LOGISTICS Maximizing its Contribution to the Organization Dave - - PowerPoint PPT Presentation

LOGISTICS

Maximizing its Contribution to the Organization

Dave Klugman – CEO Simplified Logistics Joe Brady – EVP Simplified Logistics October 13, 2016

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Take-Aways from Today

• First and foremost - Logistics should be an integral part of your business strategy
• Transportation costs, processes, and strategies DO make or break your bottom

line

• Transportation can be used to:

– Improve Profitability (and business valuation) – Differentiate your company from the competition – Drive continuous improvement upstream

• Trends, metrics, and other stuff etc.

Informal – We need you to share your logistics, challenges, concerns, and how you rank your strategy

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The Supply Chain Functions

Functions

• Sales Forecasting
• Demand Planning
• Product/Material Sourcing
• Supplier Transportation
• Order Management
• Customer Service
• Inter-Facility Transportation
• Warehousing/Distribution
• Customer Transportation
• Freight Claims/Payment
• Returns (Transportation)

Front-end Back-end

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The Supply Chain

product, information, and cash

Buy Make Move Sell

Plan Source Make Deliver Return Supplier Plant Manufacturer DC Customer DC Customer Store Consumer

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Components of Transportation and Distribution Transportation Distribution

Transportation would generally include the management of:  Outbound freight (all modes of transportation)  Intra-facility moves  Inbound freight (all modes of transportation)  Private / dedicated fleet management  Monitoring of drivers, maintenance, and equipment sourcing  International transportation  Customer returns Items included in management of transportation would be:  Selection of carriers  Pricing and costing arrangements  Contracting with carriers  Tendering of shipments (the process)  Transportation systems and technologies  Monitoring of carrier performance  Freight audit and payment  Reporting of transportation spend  Claims  Oversight of security and legislative regulations Physical Distribution typically includes:  Inventory management  Inventory transfer and replenishment  Receiving and put-away  Warehousing and all related

• perations

 Customer service  Order processing  Distribution systems design (network)  Distribution administration  Distribution systems and technologies  Interfaces with procurement, sales, manufacturing, finance, and I.T.

Logistics – Where the big guys are capitalizing on opportunities to reduce costs, improve customer service, strengthen supplier relationships, and leap frog the competition

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The (R)Evolution of Transportation

• Regulated Environment
• Price was fixed – little resourced
• Vendor-plant-customer

Pre 1980

• Evolving buying competency
• Market turmoil holds down cost
• Vendor-plant-warehouse-customer

1980-1990

• Non-Integrated Strategies on price and service
• Technology and outsourcing compete
• Suppliers-Outsourced Mfg.-Ocean-Warehouse-Customer

1990-2010

• Complex Integrated Supply Chains
• Value-add Strategic Competitive Advantages
• “C Suite” interest and involvement

2010-Present

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Where Are You on the “Transportation” Continuum?

Typical Current State Best Case Practices

Partial awareness with many assumed or embedded costs Functional Silo that is typically less understood by senior management than other corporate disciplines Understanding and managing the primary cost drivers and business complexities that make-up your transportation spend Best in class strategies and processes to maximize the contribution potential of the Logistics function

Today Tomorrow

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Where Are You on the “Transportation” Continuum?

Typical Current state Best Case Practices

Most metrics are % of sales, change from period to period, and are limited Lack of understanding causes senior management to avoid risk (or the topic at all) Developing the most relevant metrics that take into account the variables and choices that lead to realized price and service levels. Identifying potential risks in defining and implementing your Logistics strategies and processes

Today Tomorrow

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Where Are You on the “Transportation” Continuum?

Typical Current state Best Case Practices

Steps what steps? Direct to consumer is the future - Commitment vs opportunistic daily deals The “must-do’s” to identify and quantify potential cost reduction, margin expansion and process improvement opportunities Emerging trends in logistics can favorably or unfavorably impact your master operating plan

Today Tomorrow

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The “Must Do’s” to Excellence

Know your cost drivers and what you can do about them Develop a freight strategy Stay current with industry trends Metrics should have these characteristics Perform a Network Rationalization Analysis/Freight Evaluation Build Relationships (suppliers, customer, business partners)

• Service, Service, Service

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Must Do #1

Know The Impact of Cost Drivers

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Primary cost drivers and business complexities making up transportation spend

Direct Costs Related Issues

• Outbound Prepaid

Freight

• Inbound Collect Freight
• Warehousing Costs
• Inventory Carrying Costs
• Shows as a cost of sales
• Outbound collect is

invisible but is a cost of sales to your customer

• Prepaid or Collect

decision is either global

• r based upon a sales

quantity

• Invoicing the customer

for this expense is an

• pportunity

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An EOQ Example …

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So what does this Mean?

