Making Better Supply Chain Decisions with Total Delivered Cost

Making better supply
chain decisions through

total delivered cost
management
Agenda
Introductions
Who we are
Session objectives
21st annual trends in logistics and transportation study
Total delivered cost
Questions
Page 1
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HPCLC Fall Educational Event

Confidential 2012 Ernst & Young
Introductions
Gary Allen
North
America Logistics Practice Leader
Tony Ross
North
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America Healthcare Supply Chain Leader

Agenda
Introductions
Who we are
Session objectives
Questions
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Ernst & Young has a strong global presence

in Supply Chain and Operations
Global SC&O & Advisory Footprint
Supply Chain Transformation
Asia Pacific
Americas
300 Supply Chain

professionals
8,200 Advisory
professionals
EMEIA
250 Supply Chain

professionals
450 Supply Chain

professionals
3,600 Advisory
professionals
11,200 Advisory
professionals
Supply chain strategy and Operating model

transformation (including TESCM)
Total delivered cost optimization
Supply chain network and global trade flow
optimization
Transportation and logistics optimization
Improving supply chain responsiveness and agility
Improving cash to cash cycle and working capital (incl.
inventory optimization)
Supply chain functional performance improvement
S&OP, Planning, Manufacturing, Logistics, Service
Order to cash performance improvement
Improving supply chain risk management
Improving supply chain sustainability
Procurement Transformation
Global
$22.9b revenue ($4.3b Advisory)

140 countries
152,000 professionals
Advisory
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Assurance
Tax

Transaction
Procurement strategy and operating model

transformation
Advanced strategic sourcing and spend category
management approaches (incl. demand
management)
Procurement advanced hedging and risk
management strategies
Complex commercial contracting and outsourcing
reviews and implementation
Driving improved supplier relationship management
including innovation and development
Procure to pay performance improvement
Improved supplier risk management
Advanced procurement analytics incl. landed cost
models
Procurement performance management and benefits
tracking
Agenda
Introductions
Who we are
Session objectives
Questions
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Session objectives
Major trends affecting logistics and how they affect supply
chain decisions
Perspective on total delivered cost, how companies are
using it today and a road map for you to apply it within
your organization
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Agenda
Introductions
Who we are
Session objectives
Questions
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2012 trends in transportation and logistics study

Background
21st year of the study

Joint research with Dr. Karl Manrodt, Georgia
Southern University; Dr. Mary Holcomb,
University of Tennessee; Ernst & Young;
and Con-way
The 2012 study sample represents

more than
$30.1 billion domestic
$20.5 billion international in logistics
expenditures
1,370
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$50.6 billion is approximately

6.7% of total domestic
transportation spend
respondents from 16 industry sectors

represented this study

2012 study top five megatrends

These top five trends were consistent across all sectors:
Companies are not maximizing their potential
to differentiate service.
Business analytics capabilities need further development

to enable differentiation capabilities.
Increased visibility is needed to build the needed level
of flexibility and to enable differentiation of service.
Closer collaboration with key supply chain members
is needed to increase flexibility.
A deeper understanding of indirect costs are needed
to achieve the desired level of efficiency.
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Differentiated service
Companies are not maximizing their potential
to differentiate service.
Survey participants overwhelmingly agreed that being better than our competitors in terms of service would
significantly improve our competitive position.
While best customers do receive better service, the difference in service levels between this group and average
customers is fairly low.
Average customers reported more service improvements from the previous year than best customers.
1. Being better than our competitors in terms of

service would significantly improve our competitive
position.
2. Innovation in logistics / transportation service
would significantly improve our competitive edge.
3. Our customers consider logistics / transportation
service an important differentiating characteristic that
is just as important as our products.
4. Increasing costs are often used to moderate
logistics / transportation service differentiation.
5. The logistics / transportation service offered by
our company is a barrier to new competition.
6. Our logistics / transportation service allows us to
charge a premium / prestige price to our customers.
Best customers receive better service

