2010 should bring a flurry of new acquisitions with many established companies looking to expand product lines and increase growth within the organization.
Of these companies looking to expand through acquisition, raising capital expense to fund the newly acquired business unit will be a challenging experience in ramping-up operations with manufacturing and warehousing distribution.
Many companies will be looking to outside warehousing and distribution ( 3PL’s ) assistance in order to compensate the need to either add-on to a existing building or to reorganize a current floor plan.
It makes perfect sense when acquiring a new business unit to have the flexibility of outside warehousing and distribution. With all the challenges the current organization has with product line simplification, product integrity, customer retention and merging of operations and customer service the 3PL can add much value to the company but lending it’s expertise in distribution challenges.
Having the flexibility and an open working communication with the outside warehouse and distribution facility allows valuable time to evaluate and streamline the newly acquired business unit or product line.
The organization can now grow and nurture the new product line or reduce the number of SKU and not have it interfere with the current core business.
Effectiveness, is key to competing in today’s business environment. Logistics is a process, a supply pipeline which connects you with your vendor/supplier and your customer.
Whether you compete domestically or globally competitors, vendors, suppliers and customers are worldwide.
The significant cost of logistic/distribution effects the entire supply chain. Logistics importance integrates and develops long-lasting alliance is between the vendors/suppliers and customers. Logistics contributes to a competitive advantage, viewed as a comprehensive process objective, making your product more competitive in the global marketplace.
Ask yourself how does your business unit measure up? Is your logistic/distribution network competitive? Does your current logistics/distribution network meet the requirements of your customer? Most importantly is it currently effective?
To summarize, a formal logistic program will create a competitive advantage for your business unit.
Service and cost benefits can distinguish you from your competitors.
A formal logistic network program will enhance your status as a supplier domestically and more importantly in the global network.
Have you ever considered taking the air or reconfiguring your current packaging?
Many companies do not take the time to analyze their current packaging of finished product once the product has been prepared for the end-user.
Many times I have walked through distribution warehouse centers and simply picked up a master carton of blister carded product and gave it a real good shake it’s amazing how much wasted space is in that carton.
Think about it, air probably makes up 10 to 15% of the carton contents along with the blister carded product and serves absolutely no purpose other than taking up excess space.
Multiply that carton by how many other cartons are stored on that skid with the 10 to 15% of excess air contained in the package and overall you may have 75% product 25% air stacked in a single bin location.
Excess air in packaging results in higher warehouse storage costs, increased classification of product for carrier tender equals higher transportation costs, plus out of spec carton configurations results in higher component costs.
In the grocery industry many consumers will start seeing new package configurations for many of their favorite cereals and snacks, manufacturers of these products are developing ways of reducing size and packaging costs by reconfiguring packaging and ensuring product integrity.
It is important for manufacturing to periodically review and evaluate current packaging of their product, in order to determine if costs and distribution in transportation are being maximized and are not storing excess air in the packaging.
More companies are looking at centralized distribution and servicing their customer base in a timely manner in order to control costs, control inventory overhead and to improve overall customer service.
Centralized distribution sometimes has its own challenges and issues based on schedules, inventory and transportation network.
Other factors that should be considered is the size of the of the distribution center, the layout of the facility and capabilities of handling many more multiple shipments on a daily basis can result in many more LTL carriers.
Zone distribution to major market zones can eliminate much of the congestion and the handling of freight multiple times elevating issues with shortages, damages, and non-timely deliveries.
It is important to identify major market demographics pertaining to customer base, product distribution, field sales force and capabilities of end users and master distributors.
A major candle manufacturer based in the United States was faced with major issues such as damages, lost shipments, inventory shortages and untimely deliveries.
By developing major market zones utilizing 80/20, the manufacturer was able to overcome many of the above challenges and issues by driving carrier tender to specified market zones based on schedules ultimately utilizing local end-user delivery suppliers.
