warehouse and distribution footprint
TRANSCRIPT
VIEWPOINT 2016
Warehouse and distribution footprint
Themes within:
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Preface
THIS VIEWPOINT COVERS THE FOLLOWING THEMES • Network design • Channel control • In-house or 3PL • Re-tender • Cost to serve
This viewpoint is about themes within warehouse and distribution footprint – a topic that we at Implement Consulting Group are passionate about, and a topic that we have worked intensively with in collaboration with our clients. We have asked our international clients which themes they believe will have the most strategic relevance within the next two years. The purpose of this booklet is to present our viewpoints on these strategic themes. Furthermore, we want to share some of our knowledge and experience. Enjoy!
Note: For more on the process of how to create the warehouse and distribution footprint, please read our viewpoint: “Manufacturing and distribution footprint”.
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0 1 2 3 4 5
Supply chain agility Distribution flexibility
Total cost of ownership Consolidation
Distribution as a profit centre Reverse logistics
Re-tendering
Network design
Differentiated distribution
Channel control
Cost to serve
In- or outsourced logistics
We asked our international clients a number of questions, one of which was …
Which of the following warehouse and distribution themes has the most strategic relevance to your company within the next two years?
Importance Theme
… so we decided to deep dive into the top 5 themes
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2
3
4
5
Deselected Selected for deep dive
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Defining the warehouse and distribution footprint is complex, but it is all about service customer needs and supporting the flow of finished goods in the value chain
Production/ sourcing
Seasonal buffer stock
1 Network design: How many warehouses, which roles, and where should they be located?
2 Channel control: Are you designing and orchestrating the services that the customers are being offered? Should you? Or not?
3 In-house or 3PL: Should operations be handled internally or outsourced?
4 Re-tender: Do our 3PL prices correspond to the market prices?
5 Cost to serve: Understanding the true logistics costs provides an insight into which customers are truly profitable
Warehouse and distribution footprint
Customers
Distribution centre
Central warehouse
Factory warehouse
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Redesigning the distribution network is initiated, if the current setup does not meet customer requirements, or if the cost level is too high
• The warehouse and distribution setup dictates the service offerings that can be provided
• Service, speed and costs are the elements that need to be balanced
DISTRIBUTION NETWORK STRUCTURE
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› Designing the footprint is more than a centre of gravity; exploiting all design options leads to much larger benefits
› Forget the current setup – work backwards from the ideal structure
› Stick to the concept – planning complexity and broken routines eliminate the upside of logistics
› A complete redesign of the warehouse and distribution footprint can be implemented on a 1-2-year horizon
What we think … What we hear/see …
› 7 out of 10 companies have a footprint that does not match customer requirements or operates on a cost level that is too high
› To most companies, logistics costs are a significant driver that easily reaches 5-10% of revenue
› Only few companies have succeeded with a multi-/omni-channel setup – many are only talking about it
› Companies often overlook the value of redesigning their footprint
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Defining the logistics setup via a centre of gravity alone is not possible; it only provides 10% of the solution. We call the remaining 90% a footprint project
WAREHOUSE AND DISTRIBUTION FOOTPRINT PROJECT It is important that the centre of gravity analysis is used as support and inspiration for the footprint project and does not become the solution alone.
Establish common starting point and plan process
Detailed analyses and baseline mapping
Clarify market, consumer and supply chain requirements
Formulate design principles and generate footprint scenarios
Validate business case and global implementation plan
Define 1
Current state 2
Requirements 3
Scenarios 4
Develop 5
Recommendation
CENTRE OF GRAVITY
90% 10%
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KEY QUESTIONS TO CONSIDER
Designing the footprint is a balancing act with multiple dimensions and key questions to consider
Lead time
Cost Working capital
Service offerings
Maximising logistics value for customers
Number of warehouses/
DCs
Outsourcing vs insourcing vs
mix
Direct shipments from
supplier
Geographical placement
Customs and tax impact
Political implications
Distribution network structure
Services and lead time
Order cut off and time slots
Role of DC/ warehouse/
stores
Where to stock what
Customer segmentation
Degree of flexibility
Own fleet vs flexible fleet
arrangements
Degree of demand variation
Consolidation and critical
mass
Capacity utilisation and load levelling
Operating principles
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The number of warehouses is the largest component driving the highest impact on logistics costs and lead time to customers
Facility Transport Inventory Logistics costs
TRADE-OFF BETWEEN LOGISTICS COSTS VS LEAD TIME AND NUMBER OF WAREHOUSES
Number of warehouses
Lead time Total cost
Number of warehouses
Logistics costs
Lead time
Warehouse costs will increase steadily due to efficiency and less economy of scale as more locations are added.
