Eurofruit SH 2012 lin

The Cost of Cost-cutting in the Fresh Produce Value Chain

Danie Schoeman

18 October 2012

Shifting Seas

Turbulence, Uncertainty & Volatility Requires Resilient Supply Chains

Building Resilient Supply Chains, EPCA Interactive Supply Chain Workshop, Frankfurt, 14 & 15 May 2012

Faced with volatility … supply chains will need global networks, with variable cost models, asset availability, and speed. Responsiveness and flexibility will be key.” - Koert van Wissen, CEO, InterBulkGroup

The Trouble with the Southern Hemisphere is…

Jean-Paul Rodrigue, Maritime Transportation: Drivers for the Shipping and Port Industries, International Transport Forum, 2010

… we’re a bit away from the current action

Jean-Paul Rodrigue, Maritime Transportation: Drivers for the Shipping and Port Industries, International Transport Forum, 2010 based on LSCI data from UNCTAD (2008, 2009)

The Importance of Logistics andSupply Chain in Trade

• The World Bank Logistics Performance Index Report for 2010 states:– “A competitive network of global logistics is the backbone

of international trade”– “Improving logistics performance has become an

important policy objective in recent years because logistics have a major impact on economic activity”

– “The importance of efficient logistics for trade and growth is now widely acknowledged…..better logistics performance is strongly associated with trade expansion, export diversification, ability to attract foreign direct investment and economic growth”

• These sentiments are echoed in the 2012 report

Connecting to Compete 2010, Trade Logistics in the Global Economy, The Logistics Performance Index and Its Indicators, The World Bank, 2010

Top Five Supply Chain Challenges

55%

70%

60%56%

43%

Cost Containment Supply ChainVisibility

Risk Management Customer Intimacy Globalization

The Smarter Supply Chain of the Future - Insights from the Global Chief Supply Chain Officer Study, IBM, 2010

Cost Containment


Supply chains can’t keep pace with cost volatility

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

Supply chain as a revenue growth driver

Compliance programs and internal controls

Integration and visibility (external)

People development

Business performance measurement

Integration and visibility (internal)

Cost reduction

Continuous business/process improvement

Alignment of supply chain and business strategies

% of Respondents

Schematic Representation of the Fresh Fruit Supply Chain

Packer LandsideTransport

Grower/Producer

ColdStore

PortTerminal

FreightCarrier

RegionalW/houses

Distri-bution

Retailer ConsumerPortTerminal

Exporter Importer Transport

Importer Activities (Demand Side)

Exporter Activities (Supply Side)

South African Case Study

Apple 12,5 kg equivalent to Europe in week 14 (Rand Values)

Value Chain Element Rand Value

Retail Selling Price 175.00

Retail Profit 42.00

Efficiency driven SC Costs 48.94

Other SC Costs 38.57

Gross Farm Income 45.49Europe transport; R 4,25

Importer’s commission; R 8,65

Europe logistics; R 13,00

Europe duties; R -

Freight; R 26,88

Insurance; R 0,75

Exporters commission; R 5,10

Port cost; R 2,26

Wharfage; R 0,42

Transport to port; R 2,13

Finance charges & Interest advances; R 1,00

Levies; R 0,30

PPECB/Inspections; R 0,36

Packing materials; R 11,08

Packing charges (Tipping Cost); R

11,33

Based on data from Malcolm C Dodd, “Transport Logistics and the Fruit Export Value Chain”, Post Harvest Innovation Programme

Europe transport; R6,50

Importer’s commission; R7,28

Europe logistics; R5,85

Europe duties; R-

Freight; R13,40

Insurance; R0,75

Exporters commission; R4,00

Port cost; R0,50

Wharfage; R0,16

Transport to port; R3,90

Finance charges & Interest advances; R0,50

Levies; R0,36

PPECB/Inspections; R0,30

Packing materials; R8,60

Packing charges (Tipping Cost); R2,30



Retail Profit 29.25



Gross Farm Income 43.10


Grape 4,5 kg equivalent to Europe in week 52 (Rand Values)


