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.
This quarter’s Supply Chain Quarterly features an article by Dr. Alan Kosansky and Ted Schaefer entitled A Fresh Approach to Improving Total Delivered Cost.
“Most companies calculate total delivered cost (TDC) based on inaccurate and outdated assumptions. Using optimization technology to more accurately forecast TDC by product and customer will help them to improve both their supply chain planning decisions and their costs.
Profitability is the engine that drives all successful businesses. To manage profitability, a company must understand and have good control of both its revenues and its costs.
For a long time, companies have had a good understanding of the revenue side of the business at a detailed customer and product level. It is only in recent years, however, that they have begun to understand their costs at the same detailed level by customer and product. To gain that insight, many companies use total delivered cost (TDC)—the complete cost of sourcing, producing, and delivering products to customers. TDC, in turn, has become a critical metric in guiding supply chain planning decisions.”
Profit Point, a leading supply chain optimization firm, adds total delivered cost and margin at the customer location-product level of detail to its supply chain network design software.
Profit Point, the leading supply chain optimization consultancy, today announced the release of an update to Profit Network™, a supply chain network design software that is used by supply chain managers all over the world to gain visibility in to the trade-offs they will face when designing or optimizing a global supply chain. In addition to several other new enhancements, Profit Network now allows users to analyze and report on the total delivered cost and the resulting gross profit margin for all products delivered to each customer location.
“With the ever-increasing availability of granular data across the supply chain, many of our clients have expressed a strong interest in analyzing and reporting on the total delivered cost of a single product or set of customer products,” said Alan Kosanksy, Profit Point’s President. “Previously, it was quite a challenge to understand how costs accumulate over time from raw material procurement through manufacturing, inventory, transportation and customer delivery. Now our customers are able to see the true total cost for each unit of product delivered to each customer. This will be a powerful tool in helping them evaluate their product and customer portfolios.”
In addition to total delivered cost, now Profit Network also enables more control over source-destination matching, as well as inventory levels by establishing minimum and maximum number of days of inventory demand.
“Profit Network software has been helping Fortune 500 companies around the world build more robust and profitable supply chains for more than 10 years,” said Jim Piermarini, Profit Point’s CEO and CTO. “Over that time, the dramatic increase in data availability across the supply chain has provided us tremendous opportunities to solve unique and critical problems in a variety of supply chain networks.”
In addition to Profit Network, Profit Point’s line of supply chain software also includes Distribution and Vehicle Planning, Sales and Operations Planning (S&OP), Production Planning, Scheduling and Order Fulfillment software.
About Profit Point
Profit Point Inc. was founded in 1995 and is now the leading supply chain software and consulting company. 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 Dow Chemical, Coca-Cola, Lifetech, Logitech and Toyota.
Profit Point announced that it has successfully completed a distribution network optimization project with the hydrogen peroxide business team at Arkema Inc. Arkema is a global chemical company and France’s leading chemicals producer. Profit Point is a leading supply chain optimization company, delivering solutions to global manufacturers to optimize their supply chain networks, distribution plans and S&OP processes using a combination of targeted software and consulting services.
In the very competitive hydrogen peroxide market, Arkema’s objective is to continuously improve product availability and customer service across North America, while simultaneously managing costs throughout the supply chain. Profit Point examined Arkema’s distribution options from manufacturing to the end customer to develop supply chain options to provide the right level of customer service at the best total delivered cost.
“The team at Profit Point developed an understanding of our business and they analyzed complicated data and made it easy to understand,” noted Ed Gertz, Arkema’s Director of Supply Chain for hydrogen peroxide. “They made it easier for us to see how different distribution infrastructure options impacted our cost and our service, which gave us the confidence we needed to make significant changes in our terminal network.”
The solution combined Profit Point’s supply chain design software, Profit NetworkTM, and the consulting team’s supply chain optimization expertise. By leveraging existing enterprise data, Arkema was able to develop an actionable infrastructure plan that meets the business’ strategic objectives.