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Direct costs related to adding another warehouse are an additional 25%. A minor decrease in case of many locations due to cross-shipping possibilities.
2
Transport costs will drop due to shorter last mile distribution to the extent where it affects the utilisation of trucks.
3
The distance going from one to two warehouses will drive lower total costs, but the total cost will increase the more warehouses you add.
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Lead time will decrease as the number of warehouses increases, however, only to the point where delivery services are optimised.
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Companies often overestimate the time required to implement parts of the final solution to gain fast improvements IMPLEMENTATION HORIZON
Re-tendering
Outsourcing
Introduce new/optimised services
Consolidate two warehouses/DCs
Establish new warehouse/DC
Com
plex
ity
Implementation time
Route optimisation
Flow design
1 month Low
High
2 years
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CHANNEL CONTROL Supply chain orchestration
Being in control of the channel means that you design and orchestrate the services which the customers are being offered
• Strategic market position to reduce risk of substitution
• Offering value-added services to increase profitability
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› Take a strategic position, otherwise someone will take it for you
› Taking control in an existing setup when someone else is in control is hard; doing it upfront is easy
› Some companies can gain strategic advantages from having channel control; others cannot
What we think … What we hear/see …
› Companies do not know if they are in control
› Underestimating the importance of making an active decision regarding who is in control can, at worst, lead to bankruptcy
› Only few companies are able to increase profitability by taking control. In most cases, control is taken to reduce risk
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The “why” behind the struggle for channel control is typically explained by the strategic position in the market
Suppose you are to start a manufacturing company, and you must choose to be either A or B
Company A
You produce private label articles for a large retailer. The retailer picks up the goods at your factory and handles the distribution.
Company B
You produce private label articles for a large retailer. Furthermore, you handle the distribution to the retailers’ shops as well as the goods reception.
Controlled by retailer Controlled by you
• Company A and Company B currently have the same EBIT %. They are both considered healthy businesses.
• Please note that controlling the distribution does not mean that you do the distribution. It could be outsourced to a 3PL.
Comments
• What are your core competencies? And to what extent are our products/services substitutable? Could you be substituted?
• What is the strategic importance of the customer (i.e. the retailer in the above example)? And to what extent will the retailer be able to pressure you to lower prices?
• How easily will you be able to increase EBIT % in each case?
• Since only one can be in control at the same time, the question is whether you will be able to take control?
Questions to consider before choosing A or B
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When looking at each industry, a typical control pattern emerges
DEGREE OF DISTRIBUTION CONTROL
Newspaper industry Typically consolidated customer deliveries due to very low margins. Often newspapers establish shared distribution companies.
Low High
Retailers (without production)
Often, the retailers control the distribution to their own shops and supermarkets as well as inbound logistics to be able to change suppliers extremely fast.
Retailers (with production)
Large brands such as Nike/Adidas/Zebra control the entire supply chain, and the trend is increasing due to e-commerce.
Food industry Strategy depends on product characteristics and brand value.
Dairy Being able to deliver fresh milk within 24 hours requires specialised trucks to collect the raw milk and distribute the finished products directly from the dairy.
Construction materials Most suppliers of construction materials are in control of distribution. In this case, it is typically a strategic decision in order to maintain the customer relation.
Pharmaceuticals Specialised competencies within biotech and pharma. The products are often distributed by wholesalers to pharmacies and hospitals.
Manufacturing and technology
Having control is often down to the volumetric characteristics of the products, i.e. simple cost optimisation.
INDUSTRY COMMENTS
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Which channels should you control, if any?
What is to be gained from controlling the channel?
To what extent does your strategy support channel control?
What is the industry standard? Market advantages?
What is the nature of your products/services? Risk of substitution?
Who is currently in control? Suppliers? Customers?
What skills are needed to orchestrate the channel?
To what extent are the skills available at your company?
What is the cost of controlling the channel?
Are there any risks associated with taking a step towards control?
Decision
Question: Should we control channel X?