Europe transport; R10,59

Importer’s commission; R5,60

Europe logistics; R13,00

Europe duties; R-Freight; R25,93

Insurance; R0,63 Exporters commission; R5,36

Port cost; R5,00

Wharfage; R0,23

Transport to port; R1,91

Finance charges & Interest advances;

R0,90

Levies; R0,32

PPECB/Inspections; R0,22

Packing materials; R11,08

Packing charges (Tipping Cost); R18,06


Citrus 15 kg equivalent to Europe in week 27 (Rand Values)



Retail Profit 42.97



Gross Farm Income 17.45


South African Case Study –Using Pareto’s 80/20 Principle

Apples Grapes Citrus

Rand Value % of SC Rand Value % of SC Rand Value % of SC

Packing charges (Tipping Cost) 11.33 12.95% 2.30 4.23% 18.06 18.27%

Packing materials 11.08 12.66% 8.60 15.81% 11.08 11.21%

PPECB/Inspections 0.36 0.41% 0.30 0.55% 0.22 0.22%

Levies 0.30 0.34% 0.36 0.66% 0.32 0.32%

Finance charges & Interest advances 1.00 1.14% 0.50 0.92% 0.90 0.91%

Transport to port 2.13 2.43% 3.90 7.17% 1.91 1.93%

Wharfage 0.42 0.48% 0.16 0.29% 0.23 0.23%

Port cost 2.26 2.58% 0.50 0.92% 5.00 5.06%

Exporters commission 5.10 5.83% 4.00 7.35% 5.36 5.42%

Insurance 0.75 0.86% 0.75 1.38% 0.63 0.64%

Freight 26.88 30.72% 13.40 24.63% 25.93 26.24%

Europe duties 0.00 0.00% 0.00 0.00% 0.00 0.00%

Europe logistics 13.00 14.86% 5.85 10.75% 13.00 13.15%

Importer’s commission 8.65 9.88% 7.28 13.38% 5.60 5.67%

Europe transport 4.25 4.86% 6.50 11.95% 10.59 10.72%

Data from Malcolm C Dodd, “Transport Logistics and the Fruit Export Value Chain”, Post Harvest Innovation Programme

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2

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4

5

1

2

3

4

5

6

1

2

3

4

5

An EEE-xtreme EEE-xample to tackleFreight Cost

Efficiency

Economies of Scale

Environment

Shipping Lines try to gain advantages by

Vessel Specifications: Length: 400m Width: 59m Carrying Capacity: 18,000 TEUDraught: 14.5m Container Rows: 23

Maersk to operate largest Container Vessels ever Built (Triple- E Class)

Consequential Interface Issues

0%

4%

8%

12%

16%

20%

0 1 2 3 4 5 6 7 8 9 10

Typical Distribution Pick up (Out-Gate)

0%

4%

8%

12%

16%

20%

10 9 8 7 6 5 4 3 2 1 0 days

days

shar

e p

er d

aysh

are

per

day

Typical Distribution Delivery (In-Gate)

300

350

400

450

500

550

Day1

Day2

Day3

Day4

Day5

Day6

Day7

Ave

rage

Dai

ly G

ate

Vo

lum

e

2x 10,000++ TEU vessel 3x 8.000 TEU vessel

Average

Peak 460

Peak 517

Avg. 424

Peak 488

Peak 464

Day-to-day volatility increased by 80%

Total peak increased by 11%

Ch

ange

of

call

pat

tern

fro

m

tri-

we

ekl

y 8

,00

0 (

4,0

00

mo

ves)

to

b

i-w

ee

kly

10

,00

0 (

6,0

00

mo

ves)