1.94
2.58
2.59
3.12
3.85
3.96
0
1
2
3
4
5
Scale: 1 = Strongly agree; 7 = Strongly disagree
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Business intelligence
Business intelligence (analytics) capabilities need further
development to enable differentiation capabilities.
Most commonly shared data with

key customers and suppliers
primarily involves operations.
Business intelligence is not yet a
strategic imperative but driven
primarily by customer contract
requirements.
The top five impediments to
developing robust business
intelligence capabilities are:
Lack of integrated processes

Objectives that vary across
business units
Cost of implementation
Lack of standardized data
Lack of organizational strategy
Predictive modeling and

data mining
38.8%
Meta data management
Advanced analytics
(including on-line analytical
processing)
25.7%
58.9%
37.1%
15.9%
19.6%
15.9% 10.6%14.5%
27.1%
14.5%
21.3%
Not Planned
Planned
Interactive visualization
57.9%
18.2% 12.6%11.2%
Implemented
Completed
Dashboards
Data mining
19.4%
26.4%
20.3%
19.5%
22.0%
24.5%
38.3%
29.5%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%
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Increased visibility
Increased visibility is needed to build the needed level
of flexibility and to enable differentiation of service.
Domestic visibility of the physical flow of goods and products on both the inbound and outbound
sides increased.
Visibility for the remaining points in the supply chain reported no improvement.
International visibility also improved for inbound and outbound transportation. Other parts of the
supply chain halted previous years progress.
Suppliers
Supplier
5.2
Supplier
3.8
Inbound
3.0
Company
2012
2.7
NOTE: 1 = very visible; 7 = not very visible
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Outbound
1.9
Customer
3.6

Collaboration with suppliers
Closer collaboration with key supply chain members
is needed to increase flexibility.
The results show that companies have placed much more effort in sharing information and
collaborating with key customers than they have with key suppliers.
Capacity forecast sharing was near the bottom of the list of primary actions taken by
companies to offset rising transportation costs.
Improved integration of information systems with external supply
chain partners was also one of the least likely initiatives to be taken.
Sharing data (as a collaboration
initiative) has focused on operations
and tactics
If we continue to focus at these
levels, how and when will
collaboration become strategic?
Shipment
status
70%
Commonly shared data

With key customers
Advanced
ship notice
49%
63%
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62%
Production
schedules
37%
Customer
delivery
requirements
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Demand
forecasts
Order
status
68%
Commonly shared data with

key suppliers

Cost to serve
A deeper understanding of indirect costs is
needed to achieve the desired level of efficiency.
Most companies tend to focus on cost of good sold, few companies have the capability to understand their true cost to
serve (CTS).
CTS is often averaged across customers and products in a profitability review. Disaggregating these CTS averages
highlights opportunities to reduce value leakage.
Leading class companies segment CTS at a customer, product, brand or company level and complete the picture by
providing end-to-end supply chain costs.
CTS has recently become an area of focus, and many companies plan to launch CTS initiatives.
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Poll question #1: 21st annual trends in

logistics and transportation
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Agenda
Introductions
Who we are
Session objectives
Questions
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Current business environment

Companies must respond to meet increasing customer* and internal expectations without
increasing their costs
Pressures from various commercial strategies
Enterprise-wide imperative
Leverage global sourcing as a major source

of cost reduction for the company in years to
come
Focus on the product needs of customers
and reduce inventory that is not in high
demand
Monitor inventory movement and receive
automatic alerts to proactively manage
supply chain events and prevent order
failures
Understand the end-toend supply chain costs

and the impact of
changes to the current
network
Understanding impact of supply chain

changes on our bottom line and financial
reports
(*Customer in this narrative is another company or entity buying from a company; customer does not represent the end consumer.)
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Business complexities require a new

solution
Internal and external demands
Misaligned internal objectives
Companies are being squeezed from all sides:
Commercial and supply chain often have misaligned

objectives:
Commercial demanding increased promotional support and

sales incentives
Manufacturing and logistics Increasing service levels while

reducing manufacturing and logistics costs (e.g., delivery, make to
order)
Supply chain aims to minimize costs by eliminating non-value

adding activities and is frustrated when commercial overcommits.
Commercial looks to build volume through differentiated customer

offerings and is frustrated when supply chain fails to deliver orders.
Purchasing internal cost of supply reduction pressures balanced

