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Warehouse and distribution footprint

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Companies are relocating manufacturing and sourcing to regions with lower labour costs to stay competitive. This affects the efficiency of warehousing and distribution. But which elements, in particular, will be strategically important in the next two years?

Markets are changing – as are customer and service requirements. You may have implemented a new manufacturing and supply chain setup, but customers are asking for more frequent and faster deliveries.

The key to staying competitive is how quickly you can get your products from the warehouse to your customers. This can challenge your operations and calls for a review of your warehouse and distribution setup.

We asked our international clients which themes, within warehousing and distribution, they believe will have the most strategic relevance within the next two years. Here are the top five.

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Warehouse and distribution footprint

  1. 1. VIEWPOINT 2016 Warehouse and distribution footprint Themes within:
  2. 2. 2 Preface THIS VIEWPOINT COVERS THE FOLLOWING THEMES • Network design • Channel control • In-house or 3PL • Re-tender • Cost to serve This viewpoint is about themes within warehouse and distribution footprint – a topic that we at Implement Consulting Group are passionate about, and a topic that we have worked intensively with in collaboration with our clients. We have asked our international clients which themes they believe will have the most strategic relevance within the next two years. The purpose of this booklet is to present our viewpoints on these strategic themes. Furthermore, we want to share some of our knowledge and experience. Enjoy! Note: For more on the process of how to create the warehouse and distribution footprint, please read our viewpoint: “Manufacturing and distribution footprint”.
  3. 3. 3 0 1 2 3 4 5 Supply chain agility Distribution flexibility Total cost of ownership Consolidation Distribution as a profit centre Reverse logistics Re-tendering Network design Differentiated distribution Channel control Cost to serve In- or outsourced logistics We asked our international clients a number of questions, one of which was … Which of the following warehouse and distribution themes has the most strategic relevance to your company within the next two years? ImportanceTheme … so we decided to deep dive into the top 5 themes 1 2 3 4 5 Deselected Selected for deep dive
  4. 4. 4 Defining the warehouse and distribution footprint is complex, but it is all about service customer needs and supporting the flow of finished goods in the value chain Production/ sourcing Seasonal buffer stock 1 Network design: How many warehouses, which roles, and where should they be located? 2 Channel control: Are you designing and orchestrating the services that the customers are being offered? Should you? Or not? 3 In-house or 3PL: Should operations be handled internally or outsourced? 4 Re-tender: Do our 3PL prices correspond to the market prices? 5 Cost to serve: Understanding the true logistics costs provides an insight into which customers are truly profitable Warehouse and distribution footprint Customers Distribution centre Central warehouse Factory warehouse
  5. 5. 5 Redesigning the distribution network is initiated, if the current setup does not meet customer requirements, or if the cost level is too high • The warehouse and distribution setup dictates the service offerings that can be provided • Service, speed and costs are the elements that need to be balanced DISTRIBUTION NETWORK STRUCTURE 1
  6. 6. 6 › Designing the footprint is more than a centre of gravity; exploiting all design options leads to much larger benefits › Forget the current setup – work backwards from the ideal structure › Stick to the concept – planning complexity and broken routines eliminate the upside of logistics › A complete redesign of the warehouse and distribution footprint can be implemented on a 1-2-year horizon What we think …What we hear/see … › 7 out of 10 companies have a footprint that does not match customer requirements or operates on a cost level that is too high › To most companies, logistics costs are a significant driver that easily reaches 5-10% of revenue › Only few companies have succeeded with a multi-/omni-channel setup – many are only talking about it › Companies often overlook the value of redesigning their footprint
  7. 7. 7 + Defining the logistics setup via a centre of gravity alone is not possible; it only provides 10% of the solution. We call the remaining 90% a footprint project WAREHOUSE AND DISTRIBUTION FOOTPRINT PROJECT It is important that the centre of gravity analysis is used as support and inspiration for the footprint project and does not become the solution alone. Establish common starting point and plan process Detailed analyses and baseline mapping Clarify market, consumer and supply chain requirements Formulate design principles and generate footprint scenarios Validate business case and global implementation plan Define 1 Current state 2 Requirements 3 Scenarios 4 Develop 5 Recommendation CENTRE OF GRAVITY 90% 10%
  8. 8. 8 KEY QUESTIONS TO CONSIDER Designing the footprint is a balancing act with multiple dimensions and key questions to consider Lead time Cost Working capital Service offerings Maximising logistics value for customers Number of warehouses/ DCs Outsourcing vs insourcing vs mix Direct shipments from supplier Geographical placement Customs and tax impact Political implications Distribution network structure Services and lead time Order cut off and time slots Role of DC/ warehouse/ stores Where to stock what Customer segmentation Degree of flexibility Own fleet vs flexible fleet arrangements Degree of demand variation Consolidation and critical mass Capacity utilisation and load levelling Operating principles
