WHITE PAPER Uncovering Your True Landed Costs What you don t know could be depleting your bottom line.
Introduction >>> With economic struggles chipping away at profitability on a daily basis, companies need to work harder and smarter to improve their bottom line and continually find new ways to cut costs while increasing efficiency. One area of focus that many companies have begun to examine is transportation costs. With capacity slowly tightening, shippers, specifically in the retail sector, need to become creative and versatile in their shipping procedures to minimize costs while streamlining their inventory. Without full visibility and an accurate picture of the entire supply chain, it is impossible to correctly calculate true expenditures. Therefore, landed costs are often merely estimations. As a result, the profitability at a per unit level can be an unknown element. This can lead to potential errors in purchasing and inefficient, costly shipping modes and methods. To have an accurate calculation of your landed costs, down to the Stock Keeping Unit (SKU) level, you need to have an all-encompassing view of your entire supply chain. Vendor costs, straight transportation costs, deadhead miles with dedicated and private fleets, and optimized utilization of unused space on a truckload shipment are just a few issues to be considered. Loss of production due to on-time delivery issues should also be examined, as this too can decrease your profit margins and will need to be addressed. Without this detailed information, many factors could be diminishing your profits simply because they are unknown. Many buyers making purchasing decisions do so by focusing on the unit price and volume of sale. There are various elements that shippers and buyers neglect to include in their calculations that can negatively affect their bottom line. With these costs unidentified, profits may be being depleted where an increase could be realized. The two common mistakes made by many shippers are incorrectly calculating landed cost and unevenly distributing the transportation costs among stores from distribution centers. Understanding Landed Costs Revealing true landed costs at the SKU level is complicated with countless variables to consider. Transportation costs are complex and detailed when determining the costs from the vendor to distribution center to the store and are finally summed up in the hands of the buyer. Line haul charges, stop charges and fuel charges are just a few Werner Enterprises 1
Uncovering Your True Landed Costs What you don t know could be depleting your bottom line. of the elements that need to be calculated. With thousands of SKU numbers coming from hundreds or thousands of vendors, analyzing the transportation cost data to determine an accurate landing cost can be challenging. However, knowing the accurate landing cost at the SKU level and understanding what is driving that cost will be beneficial in determining retail price, vendor selection and item selection, as well as identifying inefficiencies within the supply chain, which can be improved by utilizing alternate modes or methods of transportation. Buyers need to be aware of transportation costs and factor them into their purchasing decisions. Communication among buyers and across other departments should be a common practice. The occurrence of four separate shipments coming to the distribution center from the same vendor in the same time frame is an inefficiency that will occur regularly if buyers are not working together. By consolidating shipments from the same vendor to the distribution center, you can dramatically reduce overall transportation costs. If transportation costs are not part of the buyer s responsibility, the buyer is less likely to work with other buyers to consolidate shipping and will base the purchasing decision solely on the unit price. Buyers will also be less likely to consider purchasing items with lower shipping costs, again working from the unit price only. However, when you accurately calculate your landed cost including shipping, the freight charges can sometimes nearly double the per unit price. This not only increases expenses, but it also gives an inaccurate picture of what the resale price needs to be to ensure that a reasonable profit will be made. Holding each buyer accountable for transportation costs will foster a more cost-conscious environment. Store Allocations A common mistake made by many companies is to evenly distribute the total transportation cost among all stores from the distribution center (DC). Often, this practice is derived from simply not having the access to the information that would allow for a more appropriate allocation of transportation costs. It is vitally important to determine the true SKU margin after applying the cost of the inbound freight. The most accurate way to analyze your SKU margin is to use a per cube cost rather than weight. This notion comes down to a very simple concept: small, heavyweight items will take up less room on a truck than larger, lightweight items (per square foot). Therefore, the weight of each unit is not as critical as the amount of real estate that it occupies. White Paper 2
Advantages By factoring in transportation costs and gaining perspective on an accurate landing cost per unit, you can make well-informed decisions to increase profitability. Upon realization of your accurate landed cost, you may consider: l Emphasize the need to order in full truckload quantities when possible l Route through a consolidator l Consider intermodal versus TL l Perform multiple stops to build full inbound truckloads l Identify vendor ship points within your fleet backhaul area to reduce costs l Discontinue using vendors located far distances from the DC s l Some SKU s may need to be discontinued if the margin is not acceptable Having full visibility and an all-encompassing knowledge of each facet of your supply chain will help you identify areas where you can reduce costs and increase efficiency. Areas to investigate: l Identify where opportunities exist to maximize efficiency through mode optimization software l Where