against increased logistics costs and manufacturing flexibility
Inefficient behavior is rewarded:
Customer behavior directly affects cost and

profitability:
Up to 20% of cost of goods sold (COGS) can be directly affected

by customer behavior (i.e., ordering, planning, logistics).
Connecting customer demands all the way back through

manufacturing and cost of supply is often not well understood.
Companies often return 1.5% to 2% off list price to customers in

efficiency terms that are not conditional and founded on total
delivered cost.
Purchasing is rewarded on material pricing reductions,

manufacturing on production rates and quality, and logistics on
cost and delivery.
Without an understanding of total delivered costs, companies cannot reward efficient behavior or
defend against changes that drive cost.
Enables a fact-based dialogue
Facilitates communications between commercial and supply chain
Requires a detailed understanding of total supply chain costs and profitability to uncover the next generation of cost savings
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What are companies doing?

While most companies have attempted various total cost management initiatives, they tend
to be disparate supply chain activities
Potential activities
Examples
Transportation
optimization
Increase transport efficiency ratios via customer price negotiations and introduction
of logistics terms
Global trade
management
Reduce freight, broker, duty and compliance costs
Network
optimization
Use spare capacity in distribution centers and consider shared warehousing

arrangements
Order management
Identify inefficient order demands and associated costs to drive fact-based

customer discussions
Logistics
outsourcing
Use outside expertise and capabilities to help flex with market and customer
demands
Leading companies integrate all factors across supply chain and commercial
organizations to reward efficient behavior and defend against cost increases.
Efficiency investments conditional and based on a total delivered cost viewpoint.
Total delivered
costs
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Three components of total delivered costs

Total delivered costs encompasses the entire supply chain from source of supply through delivery
to customer.
Supplier
Retailer/
Distributor/
Customer
Manufacturer
Total landed cost
Conversion cost
Cost to serve
Customers continue to struggle to understand profitability and the related impact of balancing
supply chain cost trade-offs and consumer needs across these components.
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Understanding the challenges and insights

for each component is critical
Strategic
Global
How do I optimize my supply

chain costs while balancing
internal and external needs?
Strategic/t
actical
Insight
Global/
regional
Landed costs
How do I optimize my global

sourcing and logistics
network across regions?
Sourcing strategies should

properly account for all indirect
and direct costs
Tactical/
operational
Challenge
Regional/
local
Conversion cost
How do I balance
manufacturing performance
and demand variability?
Small improvements in process

reliability can produce significant
results that make the difference
between profit or loss
Tactical/
operational
Component
Regional/
local
Cost to serve
How do I optimize my
executional flows?
Help sales teams understand

delivery cost economics to build
efficiency into trade terms
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Understand and model operating

scenarios that meet needs while
optimizing supply chain costs
Total delivered cost framework

Models tend to be unique by industry or customer but extend the focus from gross profit to
economic profit, taking into account all the cost elements.
Illustrative
Costs to serve
Secondary
warehousing and distribution:

Inbound material handling
Materials storage
Order assembly
Transportation
Order-to-cash processing costs
Selling costs
Customer working capital costs
Landed and conversion costs

Standard COGS:
Raw/purchased materials
Packaging materials
Variable conversion costs
Fixed conversion costs
Primary logistics
Customs fees, duty, tax
COGS variances:
Purchase price variance
Materials usage variance
Conversion cost variance

Economic
Profit
Gross Profit
Net Sales
Value
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Deals &
Allowances
Gross Sales
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Poll question #2: Total delivered cost framework
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Cost-to-serve capabilities allow companies to balance customer

service improvement with supply chain efficiencies
Along with sales and operations
planning (S&OP), cost-to-serve
provides the basis on which supply
chain and commercial interact. It
enables supply chain to make the
move to become more customer
centric
Cost-to-serve analytics can identify
unprofitable customer trade lanes,
allowing interventions to be made
Understanding cost to serve on a

customer-by-customer basis can
allow more specific promotion
pricing to deliver higher returns
CTS provides transparency of the
true profitability of customers and
products and enables visibility into
supply chain costs across the
business through a variety of lenses
product, customer, brand and
product group
Defining efficient trade terms makes

