TURNING LOGISTICS NETWORKS INTO STRATEGIC ASSETS

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1 Logistics TURNING LOGISTICS NETWORKS INTO STRATEGIC ASSETS AN INTEGRATED APPROACH BETWEEN STRATEGY & OPERATIONS TO EFFICIENTLY REDESIGN LOGISTICS NETWORKS

2 TURNING LOGISTICS NETWORKS INTO STRATEGIC ASSETS Economic volatility is increasing on the demand side, due to the need to quickly meet changing consumer needs, and on the supply side, due to the instability of energy/ oil and capacity prices. This volatility, together with ever-higher competitive pressures, is placing greater demands on logistics operators whether mail, express, freight, or integrated to optimize their mainly road-based networks and turn them into a source of competitive advantage. Working with transport logistics providers, Oliver Wyman has identified new strategies for improving competitiveness for road-heavy operations. By viewing the network as a strategic asset, and applying an integrated approach that involves both the operations and sales departments, logistics providers can generate more benefits from existing customer relationships and from product and service innovations. Additionally, companies can derive competitive advantage and create more value by engaging senior management in the strategic decision making process for network management. NETWORK MANAGEMENT CHALLENGES Logistics networks have always been complex, and there are plenty of mathematical models, tools, and articles that focus on the specifics of networks. But many miss the why of strategic network management; that is, how to achieve effective decision-making linked to company goals. In particular, it can be difficult to determine what might be wrong with a network at a strategic level. Over time, strategic focus shifts and new customers, products, and targets become more relevant, which the network may be unable to support because it is still largely managed using outdated operational network KPIs. In Oliver Wyman s experience, the barriers to effectively using networks and turning them into sources of competitive advantage are often the culmination of operational, organizational, and managerial factors: A missing link between strategic planning and network strategy often strategic directions are not translated for the network, i.e., strategic corporate implications are not understood in terms of how to shift the company s network strategy. Responsibilities for different aspects of the logistics network are too widely distributed, resulting in finger pointing by various levels and departments e.g., neither operations nor sales can optimize the network in a vacuum. Complex cause-and-effect relationships are difficult to unbundle for senior management, and network management tools and processes are too complicated, leading to information overload. Using the right tools and aligning sales and operations management perspectives, however, can lead to a more holistic view of network configuration based on strategically important metrics, such as profitability by customer, lane, or depot and customer satisfaction and retention levels. Copyright 2013 Oliver Wyman 1

3 THE IMPACT OF GETTING IT RIGHT An organization that ignores or delays the opportunity to develop its network as a strategic asset is leaving money on the table. There are steps that can be taken, almost immediately, to produce savings for your company, increase revenue as service levels becomes more reliable, and improve longer-term customer satisfaction. Oliver Wyman has developed a methodology (Exhibit 1) to help clients create impactful network management solutions and to understand their strategic issues. Exhibit 1: MANAGEMENT OF A NETWORK AS A STRATEGIC ASSET EXAMPLES OF STRATEGIC ISSUES What network configuration should the company target? How to strategically expand the company s network? How to strategically manage volume variations? Long-term business trends Seasonality effects Unforeseeable demand Client bankruptcy How to manage heterogeneous service level requirements on the network? How to adapt the network to a changing environment (client footprint, regulation, infrastructure & equipment, etc.)? IMPACT OF GETTING IT RIGHT Competitive advantage Greater profitability Successful integration of acquired companies Successful integration of new clients Successful growth/entry into new geographies Optimal network cost level Greater control over network capacity Ability to capture extra revenue streams Lower network-related risk Greater client satisfaction Greater control over network service levels Lower investment/network-related risk Greater profitability thanks to optimal cost level CASE STUDY MULTI-COUNTRY LOGISTICS FOR THE FASHION INDUSTRY A logistics services provider serving the fashion industry across 12 countries was losing an average of US $2 million per month. The client set a goal of increasing its network agility to accommodate changing customer needs, the shelf life of fashion products, and seasonality requirements. Based on the cooperation between the sales and operations departments and the underlying strategic network approach backed by appropriate tools the sales management and operations teams developed a collaborative process for improving network operations. This included rationalizing depots, better aligning customers with service lanes, rationalizing transport providers, and increasing truckload utilization on high-volume lanes. Benefits of the project included profitable customer targeting, network improvements, new product development, and improved forecasting, which helped the company secure depot locations at more competitive rates. Copyright 2013 Oliver Wyman 2

4 Issues related to network management are not specific to one type of industry or business, and Oliver Wyman has been able to implement this approach in a variety of contexts, e.g.: Mail and express operators for collecting, sorting, and delivery centers Freight (LTL/TL) companies for network-based or dedicated loop operations Industrial companies for moving goods across warehouses, plants, and distribution centers OLIVER WYMAN S STRATEGIC NETWORK APPROACH Based on Oliver Wyman s experience in turning networks into strategic assets, we are prepared to assist senior transport logistics executives in analyzing and improving network strategy using a two-phased approach: 1. STRESS TESTING AND RISK ASSESSMENT The first phase is designed to initiate the strategic review and develop some quick wins. Typically within 2 to 4 weeks, Oliver Wyman reviews the key components of network costs: treatment of shipments (e.g., light vs. heavy shipments), automation, efficiency, skill levels, etc. During this stage, short-term improvement opportunities based on products, operations, organization, and competitive reviews are identified and constitute initial successes that can be used to build the case for the transformation program. 2. BUILDING UP THE NETWORK AS A STRATEGIC ASSET Based on the results of the first phase, Oliver Wyman pursues a comprehensive strategic network analysis, which typically lasts from 3 to 6 months. During this phase, Oliver Wyman works with the client and uses its BLUE-net tool suite to design an optimized network management plan, based on investigating: Location and nature of bottlenecks Product focus scenarios, i.e., what products could be more profitable Options in terms of network footprint and the implications of product mix decisions on the network (e.g., go large or go small decisions) Scenarios for longer-term joint operations and sales network strategy Scenarios to ensure the support of new network scenarios through the development of underlying organizational capabilities (i.e., identification of areas that will require more analysis) Scenarios for industry consolidation, and potential risks and opportunities for the client s organization Options for longer-term strategic goals and objectives Oliver Wyman then works with the sales management and operations management teams to develop a collaborative process for reviewing and analyzing network data. This not only improves the quality of strategic management decisions but increases customer satisfaction, as the teams can be more closely aligned around customer requirements. Copyright 2013 Oliver Wyman 3