Order to Cash (OTC) outsourcing has typically been on CFOs’ lists of “potential outsourcing opportunities,” but it has not risen to the top of the list until recently. TPI is seeing more interest and activity in OTC outsourcing this year in spite of – and possibly because of – the depressed economy.
Several emerging trends in OTC are catching CFOs’ attention and changing their priorities on that list of outsourcing opportunities. These are the Top 5 reasons why OTC is growing in popularity:
The shift from function-based to process-based (“end-to-end”) outsourcing. In the past, OTC outsourcing solutions have focused on just two or three functions within the OTC process (e.g., credit, collections or cash applications). But in the past few years, sourcing service providers have invested in developing “end-to-end” OTC capabilities that offer integrated solutions (tools and processes) across order management, credit management, invoicing, cash application, dispute resolution and reconciliation and analysis. These end-to- end capabilities drive higher efficiency in transaction processing as well as resolution of order entry mistakes, pricing disputes, billing errors and credit or collection issues. The benefits of transparency and accountability that come with service provider investments in end-to-end capabilities are paying off with increased buyer interest and confidence.
Shifting buyer interest from offshoring to transformation. The “lift and shift” model has been the backbone of most OTC solutions and has driven cost savings for most companies. Most service providers have established networks of offshore centers with the technology and telecommunications infrastructures that are necessary to support customer requirements. Separate from and beyond offshore capabilities, though, some service providers have made investments to quickly broaden their offerings by making strategic acquisitions of niche companies with deep OTC capabilities. These providers have combined the proprietary tools and methodologies from those acquisitions with their other service delivery resources and capabilities to provide robust OTC transformation capabilities to their customers. The providers are offering much more than just “labor arbitrage” and are differentiating themselves from their competitors in the early stages of customers’ RFI/RFP processes.
Increased focus on customer service requirements. Buyer concerns with service provider offshore capabilities in customer service and support are not uncommon, given the language barriers and timing in getting issues resolved. This sensitivity is particularly high for companies that require higher levels of customer communication and contact. Given these sensitivities, TPI is seeing situations where customers are choosing onshore and nearshore solutions to gain better support and higher customer satisfaction (internal and external customers) by foregoing higher-level cost savings from offshore options.
Shift from customized to standardized OTC solutions. As part of the drive to “end-to-end” OTC outsourcing solutions, service providers are leveraging their investments in technology by pushing to their customer bases standardized tools and methodologies that require lower costs to implement and maintain. This trend will likely take hold in the more transaction-based areas of invoicing and cash applications, while demand for more complex and customer-facing activities (such as order management) will still require higher solution customization.
Focus on cash flow. Companies are evaluating OTC outsourcing opportunities with several goals in mind, including obtaining cost savings while balancing customer support and satisfaction requirements. A benefit that has always been part of the discussion is cash flow. Service provider capabilities to reduce days sales outstanding, to improve receivable agings or to reduce receivable write-offs have typically been a part of the “benefits” discussion. But with demonstrated end-to-end capabilities by service providers, the cash flow benefits are even better, more visible and more attributable to the changes and improvements brought by service providers’ OTC solutions.
The net effect of these five trends is that OTC is not just one of the topics on CFOs’ lists of outsourcing opportunities . . . it is quickly becoming the area of focus.
TPI’s CFO Services experts can help your organization produce an objective assessment of your current sourcing strategy and develop a roadmap for your future strategy with objective, risk-balanced, and forward-oriented solutions for maximizing value during economic uncertainty.
In Part 1 of this post, I discussed some of the shortcomings to rely on a Proof of Concept as the main decision point to select a particular suppliers Spend Visibility solution. If you decide a POC is required as part of your selection process, below are some suggestions as to how to most effectively conduct the POC as part of your overall selection process.
Some “Pros” of Conducting a Spend Data Classification Proof of Concept
Allows sourcing people to throw data over the wall and see who responds.
Enables companies to see their data reflected in vendor Spend tools, and companies can see how they would interact with their own data.
