Strategic Inbound Optimization - LeanLogistics

STRATEGIC INBOUND OPTIMIZATION: LINK COSTS/EVENTS FOR IMPROVED P&L August, 2014  Bob Heaney, Research Director Supply Chain and Retail Practices  Bryan Ball, Vice President and Group Director, Supply Chain, Operations and Retail Practices

Report Highlights p3 Cost-to-Serve (CTS) involves linking financial costs and logistics activities together in order to enable proper allocations to products/customers /channels

p5 Challenges to inbound visibility and costing: It is tough to segment an inbound shipment to allocate costs by customer or down to product or product groups ‒ even if all the shipment costs are known

p10 Lane and rate analysis – the value lies in looking at both sides of the equation for the inbound/outbound decisions

This paper will examine the challenges that companies are facing, and the capabilities they have in place, to tie logistics costs with inbound-to-outbound events ‒ a critical need in order to effectively segment their costs by product/customer for accurate ROI intelligence on inbound-to-outbond across a multichannel customer environment.

p14 The value in getting to a true cost-toserve model will encompass trade, transport, rate and lane analysis, and synchronization from raw materials through to end consumer delivery

2 61% of companies profess the ability to allocate and fulfill a specific customer order and deliver it straight to the home address. But without understanding the incremental added costs of retail unit pick/pack or expedited home/ parcel delivery, it may be that some of the new channels, may not be profitable under some customer/product combinations.

Strategic Inbound Optimization: Linking Costs and Events for Improved P&L

In our recent visibility report, Supply Chain Visibility and Segmentation: Control Tower Approach, we identified that 85% of survey respondents indicate that they plan to increase their current level of end-to-end supply chain visibility. There are some key underlying reasons to increase visibility, besides the obvious issues of eliminating surprises and disruptions. With better insights, companies can begin to tie logistics costs with events in order to better segment costs, and more accurately allocate them to products and customers across inbound and outbound activities. Why is this important? As the number of channels and customers increases due to B2B and B2C convergence and all-channel eCommerce, the ability to quickly determine the profitability for the new logistics channels and customers within those channels becomes increasingly difficult. 61% of companies profess the ability to allocate and fulfill a specific customer order and deliver it straight to the end residential address. However, even though they may fulfill the order, without understanding the incremental added costs due to a “unit pick/pack” or expedited home/parcel delivery, it may well be that while profitable in some customer instances, they are not profitable under other customer/product combinations. Indeed, in certain cases, this knowledge could lead to the decision to forgo a channel or customer. Companies need to know if each specific channel and inventory/fulfillment stream is profitable (or not) in order to make decisions on pricing, inventory placement or transport decisions, and to look for further cost reductions to optimize their margins. If a company is blind to costs or events, particularly on the inbound side, which is not always under their control, how do they segment or improve them? Best-in-Class visibility provides a view of the events and activities as well as costs. One key goal of Strategic Inbound Optimization is tying costs/rate and events

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together in order to segment costs and activities across each combination of customer, product, and logistics flows. This paper will examine the ability companies have to do this and the challenges that need to be addressed in order to improve their capabilities as they take on this challenge to first segment their costs effectively, and to then provide accurate profit and loss (P&L) intelligence to navigate the new omni-channel landscape.

Inbound is often the first blind spot in CTS modeling, since costs and inventory are typically not tied to a customer or channel at that level in the supply chain.

Strategic Inbound: Linking Cost and Events Companies face a growing challenge posed by any "Cost-toServe" (CTS) or segmentation strategy ‒ how to link financial costs and logistics activities together, in order to enable proper allocations to products/customers/channels. Linking costs with events is highly correlated to superior performance across retail, wholesale and ecommerce segments as the lines between them become more blurred. Figure 1 features some of the capabilities for companies to consider on their journey toward supply chain segmentation and an accurate cost-to-serve (CTS) model. They provide a comprehensive view of how a visibility solution provides event and cost information. They also include the connections that must be considered to harness and turn this mountain of inbound-to-outbound data into supply chain intelligence for strategic optimization and CTS models. Inbound is often the first blind spot in CTS modeling, since costs and inventory are typically not tied to a customer or channel at that level in the supply chain. Segmentation and optimization first require visibility on inbound, which is a big cost and volume category, in terms of logistics/transport/trade as well as product and inventory related costs.