5 BLUE-NET TOOL SUITE S MAIN DIFFERENTIATING FEATURES STRUCTURE (BLUE-NET) COST/TIME (STP/SCP) LINEHAUL OPERATIONAL DETAILS STRATEGY-ORIENTED MODULAR TOOL SUITE The BLUE-net tool suite tackles network management through four modules, starting with key strategic layers followed by operational control layers: 1. Finding the optimal network configuration and development plan 2. Running the network while minimizing network cost & delay 3. Optimizing linehaul, schedules, shifts, assets 4. Controlling network parameters and managing uncertainty (volumes and ad-hoc changes, etc.) TOP MANAGEMENT INTERFACE The BLUE-net suite s outputs are specifically designed to help C-suite executives visualize and understand: The company s strategic assets Network key issues Levers to enhance strategic assets and improve network management PRAGMATIC & FOCUSED MODEL INPUTS BLUE-net requires a limited set of inputs from users: Each module is designed to draw pragmatic outputs from the network s main structural parameters Data can be easily and quickly collected without significant additional workload for company resources BLUE-net is flexible enough to adapt to available network information Copyright 2013 Oliver Wyman 4

6 IMPORTANCE OF A STRATEGIC APPROACH TO NETWORK MANAGEMENT Oliver Wyman believes that network analysis and optimization should be more than a quantitative exercise. Instead, a holistic approach is required one that integrates and aligns a client s strategic, operational, and commercial objectives with solutions that capitalize on the client s organizational and financial capabilities (Exhibit 2). Exhibit 2: A STRATEGIC APPROACH STRATEGY Setting the direction (e.g., market entry, turnaround, PMI) Alignment of the network with strategic goals NETWORK STRUCTURE Ability to propose and deliver the right offers Optimization of cost vs. service level trade-off COMMERCIAL Meeting customer needs (e.g., seasonality, new customers, new markets) OPERATIONS Getting it right, reducing costs (e.g., network utilization, on-time performance) With this approach, strategic network management becomes a source of competitive advantage and value. For many companies, the course correction required to achieve this is to move away from isolated modeling exercises and instead to focus on increasing collaboration within the organization, backed by simpler, yet better fitting tools, ultimately driven by the needs of customers and anticipated changes in markets. This is a journey that can take your company to a new level, by ensuring your logistics network can support new value propositions, satisfy your most profitable customers, and contribute to the economics of your business. Copyright 2013 Oliver Wyman 5

7 CASE STUDY ROAD NETWORK OPTIMIZATION FOR A PARCEL DELIVERY COMPANY A company was using approximately 70 depots, each linked to multiple points of sale. The client set a goal of achieving on-time delivery of 95 percent of volume, while adding new B2B customers and several large B2C e-commerce fulfillment centers to its customer list. Additionally, wherever possible, it sought to keep the network fill rate high, while keeping a lid on network costs. A strategic network initiative provided senior management with needed transparency regarding service-level cost trade-offs, a heat map of lanes, and a more segmented view of customer profitability. For the first time, the company s overall strategic objectives were able to be translated into objectives for the network. An immediate result of the initiative was that sorting centers were reduced in one geography and expanded in another. Furthermore, the lease vs. own ratio for vehicles was reviewed and adjusted, ensuring capacity availability while reducing asset costs. Service-level improvements were achieved through better facility planning (e.g., appropriate automation) and trip planning, which also positively impacted resource and fuel costs. In a collaborative effort between the operations and sales teams, an improved future operating model for the network was developed, leading to a network strategy more aligned with both sales demand and core operational elements. This improved average network utilization on some lanes by as much as 80 percent. WHY OLIVER WYMAN? Oliver Wyman has worked with a number of large CEP, logistics, and supply chain clients to develop both strategic and operational approaches and efficiency solutions that often result in double-digit cost savings and/or significant service-level improvements. Our list of clients includes leading companies in the United States, Europe, South America, Asia, Australia, and the Middle East/Africa. Oliver Wyman is the only global management strategy consultancy that also has an integrated Center for Excellence focused on proprietary network optimization solutions for all transportation modes, including BLUE-net software tools for road network optimization and MultiRail freight and passenger rail planning systems. Through its Center of Excellence of more than 25 experts, Oliver Wyman customizes and enhances our software to meet specific client requirements. Our staff has extensive knowledge in relational database design and implementation as applied to transportation and logistics problems. Oliver Wyman combines custom development with commercial software components to provide powerful transportation and logistics software in minimal time and with maximum flexibility to adapt to our clients latest requirements. Copyright 2013 Oliver Wyman 6

8 ABOUT OLIVER WYMAN Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management and organization transformation. The firm s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC], a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 BN, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in risk and reinsurance intermediary services; and Mercer, a global leader in human resource consulting and related services. For more information, visit Follow Oliver Wyman on Contact Information: Michael A. Lierow Partner [email protected] Copyright 2013 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.