Provides an idea of the vendor classification capabilities to a standard classification schema, like UNSPSC.
A Better Process
Don’t do a POC too early in the selection process, and as a key selection event focus, or you may miss larger approaches to Spend Data Classification that better match your company sourcing programs. Not just UNSPSC classification, but also sourcing category classification that will support your organizations sourcing programs.
When you provide company data, focus on areas that may provide new opportunity, which helps everyone focus on the best job possible (savings opportunities are good).
Do a POC to see your data in the vendor tool and prove it out, but define a realistic (but meaningful) sized data set.
Focus on the vendor classifying to your Sourcing category structure, not just UNSPSC or other.
Allow for a hands-on workshop to review the classification process and see full blown vendor capabilities for the long haul. It is through these workshops that enable you to really see what goes on “behind the scenes” and separate out fact from fiction.
Outsourcing governance is the business of ensuring that all of the potential value of an outsourcing contract is actually achieved. During our 20 years of helping companies maximize the value of their outsourcing contracts, we have identified these Top 5 observations related to the mission-critical governance function:
Outsourcing governance is still maturing, and companies continue to have significant difficulty harvesting the value from their contracts. Outsourcing as an industry is mature, yet clients worldwide are still struggling to effectively manage their outsourcing agreements. In a study of companies that had recently outsourced to multiple service providers, 84 percent of respondents stated that they did not have what they regard as a mature governance model (Financial Times, July 2009). Additional research by the International Association of Outsourcing Professionals (IAOP) cites that, “. . . 63 percent of companies surveyed believe they lose an average of 25 percent of contract value due to poor governance.” And TPI’s own research indicates that between 5 and 30 percent of the expected value of outsourcing transactions is lost through ineffective governance. In a typical outsourcing agreement this equates to roughly US$600,000 per year of lost value for every US$10 million in annual contract value under management.
Early, comprehensive governance planning and design is critical to long-term success. Implementing an outsourcing governance organization takes time, and the first 18 months of any outsourcing agreement is critical. Without an effective outsourcing governance group in place early to guide the relationship, value leakage is inevitable. Most companies begin this process too late, thus their ability to manage the contract in those critical first few months is compromised.
Outsourcing takes more than evaluating service provider performance to be successful. In the early days of outsourcing governance, clients limited their activities to reviewing service level data generated by the service provider and checking their invoices for accuracy. Today’s best run outsourcing governance groups understand the interdependencies between all of the governance processes across four key disciplines – performance, financial, contract and relationship management. They constantly measure the effectiveness of the key governance processes and identify opportunities for continuous improvement.
Separating decision making and relationship activities from supporting governance tasks unlocks new levels of efficiency. As is the case with most back-office functions, there are aspects of outsourcing governance that can be performed by a third party more effectively and efficiently than can be accomplished in-house. TPI advocates that clients never abdicate responsibility for decision making and that they should maintain the relationship with their service providers. However, there are many support functions that can be considered for outsourcing (i.e., performance analysis, invoice verification, and contract administration [including management of the governance library]). TPI is delivering these services to clients today through a combination of onsite and offshore support models.
Technology enablement is becoming a necessity for efficient outsourcing governance. What started out as a set of executive dashboards summarizing performance and financial data has evolved into the need for higher-order management tools. Today’s outsourcing governance organizations require integrated tools that go beyond dashboards to detailed reporting capabilities; automated workflows for key governance processes; automated data feeds from service providers and a comprehensive governance library.
While many aspects of the outsourcing industry are quite mature, for many reasons clients’ abilities to effectively manage their service provider relationships remains an area where significant opportunity exists to reduce value leakage and maximize beneficial results.
