Add Total Delivered Cost Variances to Manage Your Supply Chain
It is often said that you can only improve what you measure. To that end, there has been a lot of progress in performance tracking and activity-based costing over the past 10 years. With the advent of better activity-based costing, leading companies generate monthly manufacturing variance reports at a detailed and actionable level. However, this does not appear to be the case in the supply chains of many of those same companies. At the end of this post, I’ll recommend some specific supply chain metrics to guide your supply chain improvement.
We routinely find that many companies have a very limited understanding of their supply chain costs: what they are, where they come from or why they’re happening. In a typical engagement with a new client, one of the first things we do is develop a picture of their supply chain current state with respect to flows, cost and service. We work with the client to gather all of the available information, which is much too often a very formidable task, until we can assign the cost from each operation that touches a product or intermediate from the time it is a raw material until it is delivered as a final product to the customer.
When the project team first presents the results to management, we invariably hear, “We don’t do that,” or “Those costs must be wrong.” Unfortunately, we sometimes hear, “There is no way we’re losing that much money at that customer.”
Clearly, there are times when the team learns something new and we have to adjust the costs. However, in the majority of cases we walk through the elements of the costs with management and the realization sets in that the numbers are correct and the costs really are that high. Now that we have all seen the true picture of the supply chain we can align on the effort required to improve it.
Supply chain managers, like their manufacturing counterparts, should demand ongoing metrics at the operational level that are actionable if they want to drive improvement in their supply chains. Reports that provide only the total freight spend, total warehouse spend or total person-hours worked in the supply chain vs. the plan don’t contain enough actionable information to drive performance.
I propose the following metrics as a starting point for managing the total delivered cost to the customer base and welcome your feedback on any metrics that I might have missed or that might replace one I’ve suggested.
Total Delivered Cost Supply Chain Metrics, a Start:
- Actual vs. target for shipping containers
- Actual loaded vs. the maximum allowable capacity for the commodity and shipping container combination
- Actual vs planned cost to serve variance reports at the customer/product level of detail with specific variances called out for
- Cost of Goods Sold (COGS)
- Mode exception (shipped by a premium mode of transport vs. the planned mode)
- Sourcing exception (shipped from a different location than the planned source)
- Fill exception (the difference in cost if the shipping container were filled to the maximum allowable capacity)
- Volume variance (total volume shipped vs. the planned volume to allocate fixed costs)
- Mix variance (change in the mix of products shipped vs. the plan and its impact on cost)
- Price variance (change in the price charged by carriers and other logistics service providers vs. the planned price)
With this set of metrics a supply chain manager should be able to quickly understand the reason for any changes in the total delivered cost to each customer, and thus the gross margin. Now that we can measure it, we can manage it.
December 1st, 2015 5:11 pm Category: Distribution, Global Supply Chain, Green Network, Inventory Management, Network Design, Optimization, Optimization Software, Scheduling, Solver Optimization, Supply Chain Improvement, Supply Chain Optimization, Supply Chain Planning, Transportation, Vehicle Routing, Warehouse Optimization, by: Gene Ramsay
Profit Point has been helping companies apply mathematical techniques to improve their business decisions for 20 years now, and it is interesting to review some of the advances in technology that have occurred over this time that have most enabled us to help our clients, including:
• The ability for companies to capture, store and access increasingly larger amounts of transaction and anecdotal data that quantify the behavior and motivation of customers, manufacturers, suppliers and other entities
• The improvement in analytical capabilities that help make optimized choices, in such areas as the solving mixed integer optimization problems, and
• The improvement of computing technology, allowing us to perform calculations in a fraction of the time required just a few years ago
A recent post on the Data Science Central website highlights the use of advanced techniques based on these advances by on-line marketplace Amazon, which is generally acknowledged as one of the most tech-savvy companies on the planet. 21 techniques are listed that Amazon uses to improve both their day-to-day operations and planning processes, including supply chain network design, delivery scheduling, sales and inventory forecasting, advertising optimization, revenue / price optimization, fraud detection and many others. For a complete list see the link below:
Like our customer Amazon, Profit Point is committed to using these techniques for the benefit of our clients – we have been concentrating on implementing business improvement for our clients, including optimization in various forms, since our very beginning. Are you, like Amazon, using the best methods to seize the opportunities that are available today?
Over the past week I’ve had two experiences that made me think about what’s required for a successful Organizational Change. The first was our CSCMP Roundtable tour of a family-owned food distribution company that had built a large, successful regional business by leveraging their founder’s focus on customer satisfaction and valuing his employees as cornerstone of the business. The company had recently been purchased by another family-owned company and was in the midst of a successful wholesale change in IT systems and work processes. Having seen many organizations struggle with such a large change, I asked our host about the secret of their organizational change. In a word, he said, “Culture.”
Immediately after the new owner had completed the purchase, they spent a lot of time with the employees reassuring them that the values of the company wouldn’t change even though the way that they did their jobs might change dramatically. In the end, the two companies’ cultures valued the same things: customer satisfaction and their employees. With that in mind the change management effort began as an inclusive effort with a clear set of goals for the new work processes. Not that there weren’t any bumps in the road, but the two once-separate organizations were able to push towards the new way of doing business as a common team.