New Multi-Channel Logistics Trends across B2B & B2C companies Of All respondents: • 61% Shipping Direct-toConsumer • 60% Shipping to or through a Traditional Distribution Center • 56% Shipping through Vendor DC bypass, 3PL or eFulfillment provider • 53% Shipping through a break-bulk facility (i.e. Cross Dock, Transload, or DC Flowthru Facility) • 43% Shipping through a Free Port, Freeport Zone, FTZ for customs • 38% Shipping Direct-tostore • 15% We plan to add capabilities in other areas not checked

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4 Maturity Class Definition: Leaders - Top 30% • 95.4% of orders delivered to customers complete and on time outbound • 94.6% of orders received from suppliers complete and on time • -0.5% Decrease in total landed per unit costs in the past year • -7.5% Decrease in the frequency of out-of-stock inventory in the past year


Basic operations of any kind normally include prepaid freight, and third party carriers, which have their costs spread across an entire shipment comprised of many products and customer specific orders. Figure 1: Key Capabilities - Logistics Costs and Events

Followers - Bottom 70% • 86.4% of orders delivered to customers complete and on time outbound • 84.8% of orders received from suppliers complete and on time • +8.5% Increase in total landed per unit costs in the past year • +0.9% Increase in the frequency of out-of-stock inventory in the past year

Source: Aberdeen Group, August 2014

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Challenges to Inbound Visibility and Costing: Each shipment contains products with varying item quantities and varying costs. This makes it tough to segment an inbound shipment to allocate costs by customer or down to product or product groups — even if all the events and shipment level costs are known. Additional challenges include:  Data Accessibility and Time to Information: The level of maturity in a supply chain is important, not just in talent, but also in technology and automation solutions, and the degree of integration both internally and externally may determine how accessible the information is. Even if available, questions such as timing and frequency of access across carriers and partners must be addressed. The Leaders not only have more access to essential data, but they have more completely adopted the capabilities (Figure 1) that allow them to link events with costs and apply intelligence to the data they collect to segment into a baseline and support CTS initiatives.  Multi-Party Data Collaboration and Synchronization: Gathering control of inbound processes since they are often managed by some partner such as a third-party logistics (3PL) provider, or outsourced as a service, might be a factor since there are typically many partners involved. Getting timely visibility and corresponding cost breakdowns is typically where the issues lie. Determining how the information is communicated can have an effect. Are there multiple feeds from disparate systems that must be managed or is there a common platform or community-wide solution that all participants support? Leaders are demonstrating both a broader access to essential data and are 4.75 times as likely to support "Trade/transport rate and lane analysis" (Figure 1).

Leaders are demonstrating both a broader access to essential data and are 4.75 times as likely to support "Trade/transport rate and lane analysis."

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6 Key Optimization Features: Automation Leaders versus Followers •

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9.67x as likely to automate Trade planning or Supply chain redesign tool automation (optimize sourcing / distribution decisions) 4.29x as likely to automate Communication / document exchange with other government agencies (FDA, Consumer Safety) 2.24x as likely to automate Item level updates and validations to-from HS Classifications and global Harmonization Code Matrix database