In today’s world of vendor selection for company Spend Analysis needs, the process “du jour” is to have the vendor conduct a free “Proof of Concept” (POC), Pilot, or classification test. Increasingly, this selection process is based on older standards for Spend data classification, and has become an incomplete test of a long term, successful Spend Analysis and larger “Spend Visibility solution” for your company’s Sourcing programs. Classifying data in some manner, which is an important step in ultimately finding cost savings, may be testing the size of a vendor’s pre-sales group, and may not be at all reflective of many other very important and critical capabilities that will make your company find and manage larger cost savings over time.
Some “Cons” and Missing Links
Usually a POC is done in a short time-frame; classifications are to UNSPSC, with minimal company sourcing categories and programs information.
How easy is it for a vendor to provide a good end-result, but hide difficulties and secrets, by having numerous resources put on the project (pre-sales people)? How was the classification really accomplished? The “how” will matter much more over time for your company’s on-going sourcing need.
Conducting a POC classification to UNSPSC does not test the ability to how a vendor can “roll-up” to the company’s sourcing categories, and how the classification can support the company’s strategic sourcing programs. Data classification must ultimately end up in rolled-up sourcing categories, and then be managed from there (category management – another post).
AI isn’t BI. Artificial intelligence works to a standard, like UNSPSC. But UNSPSC is being used less and less, as it is difficult to source from UNSPSC codes. If UNSPSC is not used to source, why “auto class” to it? A company needs real business intelligence specific to their sourcing programs, which of course is different from company to company, and is not conducive to AI.
Auto classification isn’t cutting it – How can “auto classification” be intelligent to a company’s sourcing categories, if every company’s taxonomy is different at a detail level?
Where in the process are you able to view the feedback and control mechanisms to refine data accuracy? You don’t want to discover problems in the months ahead, when you do more detailed sourcing projects.
You don’t really see the speed – to accomplish data classification specific to your business needs quickly and easily.
You don’t see transparency of your data – where it is, where it will be, and what happens to it.
How does this position your company for a real implementation (pre-sales people won’t be implementing)?
How does this show structure and repeatability for future refreshes of data?
Usually a POC does not incorporate new company data collection capabilities for advanced Spend Analytics, which will happen over time as the company matures.
Usually a POC does not focus on reporting, opportunity assessment, Spend measurements, and compliance capabilities.
In Part 2 I will discuss the benefits of doing a “Proof of Concept” and how to do it in the most optimal way.
What’s a buying/leveraging group?
A buying group is a collection of buyers that aggregate their demand into a single ‘account’ and negotiate with a commercial carrier/s for better prices and/or improved services and more importantly a “Known name” in the industry. The group of buyers should be organized around an industry sector or geographic region.
How do buying/leveraging groups work?
A group is usually formed when an individual or business decides use bulk buying tactics for transportation services. Once a sufficient group of customers is formed, the guaranteed customer base is used to negotiate volume discounts with service providers and carriers.
What are the advantages?
Buying groups are low risk and require little or no investment and the groups don’t have to be physically co-located just share the same “common goal.”
What are the drawbacks?
Buying groups depend on a guaranteed level of spend and are therefore at risk of being undermined by carriers offering the larger companies in the group separate deals (known as ‘cherry picking’) the group must also be accountable and be geared towards the 80.
Summarize:
The buying group or leveraging group is making a commitment to each other business unit to share information and a “guaranteed” piece of the business. “Commitment” is the largest most important piece of the organization and must be maintained and monitored on a regular basis and each business unit must have a say in each and every move.
Buying groups can grow expeditiously to encompass other units….. all geared to the “common goal.”
“America’s needs move by truck”…it is a true statement always has been and always will be. The transportation industry is faced with tremendous “issues” and “challenges” that are mounting up by the week.
Fuel, capacity, equipment, insurance, regulations, contracts, unions, economy downturn, personnel, competition, technology etc. etc. are just to name a few issues that the industry is facing.
When fuel reached $4.00 per gallon last summer of 2008 each increment of .05 increases put out approx. 1,000 pieces of equipment per month nation wide.