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IN-HOUSE OR 3PL Balancing the advantages of 3PL capabilities and cost structure in order to meet customer logistics requirements vs doing it in-house
• Match capacity with demand fluctuation
• Select services and/or competencies to be outsourced
• CAPEX and operational cost
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› Deciding whether to outsource or do it in-house is a top management decision with significant CAPEX impact – the decision may be irreversible
› Understanding your customers’ true service requirements is essential when building an outsourcing business case
› If you have critical mass and stable demand, you can take the margin of the 3PL
› 99% of all the services that you and your customers require can be provided by 3PL
What we think … What we hear/see …
› Companies often insource logistics to reduce risk. On the other hand, outsourcing is used to reach a more variable cost structure
› Logistics services are often perceived as a commodity – not a service
› Being successful in logistics is truly independent of your core business
› No one has fully flexible logistics costs – not even large 3PL
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Statistics show that the market is increasingly trending towards strategic outsourcing of logistics
72% of shippers are increasing their use of outsourced logistics, while 23% of shippers report that they are returning to insourcing, at least for some of their logistics activities.
86% of Domestic Fortune 500 companies use 3PL for logistics and supply chain functions.
The largest challenge faced by 3PL is capacity, the second is technology investments, and increasing operational costs are only the third largest challenge.
56% of companies are trending towards strategic sourcing, reducing and/or consolidating the number of 3PL they use.
Companies rate the services provided by the 3PL as four times more important than
costs.
Looking at companies, 84% use more than one 3PL in their operational setup.
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Market insights show that customer service, flexibility and cost reductions are the primary drivers of strategic outsourcing …
64%
Avoiding investment
Focus on core business
64%
38%
60%
68%
Other
Expansion to new markets
Operational flexibility
Cost reduction
Competencies of 3PL
18%
8%
3PL have the required competencies within the logistics area in terms of operation, strategic as well as integration platforms to provide the required services to meet customer demand.
In an ever-increasingly agile and competitive market, 3PL have to be flexible and highly customer-oriented. 3PL have the ability to leverage workloads better across their customers and systems to support such demand.
Cutting costs is still important for customers. 3PL have the ability to provide a cost structure that is more driven by variable costs to cope with fluctuations combined with the advantages of utilising the setup better across customers driving higher efficiency.
If logistics are not the core of the business, outsourcing is a good alternative. Outsourcing will assist customers in reducing logistics challenges in a professional environment where services are available and specific knowledge is easily accessible.
Logistics are driven by investments in buildings, equipment, trucks and technology, which influence CAPEX. Outsourcing of logistics services creates the ability to eliminate current investments and avoid new investments.
Penetrating new markets include a first phase with low volume and high uncertainty about growth development combined with an insufficient level of knowledge about logistics at market level. All parameters which favour outsourcing.
Depending on industry, this includes capacity challenges, head count reductions, access to qualified labour force, learning/training skills required for new area, risk mitigation etc.
Degree of importance Perception of customers
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… so before you decide to outsource, you need to consider the strategic impact of the decision
Decision
Cost of services • Transport time • Quality and damage • Value-added services • Etc.
Ability to reach high utilisation
• Trucks in own fleet • Demand fluctuations
over time • Margin of 3PL
Avoid investments/
CAPEX
• Assets such as buildings, trucks and equipment
• Sale and leaseback • 3PL setup: 0 CAPEX
Matching corporate strategy
• Channel control • Support of e.g.
omni-channel setup • Risk
Competitive advantage
• Special services and technology
• Speed of ramp-up in new markets
• Service as a product
AREA KEY NOTES KEY QUESTIONS
• To what degree are our customers willing to pay for logistics services, and which service do they prioritise?
• Can we deliver the services within the defined cost level, and/or can we compromise on the quality level?
• With the sold volume, can we reach critical mass in order to reach sufficient truck utilisation?
• Can we use 3PL as a buffer and then adjust our capacity in such a way that we will always have high utilisation? What would be the price consequences of 3PL?
• What is the financial agenda of the company, and is it in line with our owners/shareholders?
• If we outsource our warehouse, can we decrease our CAPEX, or could we use sale and leaseback on our premises instead?
• Do we want and/or need to use our logistics setup as a competitive advantage?
• Can we benefit from large 3PL networks to increase market share and ensure our market position?