“This is a classic example of the type of benefits large manufacturers can see when they bring together the right stakeholders and the right process, ” added Ted Schaefer, Director of Logistics and Supply Chain Services at Profit Point. “It reminds me a lot of what my Italian grandmother used to say about cooking, ‘If you choose the best ingredients, you will like the result.”
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 Dow Chemical, Coca-Cola, Lifetech, Logitech and Toyota.
A global chemical company and France’s leading chemicals producer, Arkema is building the future of the chemical industry every day. Deploying a responsible, innovation-based approach, we produce state-of-the-art specialty chemicals that provide customers with practical solutions to such challenges as climate change, access to drinking water, the future of energy, fossil fuel preservation and the need for lighter materials. With operations in more than 40 countries, some 14,000 employees and 10 research centers, Arkema generates annual revenue of $8.3 billion, and holds leadership positions in all its markets with a portfolio of internationally recognized brands.
DC Velocity featured an article entitled A Network Design is Never Done. The article, which included an interview with Profit Point’s Alan Kosansky, touches upon on the trend of large manufacturers to move from designing their supply chain networks once to continuously improving the design to meet customer demand and supplier mix, among other things.
You can read the complete article here.
“Network structure, which determines 75%-80% of total supply chain costs, offers the biggest opportunity to reduce those expenditures.”
A recent study of supply chain activities indicated that as much as 80% of total supply chain costs are determined by the network in place and not by the decisions the supply chain team makes on a daily basis within that network. The cause can be attributed to infrastructure, which significantly determines the types of decisions and degrees of freedom that are available to supply chain decision makers. As a result, many companies have literally stumbled into pitfalls associated with warehouses, distribution centers and sources of supply (manufacturing, supplier locations, etc.) because they lacked thoughtful design.
There is help available for vigilant executives in the form of 10 guidelines to implement necessary cost saving measures. All are applicable whether the company is pursuing a growth strategy or struggling with underutilized assets in a challenging economy. Keeping these guidelines at the forefront of consideration can create opportunities to ease pressures on margin and the bottom line.
1. Network structure, which determines 75%- 80% of total supply chain costs, offers the biggest opportunity to reduce those expenditures.
That’s because when manufacturing and distribution assets are in place, and major transportation contracts are negotiated, actions to improve operations and efficiencies in the supply chain are limited. The time to discover the biggest supply chain improvement opportunities is during assessment or reassessment of the infrastructure in place; e.g. manufacturing capability, raw material sourcing, major transportation lanes, distribution facilities and delivery to customers.
2. Optimize supply chain infrastructure to realize maximal cost savings.
A company’s existing supply chain infrastructure is a primary cause of daily disruptions and short-term challenges. Those companies that experience the smoothest and most profitable operations are the ones who routinely re-evaluate both operations and infrastructure. Those who reevaluate as a matter of procedure tend to become supply chain and profitability leaders. A recurring evaluation of infrastructure should be considered a necessity.
3. Understand the changes that can be impacted.
Change is inevitable, and the response to it will determine a company’s profitability. First assure that the processes and tools are in place to recognize the changes occurring in the supply chain. Then identify and analyze potential courses of actions and communicate the execution plan.
4. Consider technological analysis to make the supply chain decisions.
Spreadsheet analysis can evaluate a potential change in a business plan or supply/demand balance and perhaps project the impact of a given course of action. However when decisions involve multiple products made across multiple manufacturing sites, shipping and distribution point issues while serving thousands of customers, companies need sophisticated tools to effectively consider all the options to assure maximization of every supply chain infrastructure.
5. Modern infrastructure planning requires a collaborative effort.
Good supply chain operations happen because the people in charge of different aspects (sales, manufacturing, logistics, procurement and finance) are effectively communicating by:
- Providing the critical data necessary to make the best overall decisions.
- Understanding how each critical decision \impacts them.
- Informing each department of every decision and the steps they need to implement.
6. The planning process needs to include many different scenarios to ensure a robust solution.
Even with collaboration across all of the stakeholders, the supply chain infrastructure design process depends on forecasts of the future that will not all prove to be accurate; e.g. customer demand, competitors’ actions, cost of raw materials and transportation. Those who recognize the uncertainty of the data that drives their business planning can use supply chain tools to explore different possible futures and evaluate a course of action. That way they can confidently make decisions that will perform well across a wide range of possible futures and position themselves for a positive return.
