What is the pay-off from Build-to-Order?

Transcription

1 What is the pay-off from Build-to-Order? Finance Stream Ben Waller - ICDP Monica Bartolini - University of Bologna

2 Objectives To develop a framework for analysing the profitability of different BTO scenarios To evaluate the system costs and benefits of a build to order supply chain To identify the main areas of financial change

3 Data sources Actual financial data e.g. Data from various manufacturers, logistics companies, ICDP, etc. Simulation outputs e.g. Alternative specification sold, ageing distribution of vehicle stock, component stock levels Modelling e.g. Changes to product mix

4 A generic evaluation The financial model presented here is generic Every supply chain will actually be different because of Customer characteristics Current investments (I.e. IT systems) Current operations (I.e. build to order content) The 3DayCar scenario is contrasted with a typical current supply chain With distribution centre holding all vehicle stock

5 Basic assumptions 100,000 cars built & sold per year Split of 50% UK and 50% Export sales 11,000 list price per car Build to order capability UK sales system has 3DayCar capability Export sales system has 10DayCar capability

6 Key simulation variables Manufacturing and ordering system minimum BTO order lead time capabilities final order amendment dates for different specification types flexibility of production hours worked by labour Supplier speed and visibility of information Inbound logistics consolidation and load efficiency Distribution stock objective working hours in day

7 Investment

8 Main areas of investment change IT systems manufacturer other supply chain partners Capacity (equipment) plus environmental mitigation (outbound fleet) Value of stock Inbound Vehicle inventory

9 Investment New Investment Released Capital IT systems 49 Million Capacity (equipment) Environmental mitigation outbound fleet Finished Vehicle Inventory 24hour delivery compound system Inbound stock (all tiers) Total Net Impact on profits 2.9 Million (as per cent of system turnover): 2 Million depreciation -1.1% interest saving +1.8% 2.7 Million Net benefit 0.7% Million 1.1 Million 56.6 Million Million 65.3 Million Note: 11,000 list price per car 100,000 cars sold per year

10 Hidden slide - points to make on IT investment IT investment Currently IT spend for VM = c. 3% turnover Of IT spend: c.80% maintenance Therefore investment c.0.6% 3DayCar Amortised for 5 years we quote manufacturer spend of 0.7% Increase of 16% on current expenditure But! A unified enterprise system will bring down maintenance costs, regardless of system benefits

11 System operating costs

12 Lean system benefits Reduced transaction costs from leaner BTO processes Some are significant and can be measured e.g. Sales Administration time Some are not quantified Effects considered mostly small, and requirements for new highly skilled tasks replace those lost Transport planning at logistics companies Order processing and placing (NSC, manufacturer) Production management

13 Impact on operating costs Inbound logistics (stock and materials handling) Production capacity (people) Outbound logistics (transport) Finished vehicle (storage and maintenance) Dealer transfers (transport) Process improvements (salesperson time)

14 Operating cost changes Inbound logistics, stock and materials handling Outbound logistics (operations only) Finished Vehicle storage and maintenance Dealer transfers Production Capacity (people) Process Improvements (Sales time) Total Net Increase Decrease -0.15% 0.10% -0.11% -1.83% -0.05% 0.20% -0.46% 0.3% 2.54% 2.24% (as per cent of system turnover)

15 Visibility of component inventory Inbound stock costs reduce stock offset against tracking technology investment and improved data visibility demonstrates the Forrester effect (passing information quicker reduces distortion) Inbound logistics costs reduce increased capacity utilisation

16 Profit Potential

17 Availability of the latest specification for all customers, all the time Major source of discount is running out the previous model year stock selling the latest model increases disposal problem for old model selling the latest model, trims, options, increases desirability Example For one model 33% of sales in 1999 were previous model year Only 66% were next model year or current Extreme example, but model year run-out allowances can be up to 10m Increased profit potential from being able to offer all latest specification - 0.8% assumed

18 Increased richness of mix Evidence available: comparing mix sold from stock with mix sold from factory order Example for one model: Analysis of top 8 selling derivatives comparing Mix sold from stock Mix sold from plant Weighted results by sales content back to total sales volume Value of sales from Factory Order 983 million Value of sales from Dist. Centre 859 million Assumed increase 2% = 14% more revenue Recognising that in a well run current system basic specifications can be satisfied from stock, whilst unusual specifications will be built to order