 Optimization Model Components: Access to near realtime data and integration to partner data is prerequisite. However, without the full range of components of itemized and segmented events and costs displayed in Figure 1, no true CTS optimization can be performed. While today’s systems can begin to capture trade/transport cost components, they must be linked to the event end-to-end, properly allocated, and segmented. Linking Events and Costs Together: Turning Data into Financial Intelligence and Segmentation Capability Outlined in red on Figure 1 are some of the specific capabilities related to how to use the cost information to accurately allocate to a product/customer/channel. At this level, we are looking at the capability to assign or allocate costs event by event— assuming that they are all known to begin with. Segment Supply Chain Data Based on Customer Profiles: It is surprising the gap is so wide between the Leaders and Followers because this would be, perhaps, the top level of segmentation for any company, which is at the revenue profile of outbound fulfillment streams by customer and logistic channel. The Leaders are 1.93 times as likely to have this capability in place (Figure 1). This implies linking shipment volumes and tracing customer/channel costs by the traditional DC, as well as the emerging newer logistics channels like vendor drop ship. Only 40% of Followers have this most basic ability. Without the ability to segment revenue and cost on the outbound customer delivery leg, it is impossible to develop an effective cost-to serve model for a customer or channel. As a result, determining a P&L for these companies by product/customer/channel would not be feasible just do the lack revenue and outbound cost

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segmentation (let alone inbound cost allocations where companies are even more challenged). Tracking Actual Total Landed Costs as Shipment Progresses‒ Here, the leaders are 1.54 times as likely to have this capability. For segmentation/modeling, this capability accumulates costs at the product level, plus aggregates (logistic, trade and transport) cost as they occur on the inbound and outbound side. These costs would be direct product and shipment costs, indirect variable costs, and various fixed overhead and carrying costs (see sidebar for examples). The Implied Supporting Capabilities Include:  Define basic allocation techniques. We see, from Figure 1, that the costs themselves are available at the shipment level. But when a shipment has mixed products and customers, how is allocation performed? It could be by weight/dollars/vendor, or most likely some combination of all. Recognizing the need to have those allocation techniques well-defined will add to the speed of allocating both direct, variable, and overhead cost (see definition in sidebar on Cost Components) to build to total landed costs for products quickly.  Outbound linkages to Customer Delivery by logistics channel: Proof of Delivery (POD) is a fairly well understood term we'll use as an example. While it is agreeably hard to demonstrate true dollar value, the visibility of what is delivered and when makes POD a valuable aspect of a visibility and rates invoicing solution. These solutions will capture and display status messages from any carrier from any mode when goods are actually delivered (whether to DC, store or customer home). These status messages provide the kind of detailed backup

Cost Components for Accrued Total Landed Cost: •

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Direct product cost inclusive of material and manufacturing Variable transaction level costs- Direct and indirect trade/ transport and logistics costs attributable to each product and inbound plus outbound shipment. Fixed Indirect and overhead costs allocated by virtue of allocated overhead costing. Costs of order selection, fulfillment, inventory holding and storage and general and administrative cost. Accrued Total Costs Aggregated from each of the above cost categories by apply costs attributed to each product and shipment as orders are tendered for specific customers and channels and flow outbound for final delivery.

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8 Dynamic Optimization Enablers The Best-in-Class top 20% versus Others are… • • • •

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1.86x as likely to automate trade and transport costing 1.59x as likely to automate Spot bid capability 1.43x as likely to automate Country-skipping support 1.14x as likely to automate Suppliers and inbound carriers’ information exchange 1.14x as likely to automate Support for dynamic hub optimization 1.11x as likely to automate Total Landed Cost forecasting and tracking 1.08x as likely to automate Optimization tools to effect near real-time control


required for the ever increasing financial scrutiny, allowing companies to tender invoice, secure poof of payment and accrue costs more quickly and with more confidence. POD provides valuable carrier and supplier compliance information, but also provides the triggering mechanism to execute the settlement process ‒ a key factor when trying to capture the total cost. An effective capture of POD information is critical for linking cost to rate and revenue information by customer channel. It helps close the loop on the financial aspects and provides insight for CTS cost segmentation and allocation.  Online visibility into accrued supply chain costs. For segmentation or modeling purposes, this again deals with costs for product or customer segmentation. It enables decision-making when knowledge of cost is a factor. o Accrued Total Landed Costs are required for Supply Chain Segmentation Baselines. In order to build a baseline for CTS by customer channel, the accrued costs must be both visible and aggregated. Between 44% to 48% of companies claim to have visibility to accrued cost and can begin to apply allocation schemes to derived customer/channel/product intelligence. This information is used to form a baseline for P&L contribution linking customer revenue via POD to total segmented cost yielding calculated contribution to profit or loss. o Dynamic Optimization Enablers. The types of operational execution models that would depend on knowledge of accrued costs are postponement choices for allocating product to orders,