  9. 9. 9 The number of warehouses is the largest component driving the highest impact on logistics costs and lead time to customers Facility TransportInventory Logistics costs TRADE-OFF BETWEEN LOGISTICS COSTS VS LEAD TIME AND NUMBER OF WAREHOUSES Number of warehouses  Lead timeTotal cost Number of warehouses  Logistics costs  Lead time  Warehouse costs will increase steadily due to efficiency and less economy of scale as more locations are added. 1 Direct costs related to adding another warehouse are an additional 25%. A minor decrease in case of many locations due to cross-shipping possibilities. 2 Transport costs will drop due to shorter last mile distribution to the extent where it affects the utilisation of trucks. 3 The distance going from one to two warehouses will drive lower total costs, but the total cost will increase the more warehouses you add. 4 Lead time will decrease as the number of warehouses increases, however, only to the point where delivery services are optimised. 5
  10. 10. 10 Companies often overestimate the time required to implement parts of the final solution to gain fast improvements IMPLEMENTATION HORIZON Re-tendering Outsourcing Introduce new/optimised services Consolidate two warehouses/DCs Establish new warehouse/DC Complexity Implementation time Route optimisation Flow design 1 month Low High 2 years
  11. 11. 11 CHANNEL CONTROL Supply chain orchestration Being in control of the channel means that you design and orchestrate the services which the customers are being offered • Strategic market position to reduce risk of substitution • Offering value-added services to increase profitability 2
  12. 12. 12 › Take a strategic position, otherwise someone will take it for you › Taking control in an existing setup when someone else is in control is hard; doing it upfront is easy › Some companies can gain strategic advantages from having channel control; others cannot What we think …What we hear/see … › Companies do not know if they are in control › Underestimating the importance of making an active decision regarding who is in control can, at worst, lead to bankruptcy › Only few companies are able to increase profitability by taking control. In most cases, control is taken to reduce risk
  13. 13. 13 The “why” behind the struggle for channel control is typically explained by the strategic position in the market Suppose you are to start a manufacturing company, and you must choose to be either A or B Company A You produce private label articles for a large retailer. The retailer picks up the goods at your factory and handles the distribution. Company B You produce private label articles for a large retailer. Furthermore, you handle the distribution to the retailers’ shops as well as the goods reception. Controlled by retailer Controlled by you • Company A and Company B currently have the same EBIT %. They are both considered healthy businesses. • Please note that controlling the distribution does not mean that you do the distribution. It could be outsourced to a 3PL. Comments • What are your core competencies? And to what extent are our products/services substitutable? Could you be substituted? • What is the strategic importance of the customer (i.e. the retailer in the above example)? And to what extent will the retailer be able to pressure you to lower prices? • How easily will you be able to increase EBIT % in each case? • Since only one can be in control at the same time, the question is whether you will be able to take control? Questions to consider before choosing A or B
  14. 14. 14 When looking at each industry, a typical control pattern emerges DEGREE OF DISTRIBUTION CONTROL Newspaper industry Typically consolidated customer deliveries due to very low margins. Often newspapers establish shared distribution companies. Low High Retailers (without production) Often, the retailers control the distribution to their own shops and supermarkets as well as inbound logistics to be able to change suppliers extremely fast. Retailers (with production) Large brands such as Nike/Adidas/Zebra control the entire supply chain, and the trend is increasing due to e-commerce. Food industry Strategy depends on product characteristics and brand value. Dairy Being able to deliver fresh milk within 24 hours requires specialised trucks to collect the raw milk and distribute the finished products directly from the dairy. Construction materials Most suppliers of construction materials are in control of distribution. In this case, it is typically a strategic decision in order to maintain the customer relation. Pharmaceuticals Specialised competencies within biotech and pharma. The products are often distributed by wholesalers to pharmacies and hospitals. Manufacturing and technology Having control is often down to the volumetric characteristics of the products, i.e. simple cost optimisation. INDUSTRY COMMENTS
  15. 15. 15 Which channels should you control, if any? What is to be gained from controlling the channel? To what extent does your strategy support channel control? What is the industry standard? Market advantages? What is the nature of your products/services? Risk of substitution? Who is currently in control? Suppliers? Customers? What skills are needed to orchestrate the channel? To what extent are the skills available at your company? What is the cost of controlling the channel? Are there any risks associated with taking a step towards control? Decision Question: Should we control channel X?