you have on-time inbound and outbound delivery issues l Identify vendors that may be shipping multiple times per week LTL instead of fewer truckload shipments l Identify long transit times by the carrier l Identify areas where a dedicated fleet could be utilized l If you have a dedicated fleet, work with merchants to schedule vendor pick-up dates based on when a dedicated fleet truck is available l Identify cost of deadhead miles on the dedicated fleet so you can work to obtain more backhauls when operating a dedicated fleet Challenges In-depth analysis of landed cost and determining correct store allocation freight costs are complicated and time-consuming. It is often too difficult and cumbersome for companies to invest in the resources necessary to do this in-house. Even for many transportation companies, the complex nature of this type of reporting is difficult. Many transportation companies simply do not have the technology to Werner Enterprises 3
Uncovering Your True Landed Costs What you don t know could be depleting your bottom line. provide the level of detailed reporting necessary. The challenges for shippers include: l Time-consuming process l Thousands of vendors and tens of thousands of SKU s to calculate l Complicated analysis with many variables that fluctuate regularly, even daily l Finding an outsourced solution which easily imports specific information for customized reporting l Finding an outsourced solution with software that works in conjunction with multiple platforms l Finding an outsourced solution with web-based software for ease of report transfers l Systems to collect data and enforce compliance and manage changes Figure 1 Complex internal requirements create supply chain challenges Alignment of strategies Responsive operations Continuous product availability Rigorous inventory control Precise cost management Low Importance Moderate Importance High Importance Source: 2010 Auburn College and RILA - THE STATE OF THE RETAIL SUPPLY CHAIN Results and Findings. Collectively, the internal requirements shown above elevate the importance of supply chain management (SCM). Retailers now assign greater responsibility to their SCM executives. However, supply chain teams are required to fulfill seemingly incongruent goals. They must balance requirements for service responsiveness against cost control, product availability against inventory rationalization and high delivery frequency versus transportation efficiency. (see Figure 1) Solutions The most feasible solution to this daunting challenge of gaining visibility of your supply chain is to outsource your White Paper 4
transportation management to an organization capable of providing in-depth reporting. The reporting should be versatile, enabling you to easily import information, as well as being web-based and accessible across multiple platforms. Supply Chain Design Example Pamida stores are retail outlets located throughout the Midwest and carry a wide variety of in-stock items. For several years, Pamida s Vice President and Controller, Dave Enholm, understood the importance of knowing the true landed cost of each unit at the SKU level and having full visibility of the supply chain. For nearly a decade, Enholm investigated the development of highly detailed reporting to analyze and determine true profitability. The detailed nature and endless variables of the necessary reporting made it unfeasible to do the analysis in-house. Enholm understood the importance of this information and was passionate about finding a solution. A long-term relationship with Werner Enterprises proved to be the right environment to begin the process of unearthing a true landed cost. In the past, Enholm said, we had no visibility on each unit. We had a rough idea of the landed cost, but I knew we needed to drill down deeper to drive unnecessary costs out of our supply chain. I had a very specific way that I wanted to see the reports to be run. Werner Enterprises was willing to work with us and devote the time necessary to achieve the level of customization that we wanted. Werner Enterprises 5
Uncovering Your True Landed Costs What you don t know could be depleting your bottom line. Two of the several reports Pamida receives from Werner Enterprises are the Freight to Buyer report and Store Allocations report. The Store Allocations report takes into consideration line haul charges, stop charges and deadhead to determine the exact cost to ship to each location. Prior to the reporting, Pamida had been evenly distributing transportation costs among all locations. Information from the Store Allocations report is used to appropriately charge each location its portion of shipping charges. This gives a more accurate view of each store s true level of profitability. The information also plays a role in future site selection for new store locations. Specifically for Pamida, it was enlightening to see a much clearer picture of profit margins for what it considered its most profitable locations. The locations were still high producers, but by unearthing the true landed costs, it could also see the areas in need of improvement. This enabled Pamida to implement many operating procedures to drive the costs down and get the stores up to their highest levels of profitability possible. Such measures included: l Utilization of consolidation areas whenever possible l Monitoring shipment sizes with the objective of always having the most cost-efficient mode l Foster a transportation cost-conscious environment among buyers l Modeling of logistics cost factors during site selection process By factoring in shipping costs, Pamida has unearthed items in its purchasing history that did not hold up to profit margin standards. The retail cost assessed was based solely on the unit price from the vendor. After calculating the landed cost based off of the shipping characteristics, it was found that the item was not profitable. Information generated from the Freight to Buyer report has enabled Pamida to make informed purchasing decisions and ensure that each item will produce the expected results. I knew we needed to drill down deeper to drive unnecessary costs out of our supply chain. Pamida Vice President and Controller, Dave Enholm The overall strategy for Pamida was to drive out unnecessary costs and to increase efficiency and on-time deliveries. By providing extensive and ongoing reporting through their proprietary TMS software, SMART, Werner Enterprises was able to give Pamida the visibility and detailed knowledge of its entire supply chain to enable it to improve the profitability in a customized fashion for each location. Werner Enterprises: White Paper 6