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distribution (DC) bypass, drop ships, cross dock or flow through etc. All of these are operational calls based on dynamic event monitoring and made on the fly continuously. For example, after a shipment is in flight they depend on knowing how much accrued cost is involved, and whether some in-process decision is affordable or desirable, in the interest of service or simply leveraging an opportunity. These decisions could make or break the profitability of an order when considering the total cost of delivering it via a more complex bypass model to the final customer. Not knowing the status of the accrued costs could result in making unprofitable decisions just due to lack of visibility. o Accruals allocated properly is dynamite, but don’t miss that less than 50% of the Leaders have the cost accrual capability – so there is work to be done by both the Leaders and the Followers. Trade/Transport Rate and Lane Analysis In our last section, we discussed the capabilities to turn the visibility data into financial Intelligence. We identified how linking cost to events is essential in order to segment by revenue/costs in order to get an accurate picture of profitability, and thus ROI, by product, customers and channels. All of these capabilities assume that numbers are available. The whole segmentation and CTS modeling relies on rate analysis where we see the Leaders are 4.75 times as likely to conduct Trade/transport Rate and lane analysis (Figure 1 outlined in blue).

Trade/Transport Optimization Features: Automation Leaders versus Followers •

9.67x as likely to automate Trade planning or Supply chain redesign tool automation (optimize sourcing / distribution decisions) • 4.29x as likely to automate communication / document exchange with other government agencies (FDA, Consumer Safety) • 2.24x as likely to automate Item level updates and validations to-from HS Classifications and global Harmonization Code Matrix database www.aberdeen.com

10 B2B and B2C Convergence Capability The Best-in-Class (Top 20%) are: •

48% more likely to collaborate with the customer on a strategic level

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83% more likely to better understand tradeoffs between service level and inventory investment

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86% more likely to have closed-loop integration of supply chain planning and execution . 83% more likely to segment the demand forecasts based on key product-customer characteristics

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 Lane and Rate analysis is conducted for both the trade and transport for each segmented customer channel. The Followers at only 12% (versus 57% of Leaders) have a lot of work to conduct in the rates analysis area as this is a limiting factor for CTS modeling. In addition to transport rates trade rates are equally important. Top performers understand the need to automate trade/transport (see sidebar).  The value lies in looking at both sides of the equation for the inbound/outbound decisions. Allocating those costs for both the inbound and outbound components in a timely manner to the material, product and customer level, enable real-time supply chain decisions. The product/customer/channel related to the inbound shipment may or may not be related to the same product/customer/channel that the outbound portion of the shipment might be tied to. Most continuous moves involve optimization and aggregation of drop-off and pickup activities to minimize empty miles based on routes and across customers (outbound) and suppliers (inbound).  Top performers use a "control tower approach" to provide and end-to-end view in order to leverage their own internal capabilities as well as their suppliers and manufacturing partners through collaborative optimization technologies. Leveraging the Opportunities‒ ROI Benefit Analysis To develop the strategy for inbound-to-outbound optimization there are two initial steps an organization needs to take to get them on the right track.