  16. 16. 16 IN-HOUSE OR 3PL Balancing the advantages of 3PL capabilities and cost structure in order to meet customer logistics requirements vs doing it in-house • Match capacity with demand fluctuation • Select services and/or competencies to be outsourced • CAPEX and operational cost 3
  17. 17. 17 › Deciding whether to outsource or do it in- house is a top management decision with significant CAPEX impact – the decision may be irreversible › Understanding your customers’ true service requirements is essential when building an outsourcing business case › If you have critical mass and stable demand, you can take the margin of the 3PL › 99% of all the services that you and your customers require can be provided by 3PL What we think …What we hear/see … › Companies often insource logistics to reduce risk. On the other hand, outsourcing is used to reach a more variable cost structure › Logistics services are often perceived as a commodity – not a service › Being successful in logistics is truly independent of your core business › No one has fully flexible logistics costs – not even large 3PL
  18. 18. 18 Statistics show that the market is increasingly trending towards strategic outsourcing of logistics 72% of shippers are increasing their use of outsourced logistics, while 23% of shippers report that they are returning to insourcing, at least for some of their logistics activities. 86% of Domestic Fortune 500 companies use 3PL for logistics and supply chain functions. The largest challenge faced by 3PL is capacity, the second is technology investments, and increasing operational costs are only the third largest challenge. 56% of companies are trending towards strategic sourcing, reducing and/or consolidating the number of 3PL they use. Companies rate the services provided by the 3PL as four times more important than costs. Looking at companies, 84% use more than one 3PL in their operational setup.
  19. 19. 19 Market insights show that customer service, flexibility and cost reductions are the primary drivers of strategic outsourcing … 64% Avoiding investment Focus on core business 64% 38% 60% 68% Other Expansion to new markets Operational flexibility Cost reduction Competencies of 3PL 18% 8% 3PL have the required competencies within the logistics area in terms of operation, strategic as well as integration platforms to provide the required services to meet customer demand. In an ever-increasingly agile and competitive market, 3PL have to be flexible and highly customer-oriented. 3PL have the ability to leverage workloads better across their customers and systems to support such demand. Cutting costs is still important for customers. 3PL have the ability to provide a cost structure that is more driven by variable costs to cope with fluctuations combined with the advantages of utilising the setup better across customers driving higher efficiency. If logistics are not the core of the business, outsourcing is a good alternative. Outsourcing will assist customers in reducing logistics challenges in a professional environment where services are available and specific knowledge is easily accessible. Logistics are driven by investments in buildings, equipment, trucks and technology, which influence CAPEX. Outsourcing of logistics services creates the ability to eliminate current investments and avoid new investments. Penetrating new markets include a first phase with low volume and high uncertainty about growth development combined with an insufficient level of knowledge about logistics at market level. All parameters which favour outsourcing. Depending on industry, this includes capacity challenges, head count reductions, access to qualified labour force, learning/training skills required for new area, risk mitigation etc. Degree of importance Perception of customers
  20. 20. 20 … so before you decide to outsource, you need to consider the strategic impact of the decision Decision Cost of services • Transport time • Quality and damage • Value-added services • Etc. Ability to reach high utilisation • Trucks in own fleet • Demand fluctuations over time • Margin of 3PL Avoid investments/ CAPEX • Assets such as buildings, trucks and equipment • Sale and leaseback • 3PL setup: 0 CAPEX Matching corporate strategy • Channel control • Support of e.g. omni-channel setup • Risk Competitive advantage • Special services and technology • Speed of ramp-up in new markets • Service as a product AREA KEY NOTES KEY QUESTIONS • To what degree are our customers willing to pay for logistics services, and which service do they prioritise? • Can we deliver the services within the defined cost level, and/or can we compromise on the quality level? • With the sold volume, can we reach critical mass in order to reach sufficient truck utilisation? • Can we use 3PL as a buffer and then adjust our capacity in such a way that we will always have high utilisation? What would be the price consequences of 3PL? • What is the financial agenda of the company, and is it in line with our owners/shareholders? • If we outsource our warehouse, can we decrease our CAPEX, or could we use sale and leaseback on our premises instead? • Do we want and/or need to use our logistics setup as a competitive advantage? • Can we benefit from large 3PL networks to increase market share and ensure our market position? • Looking 3-5 years ahead, how does our strategy cascade down to logistics? Are there any special requirements that we will need to fulfil? • What risks are we willing to take in order to cost optimise in the short term?
