LOGISTICS. Maximizing its Contribution to the Organization. Dave Klugman CEO Simplified Logistics Joe Brady EVP Simplified Logistics October 13, 2016

Transcription

1 LOGISTICS Maximizing its Contribution to the Organization Dave Klugman CEO Simplified Logistics Joe Brady EVP Simplified Logistics October 13, 2016

2 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 2

3 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 3

4 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 4

5 Components of Transportation and 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 Transportation 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: Distribution Inventory management Inventory transfer and replenishment Receiving and put-away Warehousing and all related operations 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 5

6 The (R)Evolution of Transportation Pre 1980 Regulated Environment Price was fixed little resourced Vendor-plant-customer Evolving buying competency Market turmoil holds down cost Vendor-plant-warehouse-customer Non-Integrated Strategies on price and service Technology and outsourcing compete Suppliers-Outsourced Mfg.-Ocean-Warehouse-Customer 2010-Present Complex Integrated Supply Chains Value-add Strategic Competitive Advantages C Suite interest and involvement 6

7 Where Are You on the Transportation Continuum? Typical Current State Best Case Practices Partial awareness with many assumed or embedded costs Understanding and managing the primary cost drivers and business complexities that make-up your transportation spend Functional Silo that is typically less understood by senior management than other corporate disciplines Best in class strategies and processes to maximize the contribution potential of the Logistics function Today Tomorrow 7

8 Where Are You on the Transportation Continuum? Typical Current state Most metrics are % of sales, change from period to period, and are limited Best Case Practices Developing the most relevant metrics that take into account the variables and choices that lead to realized price and service levels. Lack of understanding causes senior management to avoid risk (or the topic at all) Identifying potential risks in defining and implementing your Logistics strategies and processes Today Tomorrow 8

9 Where Are You on the Transportation Continuum? Typical Current state Steps what steps? Best Case Practices The must-do s to identify and quantify potential cost reduction, margin expansion and process improvement opportunities Direct to consumer is the future - Commitment vs opportunistic daily deals Emerging trends in logistics can favorably or unfavorably impact your master operating plan Today Tomorrow 9

10 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 10

11 Must Do #1 Know The Impact of Cost Drivers 11

12 Primary cost drivers and business complexities making up transportation spend Direct Costs Outbound Prepaid Freight Inbound Collect Freight Warehousing Costs Inventory Carrying Costs Related Issues 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 or based upon a sales quantity Invoicing the customer for this expense is an opportunity 12

13 An EOQ Example 13

14 So what does this Mean? Example Customer A single largest Product example Established terms that were tied to Order value. Order $ 2000 and freight is prepaid Optimal Order Quantity (with a range) Weight 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 14

15 Freight as a Profit Center? Business decision Freight prepaid, prepaid and add actual freight cost, or, 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.. 15

16 Freight as a Profit Center Anonimized Real world Client Sample Current Annualized Projected Next 12 Mths Months of Data 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% 16

17 Freight as a Profit Center 17

18 Primary cost drivers and business complexities making up transportation spend Direct Costs Outbound Prepaid Freight Inbound Collect Freight Warehousing Costs Inventory carrying costs Related Issues 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 organizations How are you categorizing freight that moves between your facilities?? 18

19 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? 19

20 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 20

21 Inbound - Last Frontiers deserve additional time If you get one of these you know what s happening 21

22 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 22

23 Primary cost drivers and business complexities making up transportation spend Direct Costs Outbound Prepaid Freight Inbound Collect Freight Inventory Carrying Costs Warehousing Costs Related Issues Very visible and have consequences (Tax) beyond a direct expense Warehousing and Transportation are complimentary and interchangeable Service is the balance 23

24 Must Do # 2 Develop a Freight Strategy 24

25 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 25

26 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 26

27 Best in Class Strategies Key Statistics Summary Savings Statistics Average Shipment Size (lbs.): 2,388 Average Paid Per Bill: $481 LTL Mins and Non-Mins Average Class (Estimate): Time Period: january - May 2016 Overall CWT: $20.15 Sample Current Annualized Projected Next 12 Mths Fuel Table In Data Months of Data 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 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 Current Carrier Mix Con-way New Carrier Mix YRC 11% 7% 6% 3% 39% ABF Old Dominion 12% 7% 5% 5% 34% WARD ODFL OAKH UPS Freight CNWY Oak Harbor 15% RETL 34% Reddaway 22% SMTL 27

28 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. 28

29 Best in Class Strategies Best Case Practices Visibility 29

30 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 30

31 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 31

32 Must Do # 3 Stay current on Industry trends 32

33 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 33

34 Industry Trends Fuel Surcharges. Generally speaking most companies logistics and transportation departments have successfully decoupled Fuel Surcharges from their budgets. 34

35 Fuel Surcharges - Truckload Industry Trends Good Fairly standard across the industry Bad Currently 40% - 40/140 = 28% OF YOUR COST Assessment -This 40% is industry standard and typical 35

36 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. 36

37 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 37

38 Fuel Surcharges Table Industry Trends Diesel Cost Simplified Industry Current Industry Old

39 Industry Trends Simplified Industry Current Industry Old Diesel Cost

40 Here s our point.. Industry Trends 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 40

41 Must Do # 4 Metrics - Characteristics 41

42 Characteristics of a Good Measure A Good Measure Is quantitative Is easy to understand Encourages appropriate behavior Is visible Is defined and mutually understood Description The measure provides an objective value of performance The measure conveys at a glance what it is measure and how it is derived The measure is balanced to reward productive behavior and discourage game playing The measure and its causal effects are readily available to everyone who is measured The measure has been defined and mutually understood by all key parties (internal and external) 42

43 Characteristics of a Good Measure cont d A Good Measure Has outputs and inputs Measures only what is important Is multi-dimensional Can be collected economically Facilitates trust Description The measure combines factors from all aspects of the process being measured The measure focuses on key aspects of process performance The measure makes the proper trade-offs among utilization, productivity and performance Processes and activities are designed to easily capture the relevant information The measure validates the participation among the various parties 43

44 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 44

45 Mode Utilization A Small Sampling Metric Benchmarking - KPIlibrary.com 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 45

46 Must Do # 5 Perform a Network Rationalization 46

47 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 47

48 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 48

49 Must Do # 6 Build Relationships 49

50 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 opportunities 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? 50

51 Are You Carrier Friendly? What is your approach? Carriers are a commodity and if one doesn t work out there will be plenty of others 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 51

52 Carrier Relationships Are You at Risk? 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 on 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? 52

53 CSA Score Categories Compliance, Safety, Accountability 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 53

54 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? 54

55 The Perfect Order aka The Bill of Rights 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 55

56 10 percentage-point better perfect order rating correlates with 50 cents better earnings per share A 3 percentage-point better perfect order rating correlates with 1% of additional profit margin. Take the case of a $1B company with a 10% profit margin: increase to 11%, and you ve added $10M to the bottom line. 5 percentage points in the perfect order rating correlates with a 2.5% better ROA. On $1B in assets, that translates to $25M. 56

57 Questions?? 57