Face it, there are still too many carriers and carrier competition out in the industry, coupled with lack of tonnage tender carriers will be forced in to pricing themselves out of business.
Right now many service providers who either have experienced this situation many years back or just want to remain in the fight when the economy turns are walking away from non-profitable accounts and “retiring” equipment to save on insurance/usage/wage costs.
LTL revenue for the larger national and multi-regional carriers for the second quarter of 2009 is down a whopping 33% over the same time period in 2008.
The pricing wars are incredible….I can’t remember seeing this much pricing activity and “low balling” and “back selling” the competition in the last 20 years. Carriers are targeting other carriers in order to gain “market share” even though their operating revenue on shipments skyrockets to over 150%……it’s just plain crazy!
The inter-modal industry has capacity issues also, there are back haul challenges, imbalance in equipment plus the LTL carrier union dictates as to what percentage of freight may travel by rail.
In the LTL market there will be absorptions and mergers taking place and the strong possibility of several larger service provider companies downsizing dramatically or closing up shop during the first quarter of 2010.
The pricing wars will end abruptly, when or who knows but rest assured when they end shippers will be faced with major issues one being potential double digit price increases, availability of equipment and choices in the industry.
The transportation industry is going to change big time in the not to distant future…be ready for the shock of a lifetime from both a pricing and availability perspective… the only one that will be paying is the customer…shippers have had their free ride it will be time to pay up!
Many manufacturers are willing to work with suppliers and customers, and meet their logistical and distribution needs or requirements. After all, good practices increase efficiency and competitiveness, and save money. Furthermore, assisting customer and supplier needs usually means continued business.
On the other hand, the different set of requirements from each major supplier or customer may prove unattractive or overwhelming to manufacturers. Some smaller even middle sized suppliers and customers may not be able to devote the necessary resources on their own, to be able to implement necessary changes and to realize “potential” cost savings.
As a manufacturer interested in the “survival” or future “positioning” of your supply chain, be ready to actively participate in the supplier’s and customer’s efforts by investing time, resources and other assistance.
Some examples of assistance to suppliers and customers include providing access to tools, information, or programs that your company has had success with. The offering of training and mentorship from your staff or if your currently too lean at your business unit….implement through the assistance of a third-party consultant and being as available a resource as possible to key suppliers and customers when needed.
Your business is only as good as your long term “loyal” suppliers/customers… in this tough economy identifying new “opportunities” could spell the difference between “success” and “failure.”
Inventory optimization and transportation share a common thread when balancing and justifying either enters the scene. No matter how the replenishment was decided, eventually what has been ordered needs to be moved from the suppliers to the manufacturer’s business unit location or drop shipped directly to the end-user.
Many business units operate under “just in time” manufacturing guidelines and on-hand inventory is a major concern when justifying inventory cost vs. the actual transportation spend.
So many business units have inventory whether (raw material or product components) that carry very low inventory carrying costs but based on either their commodity class, weight, usage, cubic capacity or origin location has impacted and may drive up the transportation spend.
By increasing order size and purchasing full truckload quantities (many suppliers have special pricing in place for truckload purchases) and comparing the actual carrying cost of the inventory vs. the mode of transportation, the business unit may have an overall savings with inventory and the transportation cost.
Of course a lot of variables need to be addressed and the capability of adding additional inventory on the business unit floor must be clearly defined, but if analyzed and optimized correctly it may well end up as a “slam dunk” for savings with inventory and transportation.
Transportation costs when implemented correctly reduce the (COGS, cost of goods sold). It directly impacts the profitability or margin, most important profitability directly shows up in the bottom line, and provides extra cash for any other priorities perhaps low value inventory.
A large portion of companies operate in the blind when it comes to negotiating transportation/rule contracts because they leave the negotiating process in the hands of a Traffic Manager, Purchasing Agent or Cost Account who may have little or no understanding of the company’s goals beyond cost containment.