  21. 21. 21 RE-TENDER Ensure market prices of outsourced logistics services by challenging the current setup, contracts and agreements • Describe current state, review requirements for future setup • Plan and conduct tender process with multiple pre-selected 3PL on price and service 4
  22. 22. 22 › 3PL willingness to improve increases dramatically when executing a tender process › When re-tendering, remember to revise your service offerings for your customers › The most cost-efficient setup usually requires more than one 3PL › The 3PL market for warehousing and transport is volatile; therefore, tendering is a proven tool to ensure market cost level › The right cost drivers in 3PL agreements initiate a lower cost level What we think …What we hear/see … › Companies doing frequent re-tendering do not necessarily succeed, simply because focus is on procurement rather than operations › Not many understand the market mechanisms; bringing the right competencies to the tactical game of re-tendering is difficult › Successful re-tender processes are supported by firm preparations; analytical insights, clear service requirements and commercial conditions › In general, a re-tender process can decrease costs by 5-30%
  23. 23. 23 Description: Logistics management: Independent and non- asset-based integrators with the ability to combine own technology, resources and capabilities with 3PL to design, build and operate comprehensive supply chain solutions. Can be advantageous when: • Starting up or in very fast-growing industries combined with low logistics capabilities • Multiple logistics services are required and driven by technology Description: Freight forwarders: Provide an array of logistics services to customers, for selected areas. Sub-contract all or much of the services to specialised transport companies. Can be advantageous when: • Volume spreading across; large geographical area and/or means of transport • Valuable expertise accessible combined with flexible and agile solutions Description: Supply chain management: Logistics services providers who develop, implement and control, preferably in close consultation with the customer, the best possible supply chains or networks. 5PL logistics are often linked to e-com. Can be advantageous when: • The supply chain is considered not business critical to success • Alternative solutions are less attractive Description: Carriers, airlines and trucking companies: An asset-based carrier with specialised sector knowledge. Actually owns the means of transport. Can be advantageous when: • All logistics planning activities are handled internally and considered a differentiator • High volume to support attractiveness of 2PLs Description: Companies’ own equipment: A company or an individual that needs to have cargo transported from A to B by using its own equipment. Can be advantageous when: • Critical mass and low fluctuation to utilise own equipment • Specialised equipment with limited possibilities of synergies through xPLs Re-tendering is becoming more and more complex due to the number of services being handled by the xPLs 1PL 2PL 3PL 4PL 5PL Complexity of re-tender
  24. 24. 24 Obtaining cost reductions via re-tendering is not only a procurement task – understanding the market dynamics and cost drivers are key Cost drivers • The number one factor impacting the success of the re-tender process is defining the cost drivers correctly • A simple tool for quantifying the impact of different cost drivers is to build a simple model to test the consequences of historical data Market mechanisms • From a macro perspective the market for logistics services is strongly driven by global economic… • … however, from a micro perspective some 3PLs can give significant better prices due to their client base and their specific geographical setup Simulation • Building a simple cost model to simulate different prices will help in the selection process • Exploring different rate tables and accepting high prices in some weight bands might be beneficial Services • Introducing new services can trigger a re-tender, often due to a lack of market insight or xPL competencies • Defining and deciding the right service offerings and requirements are necessary before conducting a tender process Price volatility • A re-tender should be carried out every 1-2 years depending on means of transport • Prices can easily change by +/-10% in one year • You can be sure to be contacted by your 3PL, if the prices increase. However, the likelihood of them contacting you if the market prices decline is, not surprisingly, very low Fixed prices and trading • Handling logistics services as a commodity and trade prices on a case-by- case approach is only beneficial for few • Getting fixed prices via a tender is optimal for more than 95% of companies Re-tender
  25. 25. 25 More and more xPLs are investing in technology to create new services, however, we see transparency as the main benefit TECHNOLOGY TRENDS WITH LOGISTICS IMPACT 3D printing Big data Self-driving vehicles Cloud logisticsInternet of Things Robotics and automation Digital identifiers Unmanned aerial vehicles Impact on logistics With all these new technological trends, should you select your 3PL based on their technological readiness and willingness to explore? We believe not. You should select 3PL based on current expertise and their ability to support your operations. What you should consider is their ability to give you control and transparency into their operation. Q A