So what does that have to do with a bike ride on a windy day? That’s where the second experience of the week comes in. Over the weekend, I completed a two-day 176 mile ride around Galveston Bay. Just like a good organizational change-management effort the first day was preceded by a lot of training and preparation and accompanied by excitement and adrenalin. We had some tough slogs, particularly one 21 mile stretch directly into a 15 mph headwind. It was grueling, but we knew it was coming and grunted our way through it. But then came the pay-off, the headwind became a tailwind as we sailed down the coast on our way to the finish line for Day 1. Again, like an organizational change, we had some tough slogs, but our preparation paid off and we were able to celebrate as we hit our first big milestone.
The second day of the ride promised to be a tough one. We had already ridden 97 miles on the first day, winds were blowing at almost 20 mph and were forecast to be mostly in our face all the way back to our starting point on Day 1. I knew it would be a challenging day, so I decided that speed was not very important; just finishing. In addition, I knew that I needed to find some like-minded riders so we could work together into the wind. Luckily fate smiled upon me and I found a couple of riders that were taking the same approach to the ride. We teamed up, taking turns pulling from the front so that the other two could draft and waiting for each other when we had flat tires. We also got to celebrate when we turned away from the wind and had it at our backs for short stretches before turning into it again. The parallels to a successful organizational change jumped out at me.
- We made a realistic assessment of the challenges ahead
- We set goals that were within our reach, given the challenges
- We found allies with the same mind-set and worked as a team towards a common goal
- We celebrated success when we had a downwind leg
- We finished as a team
I hope to see you out on the road, be it organizational change or riding your bike into the wind. Good luck, and let me know if you need someone to help pull on the next ride.
Recent events during the summer of 2015 have exposed a major vulnerability in the supply chains of many U.S. manufacturers located in the industrial belt of the American Midwest. Iron ore as well as many other bulk commodities such as grain and coal, is shipped from Northern Minnesota and Michigan via vessels on Lake Superior through the Soo Locks at Sault Ste. Marie Michigan and then south to the lower Great Lakes region. And for 20 days this past August these vessels that normally transit the Soo choke point experienced long delays and backups because the 2 primary and largest locks were unusable or intermittently closed for maintenance.
The trouble started when the MacArthur lock had to be shutdown unexpectedly in early August because of a set of gates that did not close properly, thus diverting its normal traffic to the adjacent Poe lock. This closure eventually lasted almost 20 days. Then, according to the newspaper USA Today, the Poe had to be briefly shut as well. (There is a 3rd lock that is still available but it is functionally obsolete and rarely used these days.) With both locks out of commission or only sporadically open, 100 vessels were delayed at least 166 hours during the height of the summer shipping season: imagine the cost to shippers as well as the disruptions on the receiving end of those shipments.
The Soo locks are a critical link in the U.S. transportation network: according to the Detroit News, 3985 ships hauling 77.5 million tons of iron ore, coal, grain and other cargoes transited the locks in 2014. A large part of the production in the Great Lakes region of the Midwest is directly or secondarily tied to the manufacture of steel and other basic commodities which in turn rely on marine delivery of raw materials via the Great Lakes. The Soo Locks are so important that during World War II, troops were send to guard them against any sabotage.
Given the vulnerability of this critical asset, and the deteriorating state of the country’s infrastructure generally, you would think that Congress and the Army Corps of Engineers would be moving quickly to either build a new lock or modernize the existing ones. However no significant institutional movement or progress is underway right now. Just how critical the Soo is becomes clear when you realize that only the 47-year-old Poe is big enough to handle the 1000-foot vessels that today carry roughly 70% of the freight on the Upper Great Lakes. The impact of any prolonged outage of this asset would certainly have catastrophic consequences on many companies’ supply chains
By now, we’ve all probably heard about the fact that there is a worldwide glut of crude oil.
This is due to many factors of course, including the increased production of oil and natural gas in North America (especially as a result of fracking), as well as the rising proportion that renewable energy sources have come to represent in the overall energy marketplace. And members of the OPEC cartel have made no secret that they are increasing or at least maintaining relatively high production levels so as to drive competitors out of the market and thus maintain their market share. Therefore the supply of petroleum on world markets is high, thus driving down the price.
This oversupply of crude oil in relationship to demand has had a big impact on the supply chain for moving oil from supplier to customer. Over the past decade, there has been a huge increase in the oil supply chain infrastructure. Trading companies have built vast storage facilities in order to insulate themselves from the high prices they experienced in the past. But now with the current glut of petroleum most of this on-shore storage capacity is full, and this has led to an interesting phenomenon. Now, some trading companies are being forced to use their marine transportation assets, i.e. oil tankers and supertankers, as simply floating tank farms. As the spot price of oil has collapsed, it now makes economic sense to simply load the vessels without a definite destination or customer in mind and store the oil at sea.
Such a strategy, of using transportation assets as de facto storage locations is very typical of any commodity type market where the market power of the customer is much stronger relative to the producer. For example, this situation has long been typical in certain commodities that are delivered by rail, where customers simply leave product parked in cars out on a rail siding somewhere until it’s needed.