19 Greater detail and accuracy of sales data improves forecasting Detailed recording (transaction price etc.) Helps sales analysts understand drivers of demand Dramatic impact in many sectors of better transactions data Food sector: 4 to 6% revenue benefit from passing detailed and real-time sales data 0.4% quoted

20 Revenue Management Airlines By early 90s a 1.5% increase in revenue typical Over last 10 years O&D forecasting and bid pricing have increased this to 2.0% Prices are consistently closer to target with revenue management Hotels and car rental Increase ranges from 3% to 7% of revenue 1% gain assumed

21 Long term consistent revenue improvement Flight example 1: single route, revenues over 60 days 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, , , Emsr Maximum Minimum Note: actual revenue is always close to target 250, , , ,000 50,000 - Flight example Emsr Maximum Minimum Source: a European Airline sales data

22 Profit potential - summary Reduced discounts ageing stock Reduced alternative specification discounts Avoidance of lost sales Extra Profit on Mix Availability of all new specification More Efficient Pricing and Revenue Management Improved forecasting based on better sales data Total Profit improvement as % of whole system turnover 1.85% 0.45% 0.09% 2.00% 0.80% 1.00% 0.40% 6.59%

23 Total system benefits Profit improvement as % of whole system turnover Cost of Investment 0.7% Operational cost 2.24% Potential Profit 6.59% Total 9.53%

24 Who benefits? Profits, 3DayCar - based on current costs and payments across enterprise 8% 7% 6% 5% 4% 3% 2% 1% 0% Manufacturer NSC (as manufacturer) Dealer -1% Inbound Logistics Suppliers Outbound Logistics

25 Scale effects What is the change by turnover of player? Outbound Logistics This is the elimination of distribution centre costs which are allocated here Suppliers Inbound Logistics Dealer 3DayCar 10DayCar NSC (as manufacturer) Manufacturer -10% 0% 10% 20% 30% 40% 50% 60% 70%

26 Capacity and volume

27 Model X Cumulative Registrations UK % Dealers and volume 90% 80% 70% 60% Most dealers tied to bonuses 50% 40% 30% rather than margin per sale 20% 10% Bonuses and Support as % of new cars sales revenue 0% 01/01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/ /11/ /12/2000 Bonuses as % of new car sales revenue 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% European volume Far East brands Specialist Brands No of cars sold by outlet per year

28 Manufacturers and Volume Maximising plant capacity a myth? Yes and No! Labour more flexible than automation? Utlisation Cost as % of cost at Maximum Capacity 50% 60% 80% 90% 100% Utilisation of plant Flexibility exists within shifts (mix dependent) and in number of shifts Cost as % of cost at Maximum Capacity

29 Logistics and volume Logistics capacity scaled for normal and peaks outsourced Logistics Exchanges for Loads and Capacity will break these scale effects 120% 100% 80% 60% 40% 20% Normal Peak Ratio of Rates to Content Revenue% 0% 64% 18% 9% 9% % of Transported Units

30 Suppliers - mixed picture Overall change small, but variable Some suppliers more flexible and can react to shorter planning lead-times Example: stock value change differentials Tier 1 Tier 2 Tier 3 Total Seats Door module 17% -40% -10% -28% -2% - 2% 2% -23%

31 Incentives & measurement Dealers incentives changed to reflect build to order Future rolling targets Continuous contribution from volume Reward and penalty schemes for suppliers and logistics companies based on performance Cross-system balancing of costs Using transfer pricing to offset localised expenses

32 End to end capacity management Balancing revenue and capacity management opens up new business possibilities Short term optimisation of capacity is a complex task with a plethora of practical implications but with a large payoff Next generation IT applications emerging can monitor whole enterprise business cost in real-time Airline industry modelling with combined capacity and revenue management showed improvements ranging from 0.54% to 0.77% of revenue. And this accounts for only one capacity The automotive supply chain has a multitude of capacities to consider

33 Conclusions Costs of changing the system are small Main cost savings related to lower vehicle stock, but inbound also lower Profit potential is main area of improved performance but is difficult to quantify Overall 10% improvement in profitability Some suppliers will have to invest in stock or capacity for flexibility Opportunities for whole enterprise optimisation