Those companies that seek to elevate their Transportation Management Department by integrating it into a larger logistics-oriented or “leveraged buying group” strategy find that unless their transportation negotiators actually worked for an asset based carrier, they only see and hear an outsider’s perspective on whether they are getting the best price /service. In the game of negotiating transportation contracts, knowledge is power. The more you know about your carrier’s cost and pricing practices, the better you can negotiate a fair price.
Understanding cost drivers from a business unit perspective is only half of “freight negotiations” the other half is understanding a service providers cost.
Some of a major service provider’s cost that need to be clearly defined and understood by the shipper are:
Minutes of down time at origin and destination
Cubic capacity of shipments
Handling units
Load ability
Density on the run
Claims ratio
Break bulk cost
Lane balance and imbalance
Miles between stops
Fixed cost
Sales personnel
Negotiating freight costs is an element of the micro-logistics component called transportation. Utilizing cost accounting principles and assigning an appropriate and relevant cost will facilitate “freight cost negotiations” and satisfy the need for meaningful and proper freight rates and charges for your business.
Be ready to understand the entire impact of “freight negotiation” not only from a shipper’s perspective but also from a carrier’s needs and drive for more “balanced” negotiations and ultimately agreements.
Why are inbound shipments unique? It’s because companies don’t usually have the same kinds of controls over them as they do for their outbound shipments. In fact, many companies pay very little attention to this critical part of their business. When you leave shipping choices up to your vendors, you really have no control over the inflow of your goods and materials, which can lead to production delays, stock shortages, late deliveries, unhappy customers, and higher costs for your company.
There is no such thing as “Free Freight”! Vendors often reap extra profits for themselves by building excess freight and handling charges into their delivered, prepay-and-add, and “bundled” product prices. And, when they do negotiate reduced freight rates for themselves, they usually don’t pass the savings on to their customers. If your purchases are made on a freight collect basis, you may not be effectively leveraging your own company’s buying power to get the lowest freight rates possible.
You are the customer and you have the right to determine the freight terms and shipping arrangements that are best for you. Evaluation should be performed on your current terms and arrangements, your shipment volumes, and your alternatives to determine the purchasing terms that are best for your company. Remember…”leverage” is the key term to optimize your distribution network.
How can an organization eliminate or reduce waste and increase speed in their supply chain? One answer is to replace warehouses and/or manufacturing locations with “cross-dock facilities” or “landing pads.”
Tremendous pressure of global competition and just- in- time operations in the marketplace has spurred many manufacturers to adopt a lean production philosophy–and a lean supply chain that supports that philosophy. An important element in the identification and design of such supply chains is an effective line-haul- cross-docking-end user operation.
Cross docking is defined as: the preparation of inventory/goods on incoming shipments so that they can be easily sorted at a terminal or warehouse or “landing pad” for outgoing shipments based on final destination to end user or distributor. The items are line-hauled cleared as one shipment then moved from the incoming-vehicle docking point to the outgoing-vehicle docking point then ultimately to the end user or distributor.
Example: Business units headquartered in either Canada or the U.S. who are located along or within certain miles ( ie: within 500 miles ) from the border should consider line haul – to cross dock facility – to end user. Many companies manufacture product in both the U.S. and in Canada duplicating the effort, sourcing raw material, components from same suppliers and adding endless inventory to the bottom line.
As we move to be more effective and cost conscious more and more companies have taken distribution and cross docking to another step, by eliminating their current across border manufacturing and warehouse facilities. Thus, securing product integrity and reducing major overhead expenses such as buildings, maintenance and labor costs while servicing the end user through “seamless” distribution.
Note that not only “outbound” shipments can be cross docked but “inbound” raw material and supplier components can be handled in this manner resulting in a very cost effective and controlled distribution environment.
Fact… 85% of most U.S. companies don’t have the time or the resources to effectively analyze their current transportation network and design a plan for corrective action, or have a formal logistic/distribution network in place. There are other ways of distribution and the movement of goods geared to customer satisfaction.
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