Of course, over time as normal market forces do their work, the relative bargaining positions of the buyer and seller can shift. In the case of oil, various economic and political forces can quickly move the markets such that leaving tons of oil floating out on the seas in very expensive storage tanks no longer makes economic sense. And when this happens, those vessels will soon be put back to the purpose for which they were truly built.
A few weeks ago, Steve Westphal with Edge Network posted a piece on our blog about the benefits of SKU Optimization. This past week, Packaging Digest posted the results of a survey of the beverage industry that suggests new packaging may be one of the key drivers for profitability this year. The survey also illustrates how new packaging can cause the proliferation of SKU’s. One more reason why industry leaders maintain an ongoing SKU Optimization process within their supply chain.
If you’d like to to know more about SKU Optimization and how it can impact your bottom line, please contact us.
We all know the saying, “An apple a day keeps the doctor away.” However, for many of our neighbors, it’s easier said than done. According to some recent surveys, most of you reading this eat about 40% more fresh produce than the segment of the population that is served by our nation’s food banks. In Texas, according to the recently released Feeding America Map the Meal Gap data, 17.6% percent of the overall state population struggled to avoid hunger in 2013, including nearly two million children. Surprisingly, in many cases the problem is not the availability of food -, it is a supply chain problem.
Through a CSCMP friend at the Houston Food Bank, I recently started a project with Feeding Texas, a network of the 21 food banks serving the state, to increase the amount of fresh produce we can deliver per dollar spent. Just like in many private sector companies that have grown in size over time, each Feeding Texas member food bank operates independently. Across the food banks resources are tough to come by and tend to be used in the day-to-day operations to bring in food and get it out the door to clients. Thus, they have not yet adopted many of the current best practices in supply chain management.
Even though there is more fresh produce available than they can use at any given time, many of the key issues that Feeding Texas members face, like
- Lack of transportation capacity to move produce when it is offered
- The high cost of transportation that consumes limited budget funds and restricts the amount of produce that can be obtained
- Purchase of Out-of-State produce when produce is available in Texas
are typical of an organization that haven’t implemented modern network design, supply/demand planning and transportation planning processes.
We are currently collecting data to complete a more extensive review of the total Feeding Texas supply chain to identify opportunities to move more fresh produce at a lower cost. We are also engaging with key industry contacts and donors to help us understand whether we can adopt some of their best practices in the movement of fruits and vegetables. I have to say that I have been very gratified at the number of times I’ve called a supply chain colleague to ask for their help on this project. In almost all cases, the response has been an unhesitating, “What can I do to help?”
I’ll keep posting our updates as we hit new milestones in our project. In the meantime, I would ask you to reach out to the food bank in your neighborhood and ask if your supply chain expertise can be put to good use.
When we help our clients improve their supply chains the first step in the process is usually to identify what problem they need to solve, or what questions they are trying to answer. Examples of such questions might be
- What will be the impact of several possible capital investments in our distribution system?
- A major customer is considering changes in their manufacturing – how should we respond?
- How can we improve the assignment of available production / inventory to customer orders?
After pinning down the objectives, the focus will then shift to the design of a planning model, or a software system, that will help them to address the identified needs. We find that a key design tenet for the model, or the scope of the supply chain to be covered, is to include enough detail to be able to answer the questions at hand, but no more.
A typical supply chain will stretch from procurement of raw materials to manufacturing to distribution to customers (and possibly beyond, on either or both ends.) Part of capturing the supply chain behavior will be to define the transformation of materials along the chain. This can be done by defining a bill of materials, or BOM, which defines the quantities of input ingredients that are required at a point in the supply chain to make an output material of interest. For instance, if you are a baker then your BOM is your recipe – e.g. the amounts of flour, buttermilk, leavening and various other ingredients required to make the batch of biscuits.
Deciding on the detail of the materials going into the BOM, and getting the right quantities for the BOM, is a key step in properly modeling the supply chain. If you are working at an operational supply chain level, the BOM will need to be detailed enough to actually make the product, but many times in a planning situation, it is reasonable to omit some of the detail, and only capture the main flows of product through the system. You will need to make these decisions based on your project objective.
For instance, if you are modeling a beverage company’s supply chain, water may be a key ingredient in the production process. If the question you are trying to answer for the beverage company is whether traditional warehouses vs. crossdocks is a better distribution solution for a part of the territory, then you may decide that the sources and cost of water for the production facilities will not have a big impact on the answer, so you can omit the water consumption from the analysis. On the other hand, if the objective of the analysis is to evaluate the impact of alternative future production locations on the company’s overall environmental impact and commitment to sustainable practices, then water for production (and waste water, and other intermediate or byproduct materials) would likely need to be included in the production BOMs.
Making good choices in defining your BOM is one of the important steps in getting a supply chain model to help you answer your questions effectively. Our extensive supply chain experience allows us to bring a large knowledge base to the assignment when we are helping our clients design in enough detail, but no more.
Watch your thoughts, for they become words. Watch your words, for they become actions. Watch your actions, for they become habits. Watch your habits, for they become your character. And watch your character, for it becomes your destiny. What we think, we become. “My father always said that”. Margaret Thatcher
The year 2012 is behind us. If you are like me, you may not have accomplished all the goals that you had in mind at the beginning of the year. No worries, the year 2013 is before us.