• Looking 3-5 years ahead, how does our strategy cascade down to logistics? Are there any special requirements that we will need to fulfil?
• What risks are we willing to take in order to cost optimise in the short term?
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RE-TENDER Ensure market prices of outsourced logistics services by challenging the current setup, contracts and agreements
• Describe current state, review requirements for future setup
• Plan and conduct tender process with multiple pre-selected 3PL on price and service
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› 3PL willingness to improve increases dramatically when executing a tender process
› When re-tendering, remember to revise your service offerings for your customers
› The most cost-efficient setup usually requires more than one 3PL
› The 3PL market for warehousing and transport is volatile; therefore, tendering is a proven tool to ensure market cost level
› The right cost drivers in 3PL agreements initiate a lower cost level
What we think … What we hear/see …
› Companies doing frequent re-tendering do not necessarily succeed, simply because focus is on procurement rather than operations
› Not many understand the market mechanisms; bringing the right competencies to the tactical game of re-tendering is difficult
› Successful re-tender processes are supported by firm preparations; analytical insights, clear service requirements and commercial conditions
› In general, a re-tender process can decrease costs by 5-30%
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Description: Logistics management: Independent and non-asset-based integrators with the ability to combine own technology, resources and capabilities with 3PL to design, build and operate comprehensive supply chain solutions. Can be advantageous when: • Starting up or in very
fast-growing industries combined with low logistics capabilities
• Multiple logistics services are required and driven by technology
Description: Freight forwarders: Provide an array of logistics services to customers, for selected areas. Sub-contract all or much of the services to specialised transport companies. Can be advantageous when: • Volume spreading
across; large geographical area and/or means of transport
• Valuable expertise accessible combined with flexible and agile solutions
Description: Supply chain management: Logistics services providers who develop, implement and control, preferably in close consultation with the customer, the best possible supply chains or networks. 5PL logistics are often linked to e-com. Can be advantageous when: • The supply chain is
considered not business critical to success
• Alternative solutions are less attractive
Description: Carriers, airlines and trucking companies: An asset-based carrier with specialised sector knowledge. Actually owns the means of transport. Can be advantageous when: • All logistics planning
activities are handled internally and considered a differentiator
• High volume to support attractiveness of 2PLs
Description: Companies’ own equipment: A company or an individual that needs to have cargo transported from A to B by using its own equipment. Can be advantageous when: • Critical mass and low
fluctuation to utilise own equipment
• Specialised equipment with limited possibilities of synergies through xPLs
Re-tendering is becoming more and more complex due to the number of services being handled by the xPLs
1PL 2PL 3PL 4PL 5PL
Complexity of re-tender
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Obtaining cost reductions via re-tendering is not only a procurement task – understanding the market dynamics and cost drivers are key
Cost drivers • The number one factor impacting the success
of the re-tender process is defining the cost drivers correctly
• A simple tool for quantifying the impact of different cost drivers is to build a simple model to test the consequences of historical data
Market mechanisms • From a macro perspective the market for logistics
services is strongly driven by global economic… • … however, from a micro perspective some 3PLs can
give significant better prices due to their client base and their specific geographical setup
Simulation • Building a simple cost model to
simulate different prices will help in the selection process
• Exploring different rate tables and accepting high prices in some weight bands might be beneficial
Services • Introducing new services can trigger a re-tender,
often due to a lack of market insight or xPL competencies
• Defining and deciding the right service offerings and requirements are necessary before conducting a tender process
Price volatility • A re-tender should be carried out every 1-2 years
depending on means of transport • Prices can easily change by +/-10% in one year • You can be sure to be contacted by your 3PL, if the
prices increase. However, the likelihood of them contacting you if the market prices decline is, not surprisingly, very low
Fixed prices and trading • Handling logistics services as a
commodity and trade prices on a case-by-case approach is only beneficial for few
• Getting fixed prices via a tender is optimal for more than 95% of companies
Re-tender
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More and more xPLs are investing in technology to create new services, however, we see transparency as the main benefit
TECHNOLOGY TRENDS WITH LOGISTICS IMPACT
3D printing Big data
Self-driving vehicles Cloud logistics Internet of Things
Robotics and automation Digital identifiers Unmanned aerial vehicles
Impact on logistics
With all these new technological trends, should you select your 3PL based on their technological readiness and willingness to explore? We believe not. You should select 3PL based on current expertise and their ability to support your operations. What you should consider is their ability to give you control and transparency into their operation.