TE

U v

ess

els

Vessel Size Growth creates new Challenges for Gates

Dr. Ing. Felix Kasiske, HPC Hamburg Port Consulting GmbH, Vessel Developments and Implications on Terminal Operations, ACI's Maximising African Port Capacity Summit 2012

Container terminal dimension 9,000 TEU vessel 18,000 TEU vessel Change

Yard peak 1.2 1.36 +13.3%

Yard slots 14 525 16 340 +12.5%

Quay cranes 5 9 +80%

Yard cranes 17 30 +76.5%

Horizontal transport 27 46 +70.4%

Gate dispatches peak hour 54 82 +51.9%

Fewer Vessels Deliver More Boxes per Call …

• Ceteris paribus consideration highlights of the effects of larger vessels replacing smaller ones


Container terminal dimension 9,000 TEU vessel 18,000 TEU vessel Change

Quay crane utilization 59.5% 33.1% -44.4%

Yard crane utilization 46.1% 36.2% -21.5%

Staff 1 1.47 +46.9%

Operational cost/box 1 1.54 +54.2%

Total cost/box 1 1.50 +50.1%

… resulting in Reduced Efficiencies!

• There is a negative impact on terminals and on the total supply chain

• A Tayloristic approach does not work in supply chains – a more holistic, integrated and systemic approach is required


• “Across the board cuts, without understanding where your company’s real profitability lies, results in average performance at best and leaves your organization wide open to failure at worst. That old saying, “When you do average, you get average” really applies in these volatile times.” - Jim Tompkins

• In Visionary/Strategic firms costs are broken into three categories:

The Riddle of Supply Chain Cost Reduction

Category 1: Capital and operating costs

Traditional ongoing expenditures

Category 2: Talent costs

Expenditures for key resources that are

required to operate the business profitably

Category 3: Strategic costs

Expenditures for strategic profit

improvement initiatives

Jim Tompkins, The Riddle of Supply Chain Cost Reduction: Here's a Hint - Cut, Cut, Cut is Not a Strategy, supplychainbrain, 2009

• When times are difficult you can gain competitive advantage by focusing on:

The Riddle is Solved

• “Now you know the answer to the Supply Chain Cost Reduction riddle. It is not about piecemeal cut, cut, cut, and it never will be. The answer to the riddle is an integrated, holistic approach that increases profitability and puts your company in a stronger competitive position.” - Jim Tompkins

Segregating Category 1, 2 and 3 expenditures

Aggressively and intelligently going after Category 1 cost

reduction

Protecting and pursuing Category 2 and 3

expenditures

Jim Tompkins, The Riddle of Supply Chain Cost Reduction: Here's a Hint - Cut, Cut, Cut is Not a Strategy, supplychainbrain, 2009

Avoid Manic Cost-cutting by Building in More Flexibility

• “When it comes to managing costs, companies with top supply chains — those recognized in AMR Research’s Top Supply Chains for 2008 — take a longer-term view. They are moving more quickly toward agile supply chains that allow rapid response to changing market conditions and variable cost structures that ramp up and down with revenues. Flexibility is their antidote for cost volatility.”

• Leading supply chains actively invest in Category 2 and 3 i.e. key resources (talent) that are required to operate the business profitably and strategic profit improvement initiatives

0% 5% 10% 15% 20% 25% 30% 35% 40%

Others

Top supply chains

22%

37%

Extensive adoption of agile supply chain practices


Investing in Supply Chain Value Creation (Category 2 and 3)

Next-generation supply chains: Efficient, fast and tailored; Global Supply Chain Survey 2013; PwC; 2012

It is evident from the survey that leaders achieve excellence and competitive advantage by focusing on differentiating capabilities.

