Paul Van den Brande
Associated Partner
Just in Time Management Group
When logisticians get an audience with a CEO, they talk about goals such as reducing LTL cost per hundredweight by 10 percent. The CEO may have no idea what that means. They have to demonstrate how supply chain metrics directly relate to senior management goals.
Read on to capture how 1.371% over the annual turnover can contribute to your company EBIDTA.
"You never want a serious crisis to go to waste...it's an opportunity to do things that you did not think you could do before," said Rahm Emanuel, Barack Obama's chief of staff, in a November 2008 Wall Street Journal interview. Certainly, his words ring true in the supply chain arena as many companies are working hard to ferret out costs, inefficiencies, and redundancies. One of the most powerful tools they've found is collaborating not just within supply chain departments, but across the entire enterprise, sector and x-ross sectorial.
There are two things I observed:
Why is it so difficult for any one companynot to spend money?
The above graph shows sincere concern by your logistic co-workers of the level of logistic cost in your organization where cost reduction is overdue and possible. It also indicates that Management Buy-In is missing to take action towards cost-effectiveness. Further a seamless cost approach is necessary.
These findings originate from a Poll with 100 participants (at date 05052009) trying to find answers to the following question: What criteria would be most important in outsourcing logistics?
This is what Lee Iacocca in - Biography Extract – The Ford & Chrysler Story found out the hard way in yet another automotive squeeze
1.371%
“One of the first moves I made as president was to convene a meeting of top managers to establish a cost-cutting program. I called it "four fifties," as its purpose was to cut operating expenses by $50 million in each of four areas: timing foul-ups, product complexity, design costs, and outmoded ways of doing business. If we could reach our goal within three years, we could improve our profits by $200 million - a gain of almost 40 percent - even before selling a single additional car.
There was plenty of room for improvement. For example, it took us two weeks out of each year to prepare our factories for the production of the next year’s models.
During that time the factories were simply not operating, which meant that both the machinery and the workers were idle.
Through more vigorous computer programming and more sophisticated scheduling, it was possible to reduce the change weekend - when production lines were down anyway.
Another area where we cut costs was shipping. Freight came to only a small percentage of our total expenses, but at over $500 million a year, it was still a figure worth a second look. This wasn't something I had ever thought about before. But when I checked into it, I found that the railroads were really taking us for a ride. They were charging us by volume rather than weight, and we weren't planning accordingly.
We began packing the freight cars much more tightly. At one point, I recall, we trimmed a fender design by two inches to allow a few more cars to fit onto each train. With huge sums of money at stake, the last thing I wanted was to be shipping air. When you're dealing with figures like $500 million for freight, even a minuscule saving of half of one percent came to $2.5 million.”
Now where does this 1.371% comes from?
The Global average cost of external logistics* on sales turnover = 9.14% (up to 2008)
outsourcing + collaborative logistics save on average = 15 %
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Make an average costeffectivety over sales of 1,371%
* In 5 key areas Logistic Spend = Transportation + Warehousing + Administration & Shipping Document + Order Processing + Inventory Carrying
9.14% - The Davis Logistics Cost and Service Database - Copyright © 2008 by Establish, Inc.
The Davis Logistics Cost and Service Database is an ongoing annual survey that manufacturers, distributors and retailers participate in to receive a customized benchmarking report of logistics cost and service. Participation is free and confidential.
The Database is an internationally recognized source of logistics cost and service information. The findings are presented annually at the Council of Supply Chain Management Professionals.
Key Findings - 2009 Presentation - What is happening in terms of logistics costs?
The Economy Overall, most companies felt a reduction in demand leaving most supply chains with
excess capacity and excess costs.
Transportation Continually shifting to smaller and smaller order sizes, increases the need for smaller, less-cost-effective shipments.
Warehousing Many companies have outsourced their warehousing operations to minimize the risk of large swings in demand, however, many companies are either at the minimum contract level or are not reaching the same volume incentives.
Inventory Increased pressure due to longer supply chains and the inability to shut down the “pipe- line” in a timely manner.
Administration and Oversight A number of highly compensated supply chain executives have been “let-go” from their positions as downward pressure on demand has forced companies to tighten their belts and run their existing supply chain, rather than focus on strategies for improvement.
Trend (group average) Cost as a percent of sales is up 9,4% Cost per hundredweight is up 10.7%.
15% - A asset neutral and carrier free logistic provider – in generally referred to as a 4PL (Forth Party Logistic Operator )– shall on average save 15% on the logistic spend!
Breaking Down Barriers to Bringing a 4PL On Board
In his book, and in his interview with Logipi's Dustin, Paul Van den Brande advises anyone who is looking for the green light on working with a 4PL to "keep it simple and speak the language of the CXO, CEO, CFO or any other C-level you are pitching."