Q A
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COST TO SERVE Understanding the true logistics costs associated with the services which the customers are being offered and consume
• Differentiated logistics services are equal to different costs
• Creating insights into which customers are truly profitable
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› When providing multiple logistics services, one must understand the true cost to serve
› Do not overcomplicate the cost to serve model – take a “roughly right” approach
› Sales organisations must be impacted by the true logistics costs to change behaviour
› The cost to serve model is an enabler of improving the customer segmentation
What we think … What we hear/see …
› Companies have little insight into the true logistics costs and often underestimate the importance of creating this insight
› Building an exact model is not worth the effort. Often, they end up being “exactly wrong”
› The most successful cost to serve models are the ones where the whole organisation understands and trusts the logic
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The cost to serve analysis provides answers to a number of questions
Cost to serve
Segmentation and future service offerings
Supply chain tasks, cost drivers and unit costs
Where to focus
Full cost transparency of service offerings and profitability
Menu pricing/full “distribution” cost
• Service costs: What are the costs related to the provided service offerings (MTO, MTS, lead time, VAS, VMI)?
• Profitability: What is the full profitability of customer segments, products and channels? • To what extent are “products”/customer segments paying for the service of others? • Over-servicing: What are the costs associated with over-servicing?
• Activities: What are the supply chain activities and the related total costs? • Cost drivers: What are the most significant cost drivers in the supply chain? And what are the
primary cost drivers related to service of products and customer segments? • Unit costs: What are the unit costs of the various supply chain activities?
• Improve pricing: Change pricing to achieve profitability of all products and customer segments? • Holistic dialogue: Use full transparency to achieve more holistic dialogues with customers? • Limitation of services: Should services be limited to specific customers or segments? • Full distribution costs: As supplement to full manufacturing costs – to drive customer
behaviour?
• Differentiate to improve: Will differentiated supply chains provide better overall customer satisfaction and improve the balance between cost, lead time and delivery precision?
• Which services: How to segment the value chain, and which service offerings to differentiate? • Potential evaluation: What is the overall potential of supply chain differentiation?
• Supply chain improvements: Where should supply chain improvement initiatives be focused?
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The cost to serve calculation is based on the key activities that drive costs and is allocated accordingly to each customer order
Activities Cost
drivers
Total number of units of
cost drivers
Cost objects (e.g. products, customers)
Total cost base (general ledger) One fiscal year
Direct transfer via cost centres A
C
B Direct allocation by %
Via resources and resource drivers • Allocation of cost to
resources (FTE, M2, ?) • Find total # resources • Calculate resource unit
cost • Allocate by resource
driver split (FTE, M2,?)
Main activities identified via process mapping and interviews
1 Distribute cost base to activities 3
Understand and select cost drivers for the activities
2
Find total number of units in cost base period
4
Based on transaction data from ERP system or estimated
Unit cost by activity
Calculate unit cost 5
Find number of units by cost object total cost of cost object
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Link between products and customers
Transactional data linking cost drivers to cost objects (products, customers)
Number of units of cost drivers (e.g. # shipments)
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The cost to serve model is both an enabler of improving customer segmentation and a tool for the sales organisation to create better contracts
Low cost
Standard
Agile
Customers
Volu
me Top 30
customers High delivery frequency Small-sized deliveries
Few deliveries/week Medium-sized deliveries
STANDARD
LOW COST
AGILE
1,000
30
200
Customers
70%
25%
5%
Volume, CBM
85%
10%
5%
Sales, €
80%
15%
5%
Logistics cost, €
200
100
400
Logistics costs, €/CBM
100
50
200
Cost index
EXAMPLE OF OUTPUT FROM CTS MODEL
Problems can be complicated. Solutions cannot.
Lars Saur Feldstedt Email: [email protected]
Tel: +45 2338 0068
Kenneth V. Olsen Email: [email protected]
Tel: +45 4138 0070
Johannes J. Skibsted Email: [email protected]
Tel: +45 2338 0030
Implementconsultinggroup.com
implementconsultinggroup.com/warehouseanddistribution
Implement Consulting Group Implement Consulting Group is a leading Scandinavia based management consultancy, specialised in driving strategic transformations with a strong differentiator on “making change happen” – delivering documented Change with Impact.
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