Our views and articles

Fleet Profiling
By Ian Russell

Fleet profiling is the assessment of the number, location and type of vehicles that is demanded by the distribution profile i.e. location of depots (pick up points), delivery points and volumes. Many companies have already discovered the benefits of scheduling their transport using optimising software.

However, whilst they may be scheduling vehicles, what many people overlook is the impact an inappropriate fleet profile can have on transport cost-effectiveness. The very best scheduling software will only deliver the optimal benefit if the fleet profile has also been optimised. It can only use the vehicles that are available. If those vehicles are not in the right place, or they are of the wrong type, or there are too few or too many of them, the result will be sub-optimal.

On the other hand, many companies do not use scheduling software arguing that it is too expensive or that they can do it better manually. Whether a company utilises scheduling software or not, considerable productivity improvement can be made if the optimal vehicle profile is introduced.

Case study
A recent project entailed assessing the opportunity cost saving for the haulage operation of a major blue chip client.

They do not use optimising software but were aware that their vehicles were not in the right place. This meant that vehicles had to be moved from their nominal base to another place of work on a daily basis. Not only did this waste valuable time each day in transfer travel time but the company was also paying a transfer fee to its hauliers when they operated from a different base. In addition they had just introduced a new business tool which identified the most economic source for each of their product lines. The effect of this was to change the source depot for many product lines which in turn changed the output volumes of nearly all the depots.

An analysis of delivery data was obtained for 2 representative periods, one before the introduction of the sourcing tool and one after. The comparison of the source depot before its introduction and after showed that 41% of product was now being sourced from a different depot to the traditional one. The new data was processed through a number of models using optimising scheduling software which produced an optimal fleet profile. This was compared to the current profile and a "gap" analysis produced. This was discussed with the distribution team and other intelligence taken into account e.g. knowledge of any depot openings or closures, major contracts planned for the near future.

It was calculated that this optimal fleet profile would reduce the transfer of vehicles to other operating bases by 48% thereby saving a considerable amount of money and improving productivity. Armed with this information a migration plan was produced which detailed the individual steps needed to change the fleet profile to the optimum. This company is now negotiating the purchase of scheduling software, primarily to allow the profiling of the fleet to be reviewed on a regular basis.

Profiling can take from a few days to several weeks depending on the size and complexity of the business. Once you have seen the value of this work, you may decide to purchase your own software so that more frequent reviews of the fleet profile can be carried.

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Sales and Operations Planning
By Gerry Cusack

"Don't we already do that?"
"We've been doing that for years!"

When organisations are asked if they operate a "Sales and Operations Planning" process, these are often the initial responses.

When asked, "Do you operate a process owned by the Chief Executive, operating on a monthly cycle, balancing the Demand and Supply of the major product families with a plan signed off by all departments including the senior executive team that provides a "window into the future" for the next 3, 6 to 12 months", the answer will probably be a very different one.

Whilst working with a client recently in the Aggregate Products industry, the introduction of a S&OP process was proposed in order to improve their ability to plan the business. The client produces and distributes raw materials to both its manufacturing facilities and the general market and also distributes finished product.

The business regularly experienced shortages of materials in manufacturing, shortages of transport or transport in the wrong place as there was no visibility of future demand other than orders already on their IT system in a market where orders are confirmed close to delivery date. Frequently, large orders would catch Operations and Distribution unawares. A strong Customer Service ethos would result in costly reactive actions such as short notice hiring of transport so as not to let the customer down. A weekly planning meeting had been set up but only focussed on the detail of the week ahead rather than the "Big Picture" and was a middle management activity.

Sales forecasting was being conducted monthly within the Sales Department but not being shared with Operations and Distribution - does that sound familiar? Indeed, when one Plant Manager was presented with the forecast, he described it as "a revelation". Often, the only warning for operations/distribution of an unusual spike in demand was an informal conversation from a Salesman. The challenge for the business was to use this valuable information to plan its manufacturing, inventory and distribution activities.

The Solution: An S&OP process has been introduced which balances Demand and Supply looking up to 3 months ahead for the main product families. Large specific orders are planned well in advance of the start date with the plans being signed off by the relevant managers and directors. There is now a greater awareness of what's coming at them and time to plan the "big" jobs. Communication and understanding between departments has significantly improved and now everyone is working to an agreed, single plan.

A 10% saving in the cost of order fulfilment has been identified and some delighted customers have seen the benefits of their orders being planned in this way.

The next challenge is to include their suppliers and customers in the process so that the whole Supply Chain can benefit from working collaboratively.

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No Hiding Place
by Tim Knowles

It is interesting how few food manufacturers have a hard measure of the profits they really make from individual customers. An ambient food manufacturer has just installed a customer account profitability (CAP) process. His learning from CAP has already led to changes in the way he invests in account development and the targeting of future promotional spend.

His first achievement was to unbundle the way that 'overhead' expenses were consumed by customers. Transport and warehousing costs for example were directly associated with individual customer orders so that, for example, Sainsbury's insistence on the use of primary consolidation centres directly impacts visible profits generated by trading with Sainsbury.

Once supply chain costs were correctly attributed, the next step was to apply the same principles to national account management, trade marketing, promotional costs and customer service.

Customer service staff have always known, for example, that they spend disproportionate amounts of time dealing with Sainsbury's ordering and supply chain process, compared with Tesco's or Asda's, for example.

This supplier converted the time spent by account into a cost that fairly reflected the resources consumed. Field merchandising support costs had not been accurately attributed. Each time this manufacturer added a source of customer-attributable expense, the water level in the swamp of true CAP revealed further areas for action.