Maximum delivery performance

Sup

ply

ch

ain

va

lue

dri

ver

Sustainability

Complexity management

Minimised costs

Minimised risks

Maximum volume flexibility and

responsiveness

Tax optimisation and efficiency

Val

ue

crea

tio

n

Activated value drivers

Path To Supply Chain Value Creation


Investments in Differentiating Practices of Leaders

Supply chain value driver Top three differentiating practices of leaders

Maximum delivery performance

1. Collaboration with key customers on planning (e.g.effective forecasting)

2. End-to-end supply chain planning and visibility3. Vendor-managed-inventory direct-replenishment model

Minimised costs 1. Best-cost country sourcing2. Differentiated order-to-delivery time3. Differentiated service level, including potential reduction

Maximum volume flexibility and responsiveness

1. Internal capacity flexibility 80%-120%2. Flexible shift models/payment structure3. Regional supply chain set-up

Minimised risks 1. Multiplication of sources and sole-sourcing avoidance2. Regular review of suppliers’ financial risk and mitigation

through risk-sharing partnerships3. Visibility and regular monitoring of main suppliers’

operational indicators


Investments in Differentiating Practices of Leaders

Supply chain value driver Top three differentiating practices of leaders

Complexity management 1. Development of multi-skilled employees to cope with complexity

2. Late-stage product customisation3. Use of distributors and other channel partners

Sustainability 1. Agreement with supply chain partners to adhere to highest ethical standards

2. Responsible supply chain partner footprint and procurement framework

3. Internal carbon footprint optimisation and improvement

Tax optimisation and efficiency 1. Manufacturing and assembly optimisation (toll manufacturing)

2. Localisation of inventory ownership in tax-efficient countries

3. Localisation of procurement organisation in tax-efficient countries (e.g., Singapore, Switzerland, Cayman Islands)

A Framework for Supply Chain Collaboration in the Agri-food Industry

Managing Trust

Supply Chain Collaboration

Managing Power

Designing & Governing SC Activities

Establishing & MaintainingSC Relationships

Managing Dependence

Sharing Risks

Selecting Partner(number of

entries)

Selecting Information

& DataSharing

Techniques &TechnologiesCollaboration

Width(SC activities)

CollaborationDepth

(Strategic, tactical,operational)

Sharing Rewards

Adapted from A. Matopoulos, M. Vlachopoulou, V. Manthou, B. Manos, (2007),"A conceptual framework for supply chain collaboration: empirical evidence from the agri-food industry", Supply Chain Management: An International Journal, Vol. 12 Iss: 3 pp. 177 - 186

Sharing of Real Time Information

Retailer’sstore

Retailer’swarehouse

Manufacturer’swarehouse

Manufacturer’sfactory

Rawmaterials

2-3 days 2-3 days1-2 days

1-2 days 1-2 days1-2 days

1-2 days

1-2 daysTotal: 10-18 days

Total: 4-8 days

Demandspikes250%

Traditionalsupply chain

1-2 days 1-2 days 1-2 days 1-2 daysTotal: 4-8 days

Demand-driven supply chain

The flow of information and products across a hypothetical supply chain

Demandspikes250%

Product flowInformation flow

Real time information – no delay in passing information across the supply chain

Adapted from John Budd, Claudio Knizek, and Robert Tevelson, (2012), “The Demand-Driven Supply Chain: Making It Work and Delivering Results”, bcg.perspectives

• Traditional Information Policy = exchange order information only• Full Information Policy = exploit shared information

The Value of Shared Information

• Implement IT to accelerate and smooth the physical flow of goods through a supply chain

Average Maximum

Numerical Study 2.2% 12.1%

Simulation Model 3.4% 13.8%

Percentage SC Cost Reduction of Full Information Policy vs.Traditional Information Policy

Average

Half Lead Times 21%

Half Batch Sizes 22%

Reduction of lead times and batch sizes due tofaster and cheaper order processing

Gérard P. Cachon, Marshall Fisher, (2000) “Supply Chain Inventory Management and the Value of Shared Information”, Management Science, Vol. 46 no. 8, pp. 1032-1048


Saving due to efficiency driven by Information

policy

Saving due to acceleration and smoothing the physical flow of

goods

R1.07 to R5.92 per carton

R10.27


R6.36


R11.89

FPT Analysis based on data from M.C. Dodd & G.P. Cachon et. al.