7. Consider hybrid solutions to ensure low-cost, high level customer service.
Simplified assumptions are quite common during evaluation and analysis of complex supply chain operations. These may cause managers to overlook opportunities that are combinations or hybrids. For example, instead of sourcing 100% of a raw material from a low-cost country, perhaps optimal customer service at lower costs can be achieved by sourcing 80% to the low-cost provider and 20% to a higher cost and more reliable alternate supplier. Another example is demand variation by day of the week, which may warrant different operations on different days. Hybrid solutions are frequently solutions for optimal mix of customer service and cost, however they are often difficult to identify and evaluate.
8. Models and analysis mean nothing without implementation.
A good supply chain infrastructure planning process begins with solid analysis and evaluation of various scenarios to identify an optimal course of action. However, it is not complete without implementation planning, which must address the cultural and organizational issues that too often prevent companies from achieving the gains that have been projected. If there is resistance within the organization to change, it may be necessary to stage the implementation in increments to gain credibility before tackling the more strategic approach.
9. Optimized supply chains minimize inefficiencies.
A good supply chain infrastructure planning process goes beyond elimination of waste to analysis of benefits and tradeoffs among the different drivers of sustainability in the supply chain. This by definition means that you are creating a greener and more sustainable operation. One example is analysis of tradeoffs between profit and other sustainability measures (for example CO2emissions). Using tools to analyze the total impact of different courses of action can optimize decision making to meet the overall objectives.
10. The answer is in the data.
Assure the accuracy of the data, and then present it to the right people (See #5).
Roadmap for the Future
Supply and logistic executives recognize the importance of developing new and improved ways to understand and use the volumes of data to help them find and utilize the best approach. It is incumbent upon them to ensure that each aspect of the operation is fully aligned to business strategy and goals, which is the purpose of these guidelines. They should be considered a roadmap combining sound business management practices with the newest technologies and tools as a path to success.
Alan Kosansky, Ph.D., is president and Ted Schaefer is director of logistics and supply chain services of Profit Point Inc.. Profit Point, based in North Brookfield, Mass., is a provider of supply chain optimization systems providing such services as infrastructure and supply chain planning, scheduling, distribution and warehouse utilization improvement.
North Brookfield, MA (PRWEB) February 4, 2010 — Profit Point, a leading Supply Chain Optimization company, today announced the introduction of Profit Network 4.5, a major upgrade to their award-winning supply chain network design and modeling software. The software update includes a combination of new features and technical enhancements which combine to support richer scenario testing for larger supply chains over a longer time periods.
“With almost 10 years in the field, Profit Network has been put to the test against some of the world’s largest supply chains,” noted Jim Piermarini, Profit Point’s Chief Technology Officer. “But best practices have expanded over time, so decision makers are looking for more integrated and comprehensive modeling solutions.”
Profit Network 4.5, which is used by many Global 2000 companies to model supply chain plans, has been enhanced to integrate better capital planning, greater control over facilities decisions and improve tracking and modeling of sustainability initiatives. The modeling software now includes improved options for integrated capital spending, facilities decisions, natural resource planning and emissions mitigation.
“Ultimately, the number one priority for our customers remains capital planning and return on investments” said Piermarini. “A company’s infrastructure plan will dictate 80% or more of future costs. So, we added several features that help analysts understand the capital impact of decisions to control costs and maximize the long-term logistics benefits.”
The software update also includes several technical enhancements to improve planning for the largest supply chains, over longer periods of time. “We’ve added a new core optimization process into Profit Network 4.5,” stated Piermarini. “Customers will now have 50% more addressable memory capacity, which will yield deeper visibility in to larger networks and the long term tradeoffs that are being modeled.
To learn more about Profit Network and Profit Point’s supply chain software, 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 Dow, The Coca-Cola Company, General Electric, Logitech, Sealed Air, Bridgestone and Toyota.