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Step 1: Current State- For each business unit, product, and process step, look at their current state and build a baseline. The baseline should segment total landed costs and product flows from sourcing through final delivery to the customer. Step 2: Strategy and Future State- Determine strategy and future state, roadmap components and determine benefit streams. Discuss the future state with senior executives to see what needs to be changed and to determine what elements need to be included in the roadmap or initiative. Segment across key business units, products and logistics flows for inbound-tooutbound. The current state baseline and the proposed future state analysis helps to expose limitations and ROI opportunities across many different avenues to help you realize significant cost savings and create a strong return on investment for your enterprise. Up to this point, we have covered how a visibility and rates solution provides a foundation for supply chain segmentation and supply chain intelligence. Leaders clearly understand that "trade and transport rate analysis"(Figure 1) is key and they are more than four times as likely to provide these capabilities. The goal is to develop a segmented CTS baseline or model for you existing trade/transport and delivery network. This multidimensional view of the network exposes ROI opportunities to realign trade and transport volumes across inbound-tooutbound and fulfillment activities. Realignment Capabilities - Key ROI Benefit Areas 1. Contracts and Rates Management: Online data exchange and support of contracts and rates in a realtime and shared environment can enhance the

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12 Key ROI Concepts Utilized by Top Performers •

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Trade and lane consolidations and negotiations Backhauls and continuous moves Prepaid and collect conversions/ convergence Create multiple stop truckload moves Pooling or staging to consolidate volumes Mode skipping. Parcel Zone skipping Duty Deferral and Foreign Trade Zones (FTZ)


communication of vital information across the enterprise and with carriers and suppliers. Community-based rates and benchmarking solutions provide true rate comparisons across all modes/lanes, not only enabling correct core carrier selection, but optimal use of modes results in freight cost savings. From contract negotiations to trade and transport lane, base-lining the automated pricing/costing exercise is normally a time consuming and manual process. 2. Routing and SLA (service level agreement) Compliance: Today's routing guide and visibility monitoring software provide the capability and support where the correct contracted carrier is consistently selected based on cost and service. Combined with the contract management function above, cost-effective negotiated contracts can be leveraged across international and domestic movements to insure rate and accessorial charges are in line with contract. 3. Mode Shift, Rate/Lane Aggregation and Consolidation: This refers to the improved operational capability that helps the company to use optimal/efficient or correct modes of transportation. Consolidation by lane or mode and shipment aggregation allows multiple shipments to be consolidated. This reduces the possibility of utilizing inefficient or more costly transportation modes, thus greatly reducing the per shipment cost and tonnage rates. 4. Routes and Stop Optimization: This deals with the ability to consolidate shipments and create multiple stop truckload moves, as well as the construction and utilization of pools and mode skipping. Optimization can occur for all locations from a single management point. Shipment consolidation from single origins or to single

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destinations provides ROI, but combined with the ability to optimize routes will result in substantial ROI. The combined ability to route freight to and from multiple facilities, and also incorporate the use of pooling and cross docking results in a truly cost effective supply chain. 5. Settlements and Financial Payment: Automation of Freight Bill Payment activities can have a significant impact on streamlining your business. Cost savings from electronic transmittal of rated payment information, electronic payment, and automated match pay in a shared environment, can all drive large efficiencies and cost savings. Time and cost associated with allocations, accruals and disputes can be greatly reduced, while improving accuracy and information availability. Top performers are twice as likely to support this capability. Estimated savings and ROI results can exceed 50% of the cost of administering and auditing current freight bill process administration. This does not include the benefit of accurate and timely support of financial processing. 6. Communications and Integration: EDI and VAN costs are often a very large cost component of gaining visibility and linkage with transportation data such as advance shipping notification (ASN), status updates and tender processes. New methods of direct linkage, transport technologies and mapping capability can greatly reduce the costs typically associated with these activities. Estimated ROI can exceed 80% of total communications costs.