Here are Seven Rights of Fulfillment taken from the CSCMP website, which I believe are relevant for our industry, but also can be adopted as a framework for your goals for this year:
1. The right product
2. To the right customer
3. At the right time
4. At the right place
5. In the right condition
6. In the right quantity
7. At the right cost
The ability to meet customer requirements is built upon the expectation that everything is done correctly in the supply chain. In the quest to provide quality service and satisfy customers, world-class companies along the supply chain are guided by these Seven Rights of Fulfillment.
Goal setting involves establishing specific, measurable, achievable, realistic and time-targeted goals. Take a moment right now and think of one goal that you want to accomplish in 2013. Done? You just primed your subconscious.
What kind of risks are you prepared for?
As a supply chain manager, you have profound control over the operations of your business. However, it is not without limits, and mother nature can quickly and capriciously halt even the smoothest operation. Or other man-made events can seemingly conspire to prevent goods from crossing borders, or navigating traffic, or being produced and delivered on time. How can you predict where and when your supply chain may fall prey to unforeseen black swan events?
Prediction is very difficult, especially about the future. (Niels Bohr, Danish physicist) But there are likely some future risks that your stockholders are thinking about that you might be expected to have prepare for. The post event second guessing phrase: “You should have known, or at least prepared for” has been heard in many corporate supply chain offices after recent supply chain breaking cataclysmic events: tsunami, hurricane, earthquake, you name it.
- What will happen to your supply chain if oil reaches $300 / barrel? What lanes will no longer be affordable, or even available?
- What will happen if sea level rises, causing ports to close, highways to flood, and rails lines to disappear?
- What will happen if the cost of a ton of CO2 is set to $50?
- What will happen if another conflict arises in the oil countries?
- What will happen if China’s economy shrinks substantially?
- What will happen if China’s economy really takes off?
- What will happen if China’s economy really slows down?
- What will happen if the US faces a serious drought in the mid-west?
What will happen if… you name it, it is lurking out there to have a potentially dramatic effect on your supply chain.
As a supply chain manager, your shareholders expect you to look at the effect on supply, transportation, manufacturing, and demand. The effect may be felt in scarcity, cost, availability, capacity, government controls, taxes, customer preference, and other factors.
Do you have a model of your supply chain that would allow you to run the what-if scenario to see how your supply chain and your business would fare in the face of these black swan events?
Driving toward a robust and fault tolerant supply chain should be the goal of every supply chain manager. And a way to achieve that is to design it with disruption in mind. Understanding the role (and the cost) of dual sourcing critical components, diversified manufacturing and warehousing, risk mitigating transportation contracting, on-shoring/off-shoring some manufacturing, environmental impacts, and customer preferences, just to begin the list, can be an overwhelming task. Yet, there are tools and processes that can help with this, and if you want to be able to face the difficulties of the future with confidence, do not ignore them. The tools are about supply chain planning and modelling. The processes are about risk management, and robust supply chain design. Profit Point helps companies all over the world address these and other issues to make some of the of the best running supply chains anywhere.
The future is coming, are you ready for it?
The global economy hangs in a tenuous balance. U.S. growth has been slow, but steady, while the global economy has been mixed. The survey data suggests that logistics planners are most concerned with meeting service levels, driven by capacity concerns, rising costs and the need to increase productivity.
- A slow and uncertain economic recovery has begun to put pressure on transportation/distribution planners to plan for multiple scenarios.
- Rising fuel and driver costs remain a key long-term concern.
- Capacity is a significant concern. While trucking capacity has tightened, rail capacity is available.
- Planners are equally concerned with meeting service levels, perhaps, caused by rising costs and capacity constraints.
To read the complete report, including our conclusions, click the link below:
Isn’t that one of our main objectives in life, whether the setting is business, participation in sports, your personal life?
I see part of our role at Profit Point as helping our clients to achieve their potentials. We do this by applying mathematical techniques to find good solutions to the problems that business leaders face. Many of our clients call upon us when their business is going through a time of transition, particularly when there is a merger of organizations.
Analyzing the potential for facility rationalization is one of the standard uses of our Profit Network infrastructure planning software. We, and clients, have used this software to decide how many plants, production lines and warehouses they need to best serve their customers in many different types of situations.
But mergers present opportunities to organizations further down the supply chain as well, of course. Many companies use vehicles to deliver product to customers on a regular basis, and when there is a merger (and at other times) well-run businesses are looking for ways to ensure that these types of activities are carried out efficiently.
Our Profit Vehicle Planner (PVP) software can help in planning for a merger at that next level down – for instance, when you have two organizations serving customers in a metro area, how do you combine them together?
The diagrams below give you an idea of the situation a company might face. They have operations in various parts of the country, serving hundreds of customers in each area. Their Southern California customers might be spread as in the pattern in the diagram below on the left.
To serve these customers they currently have five route territories, covering the customer deliveries, as is shown in the diagram on the right.