The overall outcome was that the smallest customers who pay the highest net price for a product were so expensive to serve compared with the major retailers that direct trade with them is being renegotiated. Of more strategic interest is the difference in net profits between individual major retailers whose net buying prices are traditionally very similar. The way that supply deals had been struck over many years had created important differences in cost that had never been exposed in the pre-CAP financial process.

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Transparency is the key to happiness
By Tim Knowles

I recently came across a bad example of a warehouse draft contract, which failed the two basic rules of 'fit for purpose' for relationships where the user occupies the bulk of the space in a shed.Those tests are 'mutual transparency' and 'mutual fairness'.

The deal gave the user a totally variable charge based on usage of space and labour. The third party logistics provider (3PL) had sought a minimum occupancy charge by quoting a cost per pallet per week, but with a minimum guarantee of 8,000 pallets. All other charges were either a) RH&D (receipt, handling and despatch) at a cost per pallet received or b) a charge per case picked.

But there were two problems: the total cost was too high and it was unclear where the excess was hidden.

So we stripped out dedicated staff costs and asked for productivity on fork trucks and case picking. Then it became clear that the excess charge was built equally into both RH&D and picking but for different reasons.

RH&D productivity was set at 20 pallets per hour, which is OK for most warehouses. However, the RH&D charge bore no relationship to the resources consumed. Picking productivity had been set for charging purposes at 235 cases an hour where 290 would have been a fair expectation.

We accepted the occupancy charges and the minimum guarantee as we could reconcile a rate of £1.32 per pallet per week against rent, rates, depreciation and IT with a reasonable profit margin. This number was both fair and transparently related to the costs incurred. We accepted dedicated staff costs and paid for them transparently. We then negotiated a rate for RH&D that recovered the costs of hourly-paid staff and equipment rental. For picking we showed the 3PL an example of picking the specific goods and negotiated the rate in line with that productivity.

So was the outcome fair to both parties? Neither got precisely what he thought he wanted at the start, but both agreed the outcome was at least mutually acceptable. Was the outcome transparent to both parties? Undoubtedly so!

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Beware those inflexible contracts
By Tim Knowles

I had a call the other day to be a 'marriage guidance' counsellor for a third party logistics provider (3PL) and a customer who had fallen out over rising contract costs. The moral of the story? If you don't protect contractual relationships against changes in customer demand you could be in trouble.

The contract was a bog standard 'cost plus incentivised management fee'. But picking costs were rising as labour productivity fell and the customer was paying the cost of this through the standard terms of the warehouse contract. Transport costs had also risen but the 3PL was not recovering the increases because of contractual terms that set the charging rate at a fixed cost per case.

There had been an increase in the percentage of picked cases (and a reduction in full pallets) required to fulfil customer orders. As the number of picked cases rose, the cases per pick had fallen and productivity on the pick face fell. On transport the average drop size had fallen by 15% since the start of the contract, so unit costs had risen. With a fixed charge per case, the 3PL was clearly out of pocket.

So we rewrote the contract such that, as demand changed, so did the charging mechanism. The new contract recognised that, if the warehousing task became simpler, the unit costs would fall and vice versa.

For customer delivery we adopted a fixed plus variable charge. It recognised the cost-to-serve curve that shows unit costs rising exponentially as drop size falls, but also accepted that a dedicated fleet is never as commercially flexible as a multi-user solution.

Were both parties happy with the outcome? No! The 3PL no longer had the automatic right to spend money and reclaim it from its customer in warehousing. The customer, conversely, had to recognise that his costs had been driven up by changes in his customers' ordering patterns and further movement in that direction would mean more increases.

While neither party was happy, they had at least avoided a costly divorce and the new contract was fair, mutually robust and perfectly transparent.

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The True Cost of our Journeys
By Tim Knowles

It's roughly 1,000 miles from Northern Spain to the UK Midlands by road. That journey has a current commercial cost of around 70p per case for double stacked pallets of average-sized cases. 'So what?' you may ask. 'It must be fresh produce that can stand the cost.'

Well it isn't. It's a standard, branded, ambient grocery item. The corporation that sells and markets it, needed to satisfy demand in the UK and Spain.

The Spanish investment case was stronger than the UK case and the decision was easy. The alternative of two new production lines, one in the UK and one in Spain, was a non-runner as it doubled the capital investment.

But what will happen to that business case when corporations have to account for their impact on the environment? Each return journey from Spain will use 1,200 litres of fuel. The extra cost of putting production capacity into both countries would have been £12m. The lifetime of the production facility is at least 10 years. If you do a net present value (NPV) on the cash flows over those 10 years, the business case for the decision they took is £2.3m positive compared with the dual investment.

But what if that decision had been examined using 'double' bottom line accounting criteria, using normal criteria plus an environmental component? This company took a decision to invest in Spain based on a discounted cash flow benefit over the life of the investment of £2.3m. Over that same period the extra fuel used will be 7,500,000 litres.

The question is how long it will be before new standards of corporate responsibility, to which many major food companies allegedly subscribe, show this decision for the environmental mistake it really is.

All major food corporations have moved to a pan-European focus factory regime over the last 20 years. They have all used the same, short-sighted criteria for investment that ignore the impact on the environment of the extra distances that are explicit in their decisions. But, once the double bottom line becomes the accounting norm, future decisions of this ilk will be as dead as the fly tipping of hazardous chemicals.

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