Example Customer A single largest Product example Established terms that were tied to Order value. Optimal Order Quantity Order $ 2000 and freight is prepaid (with a range) Weight 4000 5000 Impact Sale Price $2,000 $2,500 25% Freight Cost $280 $280 0% Net Sale $1,720 $2,220 29% Frt % sales 14.0% 11.2%

• 20%

Profit 12.60% 15.60% 24% Impact 25% increase in average order size Freight Frt as a % of sale reduced by 20%

• Inc. Margin

3% this change increased the margin on this sale

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Freight as a Profit Center?

Business decision – Freight prepaid, prepaid and add actual freight cost,

• r, use freight as a profit center

Many companies are using freight as a profit center Challenging business conditions can make price increases difficult – Your freight strategy make up the difference Lets assume you have the most competitive freight rates …..

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Freight as a Profit Center

Anonimized Real world Client Sample Current Annualized Projected Next 12 Mths Months of Data 3.00 12 12 Bills 5,327 21,308 21,308 Current Expense $ 866,890 $ 3,467,559 $ 3,606,262 New Cost $ 690,998 $ 2,763,993 $ 2,763,993 Target Savings $ 175,891 $ 703,566 $ 842,269 Target Savings % 20.3% 20.3% 23.4%

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Freight as a Profit Center

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Primary cost drivers and business complexities making up transportation spend

Direct Costs Related Issues

• Outbound Prepaid

Freight

• Inbound Collect Freight
• Warehousing Costs
• Inventory carrying costs
• Shows as a cost of raw

materials

• An implied decision was

made to pay this expense

• The last frontier of low

hanging fruit in most

• rganizations

How are you categorizing freight that moves between your facilities??

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Inbound - Last Frontiers deserve additional time

• How much do you spend on Inbound Freight?
• Collect – you control routings and pay direct
• How do you route?
• How to you manage non-compliance
• Prepaid – you pay indirectly in cost of goods
• How much freight is implied in the purchase?
• Prepaid and Add – you pay directly as a line item in Vendor

invoice

• How does this compare with your costs if terms were

collect?

• What is the economic analysis behind these decisions?

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Inbound - Last Frontiers deserve additional time

• How much do you spend on Inbound Freight?
• What are the steps to addressing the opportunity?
• Create access for all to your direct costs
• Change culture to use access in decision making.
• Monitor back end results for opportunity

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Inbound - Last Frontiers deserve additional time

If you get one of these you know what’s happening ……

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Inbound - Last Frontiers deserve additional time 3 Stories that might be of interest

• Major Retailer “K”
• Major Diversified Conglomerate “W”
• Major Industrial Supply Company “S”

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Primary cost drivers and business complexities making up transportation spend

Direct Costs Related Issues

• Outbound Prepaid Freight
• Inbound Collect Freight
• Inventory Carrying Costs
• Warehousing Costs
• Very visible and have

consequences (Tax) beyond a direct expense

• Warehousing and

Transportation are complimentary and interchangeable

• Service is the balance

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Must Do # 2

Develop a Freight Strategy

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“Would you please tell me which way I ought to go from here? “ asked Alice. “That depends a good deal on where you want to get to.” “I really don’t know,” replied Alice. “Then it doesn’t matter which way you go,” said the cat.

Lewis Carroll Alice's Adventures in Wonderland

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Best in Class Strategies

Strategy

• Competitive Bidding
• Integrated Decision

Making Tools

• Integrated Execution

Tools

• Using logistics as a

competitive advantage

Benefits

• Freight is like advertising
• Establish you own best

case practices on cost

• Ability to impact

immediately the bottom line

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Best in Class Strategies

Average Shipment Size (lbs.):

2,388

Average Paid Per Bill:

$481

Average Class (Estimate):

100.0

Overall CWT:

$20.15 Sample Current Annualized

Projected Next 12 Mths Fuel Table

In Data Months of Data

5.00 12 12 Projected Increase

4% Bills

1,443 3,463 3,463

Min charge shipments 10% Current Expense

694,476 $ 1,666,742 $ 1,725,078 $

New Cost

626,147 $ 1,502,753 $ 1,502,753 $

Target Savings

68,329 $ 163,989 $ 222,325 $

Target Savings %

9.8% 9.8% 12.9%

Scenario 1 2 3 4 5 6 7 8

Current Spend $1,725,078 $1,725,078 $1,725,078 $1,725,078 $1,725,078 $1,725,078 $1,725,078 $1,725,078 New Spend $1,560,149 $1,551,950 $1,543,750 $1,535,551 $1,527,351 $1,519,152 $1,510,952 $1,502,753 % Utilization 65% 70% 75% 80% 85% 90% 95% 100% Potential Savings $164,929 $173,128 $181,328 $189,527 $197,727 $205,926 $214,126 $222,325

