scenarios
Stability of scenarios
Sustainability of scenarios
Determinepayout range of possible outcomes
• Determine im-plementation complexity/via-bility (consulting, logistics ser-vices) and (risk, scope complex-ity, innovative-ness, …)
• Sensitivities reg. contract parameters (e.g., cost for cost-plus)
• Sensitivities reg. scope parameters
• Shipper's per-spective – maxi-mize savings
• LSPs perspec-tive – achieve "good" margin
• Determine payout matrix of scope/con-tracting options
• How high (or low) can we get?
• Can we buildthe solutions?
• What if we change key parameters?
• Will the solution fall down a few months/years down the road?
Source: DHL SCO team
Due diligence can be extended to a 'honeymoon' open book period to gain a better understanding of customer situation and risks
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BAT – DHL Lead Logistics Provider case study
History Relationship Implementation
• What were the challenges?
• How did the relationship develop?
• How does the contract look like?
• Structure: 2 parties 1 team
• Benefits BAT
• How can we make sure the value is actually shared?
In 2010 DHL started a relation ship with BAT, in this case study we like to elaborate on the following
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Where have BAT come from?
A clear focus on optimisation..!
Full alignment with TM&D..!
Joking aside, in short, logistics had not been a major focus for the business and there was (and still is) significant scope to improve, integrate and optimise
how we plan and execute our network
Strong relationship with procurement..!
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How did Logistics WE BAT look like when we started?
All commodities from leaf to finished goods,
inbound & outbound
Total warehouse estate of over
220k sqm,
28,000+ primary movements per year,
covering 12.5 million km
Significant primary cost base linked to complex route to market supply
models
Core BAT Logistics team in partnership with DHL
LLP
75+ different freight carriers, multimodal -
sea, road, air
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What were BAT’s Key Business Challenges?
Key business challengesWhere BAT sees these challenges…
Plan Buy Make Move Service
1) Lack of supplier management
2) Commercial integration and understanding
3) Process standardisation and maturity
4) The cost we incur to deliver our service levels
5) Visibility of information and exception management
6) The degree and speed of change
BAT’s business suffered from some traditionally complex supply chain challenges – “we know the problems and that the solutions require an integrated approach”
Only 50% of inbound on time,
plus up to 21 days early (Plo)
2009 – Gross WMS write off’s of
£14m
No formal contracts or
performance SLA’s in place
GOM is only a framework – we have to operationalise processes, standards, governance & controls
5 different plan processes
20% vol x regional – GOM unclear
All manual processes
Demand decline outstrips capacity
reduction
Commercial relationships are
reactive, not responsive
Duplication of effort across
networks
Inefficient & manually intensive
processes
Running a mature thinking supply chain set up on manually intensive reporting & analysis
No real scenario plan capability
Manual status & order tracking
No EDI links for real time info
We are executing 18 regional transformation projects / Average time in G36 role (& below) is 18 months
Closure of manuf. sites
Average SKU life is 9 months
Forecast accuracy at 62%
Duplication & policing of data
No joint S&OP –clock speed is
different (2 month lag)
Separate networks between primary &
secondary
SKU schedule adherence < 50% over 3 wks (Bay)