The leaders at least have the visibility for the most part to the totals so they can see “what” the costs are, whereas the Followers do not even have that to a large degree. Specifically, top performers have achieved double-digit freight rate reductions, and optimized global trade costs, even while operating their inbound supply chains among new pressures and complexities

Cost-to-Serve Modeling: The Goal This capability is the most telling. From Figure 1, outlined in green, recognize the gap between the Leaders and Followers,

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14 The end result is a cost-serve-view of the end-to-end supply chain that is repeatable, scalable and provides timely ROI information. Best-in-Class companies are proving these efforts can improve on-time delivery, reduce expediting costs, and reduce Total Landed Cost per unit yearover-year.


who are really not even in the game, with the Leaders being more than 3 times as likely to have this capability. This states that even though visibility to total costs may be high, actually allocating them to products/customers/channels to get a true cost-to-serve and ROI is a real challenge. The categories and actual totals may be known, but properly allocating and assigning them to products/customers/channels is a different proposition. Even for the Leaders, just a little more than a third report that this capability is in place. Make no mistake; the Leaders at least have the visibility for the most part to the totals so they can see “what” the costs are, whereas the Followers do not even have that to a large degree. The value in getting to a true cost-to-serve model will insure that supply and demand synchronization will encompass trade, transport, rate and lane analysis, and synchronization from raw materials all the way through to end consumer delivery. With the bigger picture view, it creates the opportunity for "Multi-Enterprise Optimization" where users across divisions or companies are allowed to combine shipments thereby developing routes that are mutually beneficial. The broader view generally provides more saving opportunities. Summary The key to developing accurate segmentation and cost-to-serve modeling is being able to close the loop for end-to-end supply chain by linking events and rates/costs together for product, customers and channels effectively. This comes in two basic steps.  The first key component is gaining visibility and capturing and linking costs with events at the appropriate level. This is big data analytics spanning customers, shipments,

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products and orders end-to-end. Companies need to recognize what is needed to make this happen.  The second key component is to have the ability to develop the current state baseline and segmented CTS model and create the allocation schemes required to attribute cost quickly, and tie them to the appropriate revenue streams. Central to all of this and the largest driver of costs is getting a handle on inbound costs, which also requires looking at outbound as well in order to get the entire optimization picture. Having a visibility solution and automation capable of applying the control tower approach to manage this information flow in a timely, highly collaborative manner with partners, is a requirement for those who hope to complete this journey. Once known, having the allocation schemes to quickly attribute/allocate and accrue these costs as they happen are essential to making key operations decisions on the fly. The end result is a cost-serve-view of the end-to-end supply chain that is repeatable, scalable and provides timely ROI information to deal with the channel proliferation issues coming from B2B and B2C convergence. Best-in-Class companies are proving these efforts can improve on-time delivery, reduce expediting costs, and reduce Total Landed Cost per unit year-over-year. Specifically, this group has achieved double-digit freight rate reductions, and optimized global trade costs, even while operating their inbound supply chains among new pressures and complexities. Ask where your organization is on the maturity scale and what do you need to do complete the journey.

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For more information on this or other research topics, please visit www.aberdeen.com. Related Research Supply Chain Visibility and Segmentation: Control Tower Approach; August 2014

Advancing Global Trade: Foreign Trade Zone Solutions; August 2014

Answering the Call: 5 Best Practice Process Steps for B2B and B2C Demand-to-Fulfillment Convergence; August 2014

China Trade Operations: Trends and Advancements; May 2014

Authors: Bryan Ball, Vice President and Group Director, Supply Chain and Operations Practices ([email protected]) Bob Heaney, Research Director, Retail and Supply Chain Execution, ([email protected]) About Aberdeen Group For 26 years, Aberdeen Group has published research that helps businesses worldwide improve performance. We identify Best-in-Class organizations by conducting primary research with industry practitioners. Our team of analysts derives fact-based, vendor-agnostic insights from a proprietary analytical framework independent of outside influence. The resulting research content is used by hundreds of thousands of business professionals to drive smarter decision making and improve business strategy. Aberdeen's content marketing solutions help B2B organizations take control of the Hidden Sales Cycle through content licensing, speaking engagements, custom research, and content creation services. Located in Boston, MA, Aberdeen Group is a Harte Hanks Company.

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

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