Now they plan to merge with a smaller competitor in the same type of business. The acquired company has customers in southern California with a similar spread across the geography, divided into two territories, as is shown in the diagrams below.
PVP will allow the analyst to look at all of the customers together,
and in this case, when the territory planning algorithm runs, it finds that deliveries can be made in six more-compact route territories, covering all customers. Separately the two companies had seven territories – and merged they have the potential to serve them with six – thus saving a truck and various associated expenses. The merged solution is shown below.
Implementing this merged solution can help the company better achieve its potential – for profits.
Upgraded Vehicle Route Planner Software Improves Decisions in Distribution Planning, Fleet Sizing, Driver Productivity and Transportation Cost Reduction
Profit Point announces the introduction of Profit Vehicle Planner™ 3.1, a major upgrade to our distribution analysis and design software. Profit Vehicle Planner is designed for Strategic Logistic and Transportation Managers that have large fleets with multiple daily delivery stops and changing logistics processes. The software update includes a combination of new features and technical enhancements which combine to support richer scenario modeling for larger large fleets with multiple daily delivery stops and changing logistics processes.
Designed to be highly accessible and customizable, Profit Vehicle Planner (PVP™) uses standard Microsoft business tools for calculation and display of information, including Excel, Access and MapPoint. The software automatically creates and designs the optimal sales/distribution territories. It does this by dividing customers into territories and days of service, with each territory representing the volume delivered by one delivery vehicle and one driver over the course of the planning horizon. The objective of the proprietary heuristic algorithm used in Profit Vehicle Planner is to assign customers to territories that will minimize the number of trucks required to serve the customer volumes while delivering within the various common and business-specific constraints, including customer frequency of service, hours available per day, volume available per truck, unique equipment requirements and virtually any other custom constraint required.
“With 12 years in the field, Profit Vehicle Planner has been put to the test against some of the world’s largest supply chain distribution problems,” noted Jim Piermarini, Profit Point’s Chief Technology Officer. “Transportation best practices have expanded over time, so decision makers are looking for more comprehensive strategic logistics and transportation modeling solutions.”
With the new release, PVP’s expanded features include extensive customization of the software to tailor the territory planning solution to be cost and time effective to meet your unique and specific distribution requirements and the ability to use imported address data to automatically geocode customers for whom lat/long data is missing.
For companies that perceive distribution as mission critical, users have the option to integrate PVP deeply into their supply chain systems to import and export data in to their ERP system. Companies that seek the most cost-effective solution have the ability to import virtually any relevant data from an Excel template that includes the following:
- Customer data such as address, location, frequency of service, volume per stop, time required per stop, other data as needed
- Truck data such as size, days of the week that it is available, order in which it is to be scheduled, hours available each day, special equipment, other data as needed
- Warehouse and district data such as location and characteristics of associated trucks and drivers
- Time related data such as start date of planning horizon and number of weeks in the planning horizon.
- Product specific data such as unit of measure of the product being delivered
- Any other data required to accurately model unique constraints
Once optimized, users have the ability to review and assess the characteristics of the territories that are created using tables and maps to provide an enhanced visual experience. And to ensure the optimal distribution plan, users can manually move customers from one territory to another or from one service day pattern to another (e.g. from Monday-Thursday to Tuesday-Friday), if desired.
June 22nd, 2012 3:46 pm Category: Distribution, Enterprise Resource Planning, Global Supply Chain, Green Network, Green Optimization, Network Design, Optimization, Supply Chain Agility, Supply Chain Improvement, Supply Chain Planning, Transportation, Vehicle Routing, by: Editor
Supply Chain optimization is a topic of increasing interest today, whether the main intention is to maximize the efficiency of one’s global supply chain system or to pro-actively make it greener. There are many changes that can be made to improve the performance of a supply chain, ranging from where materials are purchased, the types of materials purchased, how those materials get to you, how your products are distributed, and many more. An additional question on the mind of some decision makers is: Can I minimize my environmental footprint and improve my profits at the same time?
Many changes you make to your supply chain could either intentionally – or unintentionally – make it greener, so effectively reducing the carbon footprint of the product or material at the point that it arrives at your receiving bay. Under the right circumstances, if the reduced carbon footprint results from a conscious decision you make and involves a change from ‘the way things were’, then there might be an opportunity to capture some financial value from that decision in the form of Greenhouse Gas (GHG) emission credits, even when these emission reductions occur at a facility other than yours (Scope 3 emissions under the Greenhouse Gas Protocol).
As an example, let’s consider the possible implications of changes in the transportation component of the footprint and decisions that might allow for the creation of additional value in the form of GHG emission credits. In simple terms, credits might be earned if overall fuel usage is reduced by making changes to the trucks or their operation, such as the type of lubricant, wheel width, idling elimination (where it is not mandated), minimizing empty trips, switching from trucks to rail or water transport, using only trucks with pre-defined retrofit packages, using only hybrid trucks for local transportation and insisting on ocean going vessels having certain fuel economy improvement strategies installed. These are just some of the ways fuel can be saved. If, as a result of your decisions or choices made, the total amount of fuel and emissions is reduced, then valuable emission credits could be earned. It is worth noting that capturing those credits is dependent on following mandated requirements and gaining approval for the project.)