certain that both the supplier and
customer benefit from
improvements in efficient behavior
Supply chain
and
commercial
interface
Go-tomarket
distribution
strategy
Promotion
pricing and
performance
Efficiency
trade terms
Cost
to
serve
Customer
and product
profitability
Customer
joint value
creation
Customer
service
offering
Operational
continual
improvement
Helps inform any joint customer

initiative so that both parties benefit
from changes
Helps to understand and control the

true cost of service offerings such
as:
Seven-day delivery
Custom pallet requirements
Electronic B2B utilization
Tracking and controlling customer
cost drivers in daily operations can
drive incremental cost and effort
benefits such as:
Working with customers to order
full pallets/full trucks
Increasing percentage of notouch transactions
There can be a 10x cost differential in serving efficient customers versus inefficient customers
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Resulting in benefits across the supply chain and typically

generating upwards of 10% of total cost to serve within the region
Incentivize customers to order full pallet quantities to reduce

case packing ratio through structured pricing and trade terms
Identify inefficient order demands and associated costs in

order to drive fact-based retail discussions
10%-20% of
Contract renegotiation with 3PL provider
budget
Plant
Plant
warehouse
Supplier
DC
Put in place logistics efficiency terms

based on cost to serve to reward efficient
behavior and defend against cost
increases
Make efficiency investments conditional

and based on true cost to serve
Efficient spend
1%-2% off list price
CP company supply chain
Increase transport efficiency ratios via

customer price negotiations and
introduction of logistics terms
Support transport contract renegotiation
Increase average order sizes through

the use of structured logistics trade
terms with tiered pricing reflecting
quantities ordered, leading to reduced
processing volumes
6%-12% of
budget
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Retailer store
shelves
Retailer
RDCs
Retailer supply chain
15%-30% of
budget
Transition customers to electronic order

placement and eliminate inefficient behaviors,
e.g., deductions and queries
Increase average order sizes through the use of

structured logistics trade terms with tiered pricing
reflecting quantities ordered, leading to reduced
processing volumes
Restructure teams to focus on priority customers

Increase efficiencies in how

deliveries are made to
customers through flexibility
in the network, e.g., peak
versus off-peak
6%-12% of
budget
Global consumer products company Cost to serve case study
The business problem

Customer
Initial hypothesis
Two largest retailers
Increased direct deliveries

from plant warehouse to
customer
Two largest retailers
Increase vehicle fill
Four small retailers

with low vehicle fill
Consolidation of volume to
increase vehicle fill
Opportunity
Potential
impact
(% total CTS)
4.3%
1%
0.7%
6%
The operating company has been challenged to significantly

reduce costs during FY12.
Tasked its operating companies with identifying significant cost

reductions. Cost to serve identified as a key enabler to driving savings.
Prior to implementation of the cost to serve solution, they understood
that costs are high and that there is a high volume of internal
movements, but they have no means to quantify this and create a
business case for change.
Approach
Using a cost to serve simulation, they conducted a thorough analysis of
their current cost to serve.
These opportunities were identified as relatively quick wins.
This enabled them to understand exactly where the key cost drivers were
and identify and prioritize potential solutions for further analysis.
Additional opportunities identified how fast- and slow-moving

SKUs are managed within the network.
Initially focusing primarily on their two largest retailers, using the scenario
simulation they quantified the cost and service impact to create a business
case and road map to change.
Benefits identified
Estimated net cost reduction of 6% of total cost to serve through:
Increase in direct flows
Increased vehicle fill
Cost of capital benefit from inventory reduction in supplier DCs
Additional benefits:
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Reduced G&A cost and improved operational efficiency (for supplier

and retailer) due to fewer orders, increased vehicle fill and therefore
fewer vehicles
Landed cost issues and challenges