As Partner @ Just In Time Management and the CEO of Noble House, a company that specializes in purchasing implied logistics needs, Paul Van den Brande refers to the fourth-party logistics concept as a "managed innovative logistics collaboration," or MILC.
4PLs, Paul says, were initially launched by the "big four" logistics consultants, and try as they might, they were unable to successfully market the idea, primarily because they failed to understand and address the concerns of logistic teams inside organizations. As you might imagine, those concerns were, and still are, tied to job loss and loss of knowledge.
To address those issues and determine other barriers that keep organizations from pursuing outsourcing, Paul conducted a survey on LinkedIn. Proof of cost savings came in first, followed by convincing C-levels. With a bit more digging, Paul found that most logistics professionals were not considering their audience before making the pitch. For example, telling a CXO, CEO, CFO or CPO that you are trying to save 20% per square foot on 10 pallets per load liter has very little meaning to people in those position -- it is also why very few logistics and supply chain professionals are actively involved at the board level.
The 4PL Pitch
When pitching a CXO or CEO, Paul suggests asking what he or she believes the cost of logistics means to the business? The answer is almost always "maybe 1% over turnover." It might surprise your CXO to learn that, on average, globally, it is 9.14%, going up, and that a 4PL can save 15% on logistics expenses. To put it in a language that the CXO will understand, the overall savings is 1.371% over the turnover -- a figure he or she will immediately relate to because, at the end of the day, it will boost his or her EBITA.
The complete checklist of how to pitch each C-level in a language they will understand can be found in his Paul Van den Brande's book, but he did provide additional insights into securing buy-in at the C-level, including how to address common objections.
For example, some organizations with union affiliations will oppose outsourcing on the basis of possible job cuts. A serious 4PL, Paul says, will not necessarily have that effect, because most will utilize existing staff during the partnership, and will also provide all training.
Another common objection made by the traffic or supply chain manager is loss of control and loss relationships with existing carriers. Again, Paul says, a true 4PL will absolutely leave the carriers in place, and will likely offer them additional business, not just in terms of volume and freight, but also in terms of return loads. They will also benefit from software tools, which most can't afford to invest in on their own.
What to Expect From a 4PL
The process begins by taking a snapshot of what has been paid for services to date. That, Paul Van den Brande says, is purely open book, and any direct expenses, including the customer's software tools, should be deducted first. The remainder of the cost becomes a gain share.
A true 4PL will arrange its exit at the start of the relationship. You might start with transportation, and then possibly find joint projects in inventory carrying, which is important within the total cost of ownership of any supply chain. It is vitally important, Paul says, to negotiate the exact nature of the relationship, including expectations and anticipated results, with a C-level.
Some companies have tried "collaborative clustering," where, for example, two pharmaceutical companies attempt to work together with their 3PLs in place. According to Paul, that model failed because 3PLs need to fill their own trucks, vessels, airplanes and warehouses, so the necessary gain sharing distribution system is not in place, which results in a breach of trust.
Finally, Paul Van den Brande also says he advises companies not to board with any 4PL that claims to be equipped to handle everything, because it just doesn't work. Optimizing and upgrading is a step- by-step process that involves best-of-breed software and continuous improvement programs.
Why the Time For a 4PL is Right
The first advantage of working with a 4PL is the cost saving element -- that 1.371% of the turnover, which Paul Van den Brande referred to earlier in the interview, is purely and simply removed from logistics costs.
Collaborative logistics, Paul says, is a positive side effect of outsourced 4PLs and another important advantage in terms of managing return loads and reducing a company's carbon footprint by putting less trucks on the road.
Third, while restructuring is a fact of the new economy, and something that isn't likely to go away, a good 4PL will find ways to keep, train and reintegrate an existing workforce.
Finally, as Paul Van den Brande details in his book, "There will come a day when the cost of the expertise of the logistics provider will become so expensive and the people will become so rarely available that only the largest companies will be able to hire and pay for expertise in-house, so it will absolutely go out of the company, and there will be stronger clusters, where all this expertise will become available at the outsource base. Like software as a service, like business process outsourcing, these things will undoubtedly be part of the new economy emerging.”
Noble House' 8-Step Roadmap to Boosting Your EBITA
To recap the benefits of working with a 4PL, Paul Van den Brande offered this list from his company's website:
White paper composed by Paul Van den Brande on the occasion of his publication of :
http://www.unibook.com/en/Paul-Van-den-Brande/4PL---The-book-that-never-should-have-been-written!
Note on the Author:
Paul Van den Brande is CEO @ Noble House nv and Partner @ Just in Time Management.
Contact details : pvdb@jitm.eu - +32 (0) 486 509 056
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