If your corporate environmental strategy requires that you retain ownership of these reductions, then you keep the credits created and the value of those credits should be placed on the balance sheet as a Capital Asset. Alternatively, if you are able, the credits can be sold on the open market and the cash realized and placed on the balance sheet. Either way, shareholders will not only get the ‘feel good’ benefit of the environmental improvement, but also the financial benefit from improvement to the balance sheet. If preferred, the credits can be sold to directly offset the purchase price of the material involved, effectively reducing that price and so increasing the margin on the sales price of the end-product and again improving the bottom line. If capital investment is required as part of the supply chain optimization, the credit value can also be a way to shorten the payback period and improve the ROI, or to allow an optimization to occur
So, when you consider improving your environmental impact or optimizing your supply chain, consider the possibility that there might be additional value to unlock if you include both environmental and traditional business variables in your supply chain improvement efforts.
Written by: Peter Chant, President, The FReMCo Corporation Inc.
Applying Lean Logistics Principles in Combination with Tactical Software to Improve Distribution Transportation Planning
May 23rd, 2012 3:56 pm Category: Distribution, Green Network, Profit Vehicle Planner, Profit Vehicle Router, Supply Chain Agility, Supply Chain Improvement, Supply Chain Planning, Supply Chain Software, Transportation, Vehicle Routing, by: Richard Guy
As the competitive environment changes the way companies do business, transportation managers are embracing lean principles mixed with tactical planning software to support cost reductions and quality improvements. Applying lean initiatives to supply chain and logistics operations is one method that allows businesses to reduce cost, but the marriage of tactical planning software with lean principles introduces a new approach and additional opportunity to eliminate waste.
Lean is a team-based form of continuous improvement that focuses on identifying and eliminating waste and increase of speed and flow of an operation, such as distribution of products. Waste can be defined as activities that do not add value for the customer.
A short waste target list for a distribution transportation planner may include the following:
- Underutilizing employees or behavioral waste
For example, managing a large delivery fleet with a relatively fixed, repeating delivery pattern will benefit from an optimal territory planning and routing solution. Since lean adds emphasis on waste, non-value added work, queue times, to traditional process analysis, improving the distribution and routing plan for a company’s fleet can eliminate waste in all of the above categories.
Selecting strategic territory planning software that will optimally divide a customer region into geographical “territories” based on customer delivery requirements can be an important first step in the lean process. Think of each territory is a contiguous area containing the customers that will form a single route, or a regular pattern of routes, over a day, week, month or other time period. Lean solutions can include optimal delivery territories shaped to minimize total travel and to equalize the delivery workload for drivers.
Most software packages utilize geographical mapping software such as MapPoint or Google Maps to generate a solution that will minimizes total travel miles while meeting customer service and delivery requirements. Some of these tools can also be personalized and customized to meet specific business requirements. Planning tools that create both territories and routes in a single integrated package appear to be the most popular.
Before implementing the territory planning software solution, let’s compare the results to the target list of waste. Transportation waste is minimized. Drivers (“employees”) become more productive since they now have a delivery territory designed to adhere to the driver profile, which may specify shift time and driving break intervals. Routes are optimized, so there is no more wasted motion time. Routes can be built to ensure sufficient inventory is available at all stops. Natural boundaries such as rivers, mountains, canyons and man-made boundaries such as rail tracks, major highways, canals can be model to create optimal delivery territories that are bounded by these constraints, thereby eliminating driver waiting to go around these obstacles.
In summary, managers that use transportation routing and territory planning software are following the lean principles to identify and reduce waste. Implementing the solution can potentially reduce transportation costs by 5% to 20% by decreasing miles traveled and increasing on-time delivery while dramatically increasing driver productivity. Lean principles when married to tactical planning software can be competitive weapons and a great advantage in tough economic times. Start considering lean logistics principles in conjunction with territory planning software applied to distribution transportation problems as opportunities to reduce waste.
The following is a guest blog post from Sam Polakoff, President, TBB Global Logistics.
Now sit down and think about it for a moment. Exactly when did your company establish its current distribution network? In all likelihood, the answer is three or more years. Is your business the same as it was three years ago? Probably not. What factors commonly drive change necessitating a shift in supply chain strategy? There are many including, but not limited to, the addition of key customers, product introductions, changing sources of supply, competitive threats, mergers, acquisitions, natural disasters and shifting demographics. So how do you rationalize using yesterday’s supply chain for today’s business needs? At best, you are getting by with higher costs and lower margins. You may feel as if you are losing the battle to stay competitive in a difficult economy.
To compete effectively in a dynamic business environment, continuous evaluation of the marketplace is a critical success factor. Once knowledge is in-hand, your supply chain must be built in an agile manner allowing for efficient shifts to accommodate expected and unexpected change.
I recently spoke to the owner of a U.S. manufacturing company that dates back to the early 20th century. He was explaining how he was in the final stages of divesting the company of all its hard assets. They had long ago moved manufacturing offshore. They had evolved into a substantial importer managing a series of company-owned distribution centers. Today, all of the distribution is outsourced and the old company headquarters building is up for sale. The shift to a virtual company is near complete. The executives are now free to work on product innovation and the related sales and marketing. They still compete effectively but with higher margins and more agility. This old line company has adapted and overcome, multiple times, aligning and realigning supply chain process with strategic business objectives and changing marketplace conditions. The results are higher profits, supply chain flexibility and happier customers.