Key Statistics

LTL Mins and Non-Mins

Time Period: january - May 2016

Summary Savings Statistics 39% 34% 11% 7% 6% 3%

Current Carrier Mix

Con-way ABF Old Dominion UPS Freight Oak Harbor Reddaway 34% 22% 15% 12% 7% 5% 5%

New Carrier Mix

YRC WARD ODFL OAKH CNWY RETL SMTL

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Best in Class Strategies

Strategy

• Competitive Bidding
• Integrated Decision

Making Tools

• Integrated Execution

Tools

• Using logistics as a

competitive advantage

Benefits

• Shipping
• Purchasing
• Sales quotations
• Etc.

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Best in Class Strategies

Best Case Practices Visibility

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Best in Class Strategies

Strategy

• Competitive Bidding
• Integrated Decision

Making Tools

• Integrated Execution

Tools

• Using logistics as a

competitive advantage

Benefits

• WMS
• TMS
• Load planning
• Dedicated services
• Time definite service

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Best in Class Strategies

Strategy

• Competitive Bidding
• Integrated Decision

Making Tools

• Integrated Execution

Tools

• Using logistics as a

competitive advantage

Benefits

• Ability to provide your

clients with total lowest cost

• Improved order status

visibility for your clients

• “Perfect Orders”

increase client delight factor (and your margins)

• Allows for value added

services

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Must Do # 3

Stay current on Industry trends

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Industry Trends

• Dimensional pricing has come to the LTL industry
• Motor carriers focused on increasing O/R’s vs. taking market share
• Mergers and Acquisitions will continue to escalate
• The use of 3PL’s is growing like never before
• Carriers will invest more heavily in technology bridges with 3PL’s that can bring

them more profitable business and proactively service end users

• Formation of Logistics councils – getting a seat at the senior executive strategy

table (at least at the larger companies)

• Fuel is expected to rise but when?

– We need to chat about Fuel Surcharges

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Industry Trends

Fuel Surcharges ….

Generally speaking most companies logistics and transportation departments have successfully decoupled Fuel Surcharges from their budgets.

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Industry Trends Fuel Surcharges - Truckload

• Good – Fairly standard across the industry
• Bad – Currently 40% - 40/140 = 28% OF YOUR COST
• Assessment -This 40% is industry standard and “typical”

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Industry Trends Fuel Surcharges – LTL (Less than Truckload)

• Good – Industry standard is about half of TL
• Bad Industry standard is double/triple what smart

shippers are paying

• Assessment – an area of opportunity for one side of the

purchase.

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Industry Trends Fuel Surcharges – LTL (Less than Truckload)

– LTL carriers have effectively doubled their fuel surcharges over the past 2 years negating the decline in revenue for customers operating under their common carrier authority – Customers using their contract authority have benefitted from est. 10% reduction in overall cost

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Industry Trends

• Fuel Surcharges Table

Diesel Cost Simplified Industry Current Industry Old 1.0

• 18.6

1 1.5 2.5 18.6 5.1 2.0 5.0 18.6 10.9 2.5 7.5 21.1 15.9 3.0 10.0 23.6 20.9 3.5 12.5 26.1 25.9 4.0 15.0 28.6 30.9 4.5 17.5 31.1 35.9 5.0 20.0 33.6 40.9

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Industry Trends

• 5.0

10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 Diesel Cost 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Simplified Industry Current Industry Old

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Industry Trends

• Here’s our point …..
• Fuel is a large part of what you pay in freight and you should understand

how you are buying it

• Many “increases” have taken place not in freight rates but in how fuel is

calculated

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Must Do # 4

Metrics - Characteristics

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Characteristics of a Good Measure

A Good Measure Description Is quantitative The measure provides an objective value of performance Is easy to understand The measure conveys at a glance what it is measure and how it is derived Encourages appropriate behavior The measure is balanced to reward productive behavior and discourage “game playing” Is visible The measure and its causal effects are readily available to everyone who is measured Is defined and mutually understood The measure has been defined and mutually understood by all key parties (internal and external)

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Characteristics of a Good Measure cont’d

A Good Measure Description Has outputs and inputs The measure combines factors from all aspects of the process being measured Measures only what is important The measure focuses on key aspects of process performance Is multi-dimensional The measure makes the proper trade-offs among utilization, productivity and performance Can be collected economically Processes and activities are designed to easily capture the relevant information Facilitates trust The measure validates the participation among the various parties

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A Small Sampling … Metric Benchmarking - KPIlibrary.com