Benefits of Investing in Differentiating Supply Chain Practices of Leaders

Gain in earnings per share (EPS) of 50 US cents

5 % increase in return on assets (ROA)

2.5 % gain in profit margin

Next-generation supply chains: Efficient, fast and tailored; Global Supply Chain Survey 2013; PwC; 2012Debra Hofman, Mastering Supply Chain Excellence, AMR Research Executive Spring Conference, June 2004

17 % stronger order fulfilment (with the associated revenue increase)

15 % less inventory

35 % shorter cash-to-cash cycles

Benefits to the Company Benefits to the ShareholdersBased on 10 percent improvement in perfect orders

0

5

10

15

Laggards Average Leaders

4

8

15

Average inventory turns per year

0%

20%

40%

60%

80%

100%


79%89% 96%

Average delivery performance (OTIF)

0%

5%

10%

15%

20%


7%

12%

16%

Average EBIT margin XXXXXXXXXXXXXX

So What is The Cost of Cost Cutting?

• Achieving average performance at best– A profit of 1.8% to 4% less than the Leaders

• Loss of revenue– With an on time in full (OTIF) measure of 7% to 17% less than the Leaders,

there will be a commensurate lag in revenue

• Loss of profits– A profit of 4.3% to 9% less than the Leaders

• Diminished cash flow– With average inventory days of 21 to 67 days more than the Leaders, cash is

tied up in working capital

• Reduced Earnings per Share (EPS)– An EPS of US$ 0.35 to 0.85 less than the Leaders

• Reduced Return on Assets (ROA)– An ROA of 3.5% to 8.5% less than the Leaders

• Closure of the business– When Category 2 & 3 has been cut to such an extend that the business cannot

recover its profitability at all

Can Transport and Logistics Providers Help?

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

Year-over-year incremental benefits

Order accuracy

Order fill rate

Logistics fixed asset reduction

Inventory cost reduction

Logistics cost reduction

% of Respondents

2012 Third-Party Logistics Study, The State of Logistics Outsourcing, Results and Findings of the 16th Annual Study

Yes they can! Shipper respondents experience continued measurable benefits from 3PL services.

Shipper Methods of Finding Partners for Horizontal Supply Chain Collaboration

European Supply Chain Horizontal Collaboration Report (2010)

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%50%

Other

With the help of a carrier

Searching for partners with same carriers

With the help of a consultant or orchestrator

Seeking partners with complementary goods

Being approached by potential partners

Searching for partners that can be trusted

Comparing trade flows & delivery information

Searching for partners with similar goals

Searching for partners with same 3PLs

Searching for partners by industry

With the help of a 3PL or 4PL

3PL /4PL service providers play a major role in supply chain collaboration

Conclusion

• In the Southern Hemisphere we are inextricably connected to global supply chains, purely from our location point of view

• Cost containment is one of the top five supply chain challenges, but it is not the same as cost cutting

• A piecemeal cut, cut, cut approach does not work in supply chains – a more integrated, holistic and systemic approach is required which will ultimately increase profitability

• Leaders in supply chain achieve excellence and competitive advantage by focusing on and investing in differentiating supply chain capabilities (Category 2 and 3), such as flexibility which is their antidote for cost volatility

Conclusion

• Investments in differentiating practices of leaders make them more demand driven, resulting in improved revenue and profitability

• The ultimate cost of cost cutting through a piecemeal cut, cut, cut approach, could mean that you cut yourself out of business

• Suitable logistics providers can help in assisting shippers to continued achievement in measurable benefits, especially in order fulfilment, which is the key driver to demand driven success

Eurofruit SH 2012 lin

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Transcript of Eurofruit SH 2012 lin