Establishing and using key performance indicators will serve as confirmation of effective supply chain process or as a red flag requiring attention. Aligning supply chain with strategic business objectives and keeping your finger on the pulse of the customer will propel you forward on the road to prosperity.
I’m a picture guy. In our kind of work, we have to be able to take a lot of data and make sense out of the process or processes that generated it. I used to work with a fellow named, Bill, who has a PhD in Operations Research, and is probably one of the smartest people I’ve ever met in my life. Bill is a guy who can look at six or seven big tables of numbers and then say something like, “… and the answer is 7.563.” He was usually right. I don’t have that talent to create the linkages among lots of different types of information in my head to come up with a conclusion like that. That’s why I like pictures.
Recently, one of my colleagues and I were visiting a manufacturing plant to assess their production scheduling process. The client invited us to visit the plant because they knew they had a problem. As we followed the scheduler through his day, we began to understand the root causes of the problem. So how did I choose to communicate what we’d found to the client? You guessed it; I drew a picture.
When the plant manager first opened the file containing the flowchart of their existing process, she told me she only needed to see that it took me three letter-sized pages to document to the process to know that the process was much too complex and cumbersome to be fixed with a couple of “quick hits.” Why is it that she knew without studying the details that we needed a full redesign to fix this process?
I think many of us are just built that way. I know there is a lot of clinical and academic research that shows how we human beings use our sense of sight as a first preference for observing the world, and that there are specific parts of our brains that are able to detect visual patterns or the lack thereof. However, I don’t think we need to see the results of that research to know why the phrase, “a picture is worth a thousand words,” is such an enduring statement. It rings true with all of us.
That’s why I like a software product called Tableau. It is marketed as a visual analysis tool and I think it does its job quite well. Although I don’t claim to be an expert user, I have found it quite useful when I need to understand what’s going on in a large dataset. Let me illustrate using an example from a recent transportation analysis that we did for one of our clients.
Our client had grown by acquisition and managed its transportation in a very de-centralized manner. Each of the sites contracted individually with their own set of carriers, using their own set of criteria for selecting and then awarding business to the carriers. Profit Point was called in to help the client understand the cost-savings opportunities that would result from a more centralized approach to carrier contracting and management.
Our first priority was to find out what was going on at all of the different sites so we developed a database from the client’s freight payment records to do it. Now, picture this (pun intended). We now have over 63,000 individual shipment records to analyze and we needed to do it in a way that told a story that we could understand and that we could then communicate to the client. The first thing we did was look at the spend by plant and by carrier. The spend by plant was more of a prioritization issue, to understand which of the plants had the highest freight spend, but the spend by carrier became the first part of our story as you can see in the two pictures below.
This second chart was a very powerful image to help the client quickly see that the number of carriers being employed was out of control. You don’t even need to be able to read the name of the carrier on the Y-axis to know that there are too many carriers in this picture. Many of these carriers had only a single load all year long, but were still carried in the system.
We also wanted to show the client the significant different in pricing policies across their carrier base. The following slides show how we used some more of Tableau’s functionality to make our point.
By plotting cost vs. distance for all of the shipments, we were able to see the general correlation of cost with distance that we expected, but we also saw a number of outliers that we wanted to better understand.
We then highlighted a group of very high-cost shipments and kept only those points to see what we might find out.
Using a simple stacked bar chart, it was very apparent that carrier “C-g,” the red bar in the chart at left, was the main player in this group. Once “C-g” was identified, we were able to demonstrate that their cost was always greater than the average cost for shipments with distances greater than 200 miles and by as much as 50-66% for shipments with distances greater than 1000 miles.
Again, these pictures allowed us to find one of the smoking guns inside this mass of data. Suffice it to say that we found many other opportunities through similar visual analysis.
Because of these pictures, and others like them, it was an easy sell. Using a tool that makes it easy to use the built-in “intelligence of our eyeballs,” we were able to develop a convincing call to action for our client, who went out to the market with a targeted freight bid and reduced their transportation spend dramatically.
As technology continues to penetrate more and more aspects of business and our everyday lives, it makes more and more data available for us to turn into useful information. But it’s only useful information when we can put it into a form that we understand and can communicate it to others. That’s why I’m a picture guy.
Profit Point’s transportation procurement optimization service reduces outsourcing costs by quickly analyzing multiple carrier bids and provides insightful data for decision makers
Profit Point, a leading Supply Chain Optimization company, today announced the introduction of Transportation Procurement, an optimization service that will cut costs for manufacturers and distributors that outsource some or all of their shipping to third-party carriers. The service provides transportation analysts and procurement managers unsurpassed ability to quickly analyze carrier bids and evaluate the best combination of carrier discounts, enabling them to negotiate rates to ship at the lowest total cost.