  26. 26. 26 COST TO SERVE Understanding the true logistics costs associated with the services which the customers are being offered and consume • Differentiated logistics services are equal to different costs • Creating insights into which customers are truly profitable 5
  27. 27. 27 › When providing multiple logistics services, one must understand the true cost to serve › Do not overcomplicate the cost to serve model – take a “roughly right” approach › Sales organisations must be impacted by the true logistics costs to change behaviour › The cost to serve model is an enabler of improving the customer segmentation What we think …What we hear/see … › Companies have little insight into the true logistics costs and often underestimate the importance of creating this insight › Building an exact model is not worth the effort. Often, they end up being “exactly wrong” › The most successful cost to serve models are the ones where the whole organisation understands and trusts the logic
  28. 28. 28 The cost to serve analysis provides answers to a number of questions Cost to serve Segmentation and future service offerings Supply chain tasks, cost drivers and unit costs Where to focus Full cost transparency of service offerings and profitability Menu pricing/full “distribution” cost • Service costs: What are the costs related to the provided service offerings (MTO, MTS, lead time, VAS, VMI)? • Profitability: What is the full profitability of customer segments, products and channels? • To what extent are “products”/customer segments paying for the service of others? • Over-servicing: What are the costs associated with over-servicing? • Activities: What are the supply chain activities and the related total costs? • Cost drivers: What are the most significant cost drivers in the supply chain? And what are the primary cost drivers related to service of products and customer segments? • Unit costs: What are the unit costs of the various supply chain activities? • Improve pricing: Change pricing to achieve profitability of all products and customer segments? • Holistic dialogue: Use full transparency to achieve more holistic dialogues with customers? • Limitation of services: Should services be limited to specific customers or segments? • Full distribution costs: As supplement to full manufacturing costs – to drive customer behaviour? • Differentiate to improve: Will differentiated supply chains provide better overall customer satisfaction and improve the balance between cost, lead time and delivery precision? • Which services: How to segment the value chain, and which service offerings to differentiate? • Potential evaluation: What is the overall potential of supply chain differentiation? • Supply chain improvements: Where should supply chain improvement initiatives be focused?
  29. 29. 29 The cost to serve calculation is based on the key activities that drive costs and is allocated accordingly to each customer order Activities Cost drivers Total number of units of cost drivers Cost objects (e.g. products, customers) Total cost base (general ledger) One fiscal year Direct transfer via cost centresA C B Direct allocation by % Via resources and resource drivers • Allocation of cost to resources (FTE, M2, ?) • Find total # resources • Calculate resource unit cost • Allocate by resource driver split (FTE, M2,?) Main activities identified via process mapping and interviews 1 Distribute cost base to activities3 Understand and select cost drivers for the activities 2 Find total number of units in cost base period 4 Based on transaction data from ERP system or estimated Unit cost by activity Calculate unit cost5 Find number of units by cost object  total cost of cost object 6 Link between products and customers Transactional data linking cost drivers to cost objects (products, customers) Number of units of cost drivers (e.g. # shipments)
  30. 30. 30 The cost to serve model is both an enabler of improving customer segmentation and a tool for the sales organisation to create better contracts Low cost Standard Agile Customers Volume Top 30 customers High delivery frequency Small-sized deliveries Few deliveries/week Medium-sized deliveries STANDARD LOW COST AGILE 1,000 30 200 Customers 70% 25% 5% Volume, CBM 85% 10% 5% Sales, € 80% 15% 5% Logistics cost, € 200 100 400 Logistics costs, €/CBM 100 50 200 Cost index EXAMPLE OF OUTPUT FROM CTS MODEL
  31. 31. Problems can be complicated. Solutions cannot.
  32. 32. Lars Saur Feldstedt Email: lsf@implement.dk Tel: +45 2338 0068 Kenneth V. Olsen Email: kvo@implement.dk Tel: +45 4138 0070 Johannes J. Skibsted Email: jjs@implement.dk Tel: +45 2338 0030
  33. 33. Implementconsultinggroup.com implementconsultinggroup.com/warehouseanddistribution Implement Consulting Group Implement Consulting Group is a leading Scandinavia based management consultancy, specialised in driving strategic transformations with a strong differentiator on “making change happen” – delivering documented Change with Impact. Stalk us on:

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