Global sourcing presents significant challenges that can lead to value leakage,
brand damage, penalties and even jail.
Companies face growing cost, compliance and risk challenges across their global supply chains as they become
stretched in the pursuit of low-cost country sourcing and revenue growth.
Challenges of globalization
Examples
Breaking into new and emerging

markets
Kelloggs Indian breakfast cereal initially failed due to price, positioning and logistics
problems.
Margin pressure and value

leakage
Hidden duties within delivery duty paid (DPP) contracts cost a manufacturer an additional
30% on landed costs
Need to protect brand

reputation
Recalls cost Mattel $40m in 2007 and took $612m off its market capitalization.
Increased cash flow needs of

the global supply chain
A multinationals VAT systems setup did not match its evolving supply chain, leading to
20m of irrecoverable VAT trapped on the balance sheet.
Excessive lead times
Weak controls over third-party distributors led to delays of up to three months in customers
getting orders delivered for this high-tech manufacturer.
Many companies continue to address global sourcing issues in a fragmented, silo-based approach that can further
contribute to these issues. These are just a handful of examples to illustrate why it is important to understand global
trade in an integrated way.
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Landed cost optimization can enhance procurement and supply

chain decision-making by taking a holistic view of the inbound
supply chain costs
Network optimization
Materials and finished goods

sourcing
What is the impact on total landed

cost and total delivered cost?
New product development
Capacity rebalancing
Does the classification, source or

use of import material have
significant indirect tax implications?
Value analysis and engineering
Do indirect tax factors trigger or

nullify cost-saving opportunities?
Landed cost
optimization will allow
procurement, logistics
and manufacturing to
uncover hidden costs.
Product costing and

rationalization
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Are you able to rebalance

production capacity while still
minimizing delivered costs
Make vs. buy (life-cycle cost)
Do the cost variables in your makebuy analysis encompass indirect

tax cost drivers?
Plant rationalization
Do you consider substitutes versus

original? Are your product costing
methods aligned?
Page 28
Is your supply base cost effective,

and can you take advantage of
short-term price opportunities?

Are you considering trade and

indirect tax levers as well as
logistics and conversion costs?
Deploying the appropriate landed cost and network modeling tools

to analyze supply chain costs and trade agreements will help
identify potential opportunities
Utilizing actual ERP data
on materials purchases
and product sales,
combined with logistics
transaction data
Enables improved
decision-making for:
1 Duty cost reduction
Example customer output
Assess use of available

duty regimes and free trade
agreements
2 Sourcing decisions
Compare different sources
in use on a total delivered
cost basis
2 3
3a
Plant rationalization
Assess and check which
plant should supply which
end market
3b
Capacity balancing
Assess and check which
plant should supply which
end market
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Diversified manufacturer Global trade

software implementation case study
Trade preference determination improvement and automation projects generate duty savings between
30% and 60%
A recently completed project yielded the following benefits:
Diversified manufacturing
$8.3B FY09 revenue
6,000
ROI*
First savings
$5,600
Over 600 types of products/ parts

traded across NAFTA and EU
Manual origin qualification and trade
preference determination processes
Annual duties paid in thousands for comparable

volume of trade
achieved in month 5
$850K income
5,000
FY09 US imports: $706M

FY09 US import declaration filings:
6,300 lines (distinct product/
transaction)
4,000
Import FTEs: 2.5
3,000
statement impact in
first 12 months
Savings:
$3M
annually
Cash flow payback
achieved in 20
months
$2,600
Investment
Improved working
2,000
capital
Software cost: $2,800,000
Lower inventory
Hardware cost: $40,000

Process improvement and software
implementation services: $600,000
levels
1,000
Labor efficiencies
Lower brokerage fees
Total: $3,440,000
0
* Assumes a 4 months implementation, cost of
capital 8% and 3 years capital amortization period
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Other benefits
Prior to GTS