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Solutions Framework
DHL - Lead Logistics Provider
CustomerSupply Chain Strategy
DESIGN MANAGE OPERATE
Supply Chain Transformation
World class systems and people to optimise your
supply chainDHL Managed 3rd Party Operations
Supply Chain Visibility
Freight Control Towers
Continuous Improvement across all layers
Presentation title | Location | xx Month 20xx
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Workshop questions
1. What type of contract would you go for?
2. What KPIs to include in contract?
3. Would you include penalties and/or incentives and if so how?
Break out in 3-4 groups
Presentation title | Location | xx Month 20xx
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Western Europe Control Tower – The Beginning
• BAT European SC Steering Committee 2003• Western Europe Control tower Implemented in 2006 (DHL)
o 5 factories• Establishment of routes and look to optimise and develop network savings
o Load Fillo Vehicle Reduction
• Transport planning via Ethos and manual spread sheets
• Lead Logistics Provider (LLP) for BAT in Western Europeo Local Services Agreement for WE
• Move from a Control Tower to a Transport Service Centre (TSC)• System led operation• Continuous improvement culture• Challenging BAT ways of working
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Expansion of LLP
Primary Transport
Solution Design
2010
Primary Transport
Solution Design
2011
Proc’ment
Factory Reviews
Primary Transport
Solution Design
2012
Proc’ment
Secondary
Contract Novation of 3PL
Contracts
WMs
Factory Reviews
Primary Transpo
rt
Solution Design
Proc’ment
Secondary
Contract Novation of 3PL Contract
s
Inventory Mgmt
WMs
Project Mgmt
Factory Reviews
Contract Mgmt and
Handling
Shared Proc’me
nt
Multi User
Control Tower
2013
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Our Solution - 2 partners 1 team
WE LLP
TLCM
Transport Service Centre
Carriers & Procureme
nt
Solution Design
BAT Finance
SC Developme
nt Mgr
WE Freight
Ops Mgr
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• Open and transparent cost base
• Open book
• Cash neutrality
• Management fee plus gain share
• Gain share only paid on actual savings
How does a contract like this look like?
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Benefits to Date for BAT
• 2010 – 2013 savings totalling +20% original baseline
• Increased V1 security carrier base equals 20% increase in transport capacity
• Average finished goods vehicle fill increase of +15%
o 7.35 million (2011) – 9.11 million (2013)
• Significant reduction in truck re-positioning
• Visibility and control across the supply chain
• One Standard Carrier Agreement for all suppliers
• ISO 9001 accreditation
• Short listed for CILT award 2013
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KPI Dashboard
050
100150200250300
Dec Jan Feb Mar Apr May
SlipSheet Loads Monthly Trend
0
10
20
30
40
50
Dec Jan Feb Mar Apr May
Loose Loads Monthly Trend
350
400
450
500
Dec Jan Feb Mar Apr May
Pallets Loads Monthly Trend • Full KPI suite available to direct operational focus and
continuously improve supply chain efficiency
• Information availability is providing the backbone of operational excellence and identifying project initiatives
KPI Highlights• Decreased Cost per Mille• Improved vehicle Fill despite optimum stretch• Increased OTIF deliveries• Reduced cost of poor quality due to improved and ingrained
process• Production volatility proactively used to plan fleet• Reduced re-positioning to zero for 3 consecutive months
Presentation title | Location | xx Month 20xx
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Pipeline to Profit
Blue Sky Meetings
Look
afte
r you
r Ide
a P
ool Customer’s own Tactics
DHL Development Team Meetings
Knowing the customer’s business
Personal experience & ideas
Customer non-Logistics Functions manufacturing, sales , planning, finance
Stealing with Pride !
STOPReasonsPoliticalPracticalFinancialToo Far Too FastHoldBack BurnerOther priorities‘Next Year’
Go !
Produce Charter 1
Customer Head of Function (HoF)Customer Logistics
DHL Head of LLP DHL Development GM
Support as needed
LLP
Charter 1
Monthly
Progressed thru Dragon’s Den
• Overview of idea• Success Criteria• Savings Estimate• Resource indication• External costs and time• Data Requirements
LSA Review Board
• Customer HoF• Customer Procurement• Customer Finance• DHL Global LLP • DHL Head of LLP• Support as needed
Go !
Produce Charter 2Presentation title | Location | xx Month 20xx
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Pipeline to profitComplete Analysis& Business CaseTimelineImplementation planCostsResourcesBenefitsMeasurement CriteriaBase LineGain Share
Programme members include LLP and Customer ownersof Operations, Finance & Development. Agree at eachstage of development.
DHL LLP own the process
LSA Review Board
• Customer HoF• Customer
Procurement• Customer Finance• Customer Country
Mgrs• DHL Global LLP • DHL Head of LLP• Programme Lead• Support as required
Go !
ImplementationDHL ExclusivityGainshare Approved
Track Results to Base Line
Track Results to BaselineImplementation to planCosts on targetResources in placeBenefits DeliveredGain Share Signed offGain Share Realised
Charter 2
Presentation title | Location | xx Month 20xx
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Summary
DHL as an LSP can offer different value propositions, taking different
roles in the supply chain and taking different types and levels of risk
each having their own type of contract.
The LLP model gives BAT access to world class supply chain
professionals with a flexible cost effective commercial model.
This has led to a true WIN-WIN relationship.
DHL has developed a methodology to be sure the value is accurately
recognized and shared.
Today DHL is led by our customers demand for services however
tomorrow we recognize our customers will look for more and more
partnership to shape future solutions together
“Performance based contracting as seen from the LSP’s perspective”
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Jeroen MartensDirector of Network Design & Supply Chain ConsultingDHL Supply ChainBD EuropePhone +31 611 [email protected]
Contact