“Our clients are looking for new ways to reduce costs and gain productivity in every aspect of their business.” said Alan Kosansky, Profit Point’s President. “With the constant fluctuations in the transportation market, this service enables clients to manage their core carrier base and make effective decisions quickly, negotiating with carriers from a position of strength.”
The company’s optimization service and technology provide the analytical horsepower to the transportation or procurement professional to quickly evaluate different mixes of carriers and lane assignments, making trade-offs among both quantitative and qualitative business goals. The service’s richness and flexibility enables clients to dictate constraints to enforce site-specific, regional or global limits on the number and types of carriers that are included in the awarded lanes.
“We have deployed carrier bid optimization software to our clients in the past; however we have found that many of our clients prefer to leverage our deep analytical expertise. By partnering the client’s negotiating team with the analytical insights we provide them, they are able to reach the best possible outcomes in their negotiations with carriers,” said Kosansky. “And when our clients are ready to bring the analysis in house, we readily provide our Profit Procurement for Transportation software.”
Most large manufacturers have hundreds of carriers and thousands of lane options available to ship products from their manufacturing and distribution centers to their customers. The firm’s procurement optimization service addresses all inbound and outbound transportation routes, including rail, truck (bulk, packaged, and LTL), and marine bids, and simplifies the selection process while lowering the overall transportation costs.
To learn more about Profit Point’s transportation procurement optimization services, call us at (866) 347-1130 or visit www.profitpt.com.
About Profit Point:
Profit Point Inc. was founded in 1995 and is now a global leader in supply chain optimization. The company’s team of supply chain consultants includes industry leaders in the fields infrastructure planning, green operations, supply chain planning, distribution, scheduling, transportation, warehouse improvement and business optimization. Profit Point has combined software and service solutions that have been successfully applied across a breadth of industries and by a diverse set of companies, including The Coca-Cola Company, General Electric, Logitech, Rohm and Haas and Toyota.
Profit Point’s data integration and scheduling optimization services deliver reliable results with reduced operations costs.
North Brookfield, MA
Profit Point today announced that its Profit Data InterfaceTM software has been selected by Rohm and Haas Company (NYSE: ROH) to integrate its scheduling processes with the company’s ERP data warehouse. The company, which last reported nearly $9 billion in annual sales, produces innovative products for nine industries worldwide through a network of more than 100 manufacturing, technical research and customer service sites. Optimizing and supporting the production and distribution scheduling across this network is a complex and ever-changing process.
“Rohm and Haas has a history of improving our operations to enhance customer service levels and reduce cost,” said Dave Shaw, the company’s Business Process Manager for MFG and Supply Chain. “Production scheduling, which entails constant change to meet demand, is one of the toughest challenges in the supply chain. In the past, the lack of a reliable data interface has limited our ability to react quickly and with a high degree of confidence in our results. Profit Point’s Data Interface software has given us near real-time access to highly reliable data, so we can respond quickly and know that our plan is right.”
Profit Data Interface is a robust application that helps decision makers boost the effectiveness of their ERP data by extending its usefulness with optimization applications. By leveraging existing ERP systems, the software provides a robust and proven method that supply chain managers can rely upon to optimize their critical business processes and improve profitability.
“Rohm and Haas is a recognized leader in the chemicals industry with a reputation for supply chain excellence,” said Jim Piermarini, Profit Point’s CEO. “We have supported their scheduling processes for years. So, it was clear that the next evolution was to directly connect their optimization software to the date store using our Data Interface product.”
Profit Data Interface, which integrates with SAP® and Oracle® data stores, can be used to optimize the entire supply chain including network planning, production and inventory planning, distribution scheduling, sales planning and vehicle routing.
To learn more about Profit Point’s supply chain software and services, visit www.profitpt.com.
About Profit Point:
Profit Point Inc. was founded in 1995 and is now a global leader in supply chain optimization. The company’s team of supply chain consultants includes industry leaders in the fields infrastructure planning, green operations, supply chain planning, distribution, scheduling, transportation, warehouse improvement and business optimization. Profit Point’s has combined software and service solutions that have been successfully applied across a breadth of industries and by a diverse set of companies, including General Electric, Dole Foods, Logitech and Toyota.
About Rohm and Haas Company:
Leading the way since 1909, Rohm and Haas is a global pioneer in the creation and development of innovative technologies and solutions for the specialty materials industry. The company’s technologies are found in a wide range of industries including: Building and Construction, Electronics and Electronic Devices, Household Goods and Personal Care, Packaging and Paper, Transportation, Pharmaceutical and Medical, Water, Food and Food Related, and Industrial Process. Innovative Rohm and Haas technologies and solutions help to improve life every day, around the world. Visit www.rohmhaas.com for more information.
LQM Petroleum Services is one of the largest international marine fuel oil brokers in the world, with core competencies in marine fuel oil brokerage, futures markets and outsourced bunker procurement solutions. With its deep expertise in marine refueling, LQM recognized that marine operators lacked a comprehensive refueling and inventory management system.
When it came time to build the system, BOptimumTM, LQM partnered with Profit Point to optimize the software algorithm in its bunker refueling recommendation software system. Read our case study to learn more about how LQM partnered with Profit Point to optimize its BOptimum bunker refueling recommendation software system.