After GTS
Lessons learned
Area
Risk
Mitigation plan
Scope of work
and complexity
Project delays through too much data

analysis and scope of effort
BU participation
and buy-in
Depends heavily on BU level

participation and top-down
sponsorship from BU executive
Launch an assessment to confirm

business case and prioritize initiatives
Segment into logical buckets and pilot
one segment in one region
Structure around supply chain
processes; Plan, Buy, Make, Move, Sell
BU participants identified at every level

within the project
Initial buy-in from BU owners
recommended prior to kick-off
Tool: scalability
and alignment
Tools built in this project may not be

in alignment with IT systems and
direction
Involve IT from the beginning to make

sure that activities are aligned with IT
systems and IT strategy
Assignment and
allocation rules:
buy-in
Assignment and allocation rules need

to be defined and bought into across
functions
Participation from BU, sales, finance,

supply chain and operations
Facilitated workshops for buy-in
Data availability
Profitability dashboard and total

delivered cost waterfall, hinges
heavily on data availability
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Initial two weeks of deep-dive on data

availability
Leverage data warehouse if available
Poll question #3: case studies and lessons learned
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Total delivered cost implementation steps

1.
Strategic alignment
Understand business priorities, objectives & goals
Get support from executive management & key functional leaders
2.
Business segmentation
Understand supply chain & customer unique characteristics
Break it down into manageable pieces & identify a pilot to get started
Establish clear definitions & understanding of services
3.
TDC assessment and modeling
Collect, analyze and model scenarios to help prioritize focus areas
Focus on useful and value-driven cost data
4.
Organization collaboration
Gain alignment & proper incentives across all functional areas
Create a cross-functional team with executive sponsorship
5.
System enablement
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Evaluate which tools are right for you & will help sustain benefits

Conclusion
Key industry trends highlight the

importance of service differentiation,
business analytics, visibility,
collaboration and understanding total
costs.
Customer behaviors and
organization factors directly affect
supply chain costs.
TDC encompasses the entire

supply chain from source of supply
through delivery to customer.
Without understanding TDC,
companies cannot reward the right
behavior that drive efficiencies.
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TDC is complex and must be broken

down into bite-size chunks.
Cost-to-serve capabilities allow

companies to balance customer
service improvement with supply
chain efficiencies.
Landed cost optimization allows

procurement, logistics and
manufacturing to uncover hidden
costs.
Successful projects require executive

sponsorship and cross-functional
involvement.
When launching a TDC project, make

sure your strategy is clear and that a
proper assessment is conducted.

Agenda
Introductions
Who we are
Session objectives
Questions
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Thank you!
Gary Allen
Executive Director, Logistics Leader
gary.allen@ey.com
+1 313 628 8639
Tony Ross
Senior Manager, Logistics Practice
tony.ross@ey.com
+1 214 969 8846
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Making better supply

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HPCLC Fall Educational Event

America Logistics Practice Leader

America Healthcare Supply Chain Leader

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HPCLC Fall Educational Event

Ernst & Young has a strong global presence

Supply Chain Transformation

300 Supply Chain

250 Supply Chain

450 Supply Chain

Supply chain strategy and Operating model

$22.9b revenue ($4.3b Advisory)

HPCLC Fall Educational Event

Procurement strategy and operating model

HPCLC Fall Educational Event

HPCLC Fall Educational Event

HPCLC Fall Educational Event

2012 trends in transportation and logistics study

21st year of the study

The 2012 study sample represents

$50.6 billion is approximately

respondents from 16 industry sectors

HPCLC Fall Educational Event

2012 study top five megatrends

Business analytics capabilities need further development

HPCLC Fall Educational Event

2012 study top five megatrends

1. Being better than our competitors in terms of

Best customers receive better service

HPCLC Fall Educational Event

2012 study top five megatrends

Most commonly shared data with

Lack of integrated processes

Predictive modeling and

Meta data management

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%100%

HPCLC Fall Educational Event

2012 study top five megatrends

NOTE: 1 = very visible; 7 = not very visible

HPCLC Fall Educational Event

2012 study top five megatrends

Commonly shared data

HPCLC Fall Educational Event

Commonly shared data with

2012 study top five megatrends

HPCLC Fall Educational Event

Poll question #1: 21st annual trends in

HPCLC Fall Educational Event

HPCLC Fall Educational Event

Current business environment

Leverage global sourcing as a major source

Understand the end-toend supply chain costs

Understanding impact of supply chain

HPCLC Fall Educational Event

Business complexities require a new

Misaligned internal objectives

Companies are being squeezed from all sides:

Commercial and supply chain often have misaligned

Commercial demanding increased promotional support and

Manufacturing and logistics Increasing service levels while