l l l l Re-engineered store delivery schedules to better optimize the use of Pamida s dedicated fleet Combined stores to allow for a minimum of one load per week to each store Increased the total average cube per outbound load by tuning load factors Demonstrated that additional prepaid freight collected within the dedicated delivery zone would allow for increased utilization and drive out costs Werner Enterprises SMART system was able to manage Pamida s inbound freight and give it: l Web-based TMS Applications. This allows for complete order / PO visibility across all supply chain partners. l Vendor Compliance and Order Management. Werner Enterprises system applications assist in managing their customer s vendor base to ensure that the right product is delivered at the right time by the right transportation provider. l Dynamic Optimization. This brings the entire vendor community onto one platform to consolidate shipments and reduce costs adherence to optimize supply chain design. Inbound Werner TMS Werner Enterprises SMART system also assists with Pamida s outbound freight: l Web-based TMS Applications. The system integrates to efficiently and expeditiously perform shipment load planning and exchange information between Pamida s ERP system and providers. Werner Enterprises 7
Uncovering Your True Landed Costs What you don t know could be depleting your bottom line. l Shipment Execution. With a global network, Werner Enterprises leverages their strong asset services along with their extensive vendor partner community to execute Pamida s outbound shipments efficiently and in the most cost-effective manner. l Dedicated Professional Staffing Werner Enterprises is staffed with an experienced group of logistics professionals that are dedicated to Pamida. Werner Enterprises also placed a Werner Enterprises Logistics Specialist on-site at Pamida working full-time providing expert transportation management. Outbound Werner TMS Pamida Vice President of Logistics, James Wichern, has seen dramatic improvements in the efficiency of the company s supply chain since working with Werner Enterprises. Wichern said, We can now identify, based on the outbound cube utilization, where we can build additional combo multi-stop loads. We can also identify, based on the inbound cube, where we can build additional multistop loads. Wichern continued, Having full visibility of our supply chain has been a real benefit. You can t manage what you can t measure. We can now identify, based on the outbound cube utilization, where we can build additional combo multistop loads. We can also identify, based on the inbound cube, where we can build additional multi-stop loads. Pamida Vice President of Logistics, James Wichern Summary By knowing true landed costs and having accurate, ongoing reporting on your entire supply chain, you will be able to make well-informed decisions on purchasing, site selection and standard operating procedures. You will be able to identify profit-depleting practices that may White Paper 8
have continued undetected for years and also alter the way you do business to increase your bottom line. When looking for a transportation partner to assist with this reporting, be sure to ask specific questions about: l The procedures and software, including the ease of transferring your information to the system l How customizable the solution will be for your specific needs l Whether the web-based system will work across all platforms l Whether it will have transportation specialists dedicated to your account >>> For more information on customized TMS Solutions, please contact John Bartman at 402.895.6640. Werner Enterprises 9
Uncovering Your True Landed Costs What you don t know could be depleting your bottom line. About Werner Enterprises Werner Enterprises, Inc. was founded in 1956 and is a premier transportation and logistics company, with coverage throughout North America, Asia, Europe, South America, Africa and Australia. Werner maintains its global headquarters in Omaha, Nebraska and maintains offices in the United States, Canada, Mexico, China and Australia. Werner is among the five largest truckload carriers in the United States, with a diversified portfolio of transportation services that includes dedicated, medium-to-long-haul, regional and local van capacity, expedited, temperature-controlled and flatbed services. Werner s Value Added Services portfolio includes freight management, truck brokerage, intermodal, load/mode and network optimization and freight forwarding. Werner, through its subsidiary companies, is a licensed U.S. NVOCC, U.S. Customs Broker, Class A Freight Forwarder in China, China NVOCC, TSA-approved Indirect Air Carrier and IATA Accredited Cargo Agent. Werner Enterprises, Inc. s common stock trades on the NASDAQ Global Select Market SM under the symbol WERN. For further information about Werner, visit the company s website at www.werner.com. About Pamida Headquartered in Omaha, Nebraska, Pamida operates 204 stores in 17 states, primarily in the Midwest, and carries a wide variety of general merchandise including apparel, home and electronics, seasonal items, toys, housewares and groceries. The company also operates 104 pharmacies and is a health care leader in each of its communities. In addition to its hometown service, Pamida generously gives back to local organizations throughout communities via the Pamida Foundation. For more information about Pamida or the Pamida Foundation, visit our website at www.pamida.com. White Paper 10
Global Headquarters 14507 Frontier Road Omaha, Nebraska 68138 www.werner.com MKT100702.0418