• % of orders delivered with damaged products/items
• Total transport cost as % of delivered sales
• Damages as % of throughput
• Average dock-to-stock time for receiving
• Total logistics costs as a percentage of sales
• Optimize Load Fulfilment (OLF) %
• Empty miles
• Customer order pick-to-ship cycle time

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A Small Sampling … Metric Benchmarking - KPIlibrary.com

• Mode Utilization
• Savings Realized and Savings Left on the Table
• % Recovery of Freight Costs in customer Purchases
• Freight Density (cube utilization)
• %age and Dollars Paid in Expedited Freight
• Your Costs to Others with Similar Operating Characteristics
• Impact of Fuel and Assessorial charges

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Must Do # 5

Perform a Network Rationalization

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Business Conditions for a Network Rationalization

• Volume growth or contraction
• New or lost customers
• New or changed customer requirements – change in demographics
• New or changed distributor capabilities
• New or reduced service requirements
• New or retrenched geographic markets
• New products or product line
• Acquired, merged or divestiture of businesses
• Desire to outsource or insource the logistics function

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Desired Results of Network Rationalization

• Rationalize inventory investment
• Minimize transportation costs
• Minimize warehouse space/costs
• Minimize warehouse labor costs
• Minimize administrative burden
• Minimize tax burden (Nexus, throwback rule, unitary tax, etc.)
• Maximize business incentives
• Increase service responsiveness and on-time performance
• Increase operating flexibility
• Change the transportation mode mix
• Improve inbound economics
• Increase on-time fulfillment and fill rates

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Must Do # 6

Build Relationships

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Develop and Nurture your Carrier Base

• Encourage sharing your goals, objectives, and forecasts with

current and prospective carriers

• Communicate your expectations up front
• Insist on flexibility (schedule, volume)
• Reward your better performing carriers with expanded
• pportunities to partner with you – in the profitable lanes
• Many shipment have unique drop-off requirements

(lockboxes, locked lots, appointment hours, lift gates, driver unload assist); driver consistency and familiarity can go a long way

• Build trust and accountability – both ways
• Ask yourself – “How easy is it to do business with you?”

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• What is your approach?

− Carriers are a commodity and if one doesn’t work out there will be plenty of

• thers

− One-sided orientation – Winning? − Collaborative – looking to manage costs over the long term

• What is carrier friendly?

− Have carriers help you understand their cost drivers − Look for ways to change your processes and practices that help reduce the carriers’ costs − Information sharing − Proper packaging of goods for transport − Operational flexibility (dock hours, timely loading and unloading, etc.) − Treating drivers with respect and courtesy

Are You Carrier Friendly?

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You need to understand where the risks lie:

• What is my exposure to liability in the event of a catastrophic accident?
• When contracting with carriers and brokers, far too many shippers focus
• n cost and service criteria, while overlooking the need to protect

themselves by actively investigating the carriers and brokers they are using

• What is my loss exposure in the event of theft or damage?
• How am I liable when a third party contracts with an unqualified carrier

for me?

• What happens if my carrier goes bankrupt?
• What happens if my carrier is involved in an accident of a serious nature?

Carrier Relationships – Are You at Risk?

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• The measurement system groups the safety performance data of motor

carriers and drivers into seven categories, called BASICs – Behavioral Analysis Safety Improvement Categories. The seven BASICs are:

• (1) Unsafe Driving
• (2) Fatigued Driving
• (3) Driver Fitness
• (4) Controlled Substances/Alcohol
• (5) Vehicle Maintenance
• (6) Improper Loading/Cargo
• (7) Crash Indicator

CSA Score Categories

Compliance, Safety, Accountability

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A Few Reasons to Include Freight as a Business Focus

• Great freight partnerships have a direct impact on your

relationship with your customer

• The physical condition of your product upon receipt and

the accuracy of your paperwork is a direct reflection on you as a supplier

• A great freight program can reduce claims and

associated costs to improve gross margins

• Freight dollars saved fall directly to the bottom line and

effect your EPS

• A $1 freight savings is the same as increasing revenue by

$16 in a 6% EBITDA company. Which is easier?

• Business Valuation – what’s your multiple?

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• The right product
• The right supplier
• The right location
• The right time
• The right quantity
• The right customer
• The right condition and packaging
• The right documentation

The “Perfect Order” aka The Bill of “Rights”

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10 percentage-point better perfect order rating correlates with 50 cents better earnings per share 5 percentage points in the perfect

• rder rating correlates with a 2.5%

better ROA. On $1B in assets, that translates to $25M. A 3 percentage-point better perfect

• rder rating correlates with 1% of

additional profit margin. Take the case

• f a $1B company with a 10% profit

margin: increase to 11%, and you’ve added $10M to the bottom line .

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Questions??