MAR 5465 - Final Exam

Assumptions of Break-Even Analysis

- One product is produced - The variable cost per unit is constant, regardless of the volume - Revenue per unit is constant, regardless of volume - Fixed cost is either constant or step function

Market-Driven Pricing Models

* Price volume model * Market-share model * Market skimming model * Revenue pricing model * Promotional pricing model * Competition pricing model * Cash discounts

Performance-Based Logistics

-A process whereby the firm tells the logistics provider what the desired outcome is and lets the logis tics provider determine the best way to meet those requirements. -The practice is currently used mainly by the government, but is being adopted by business and industry more each year. • Buyer's goals and objectives • Development of key performance variables • Development of timely, accurate, and cost-effective performance metrics • Performance may be difficult to define

Potential Candidates for Outsourcing

-Contract management -Load and routing optimization -Mode selection -Shipment execution -Carrier payment -Yard and dock management -Tracking and tracing services • Supplier and carrier management • Reverse logistics • Loss and damage claims management • Service level reporting • Carrier and 3PL performance management

Select Third Party Logistics Providers

-Customs brokers -Freight brokers (air and surface) -Warehousing and DC operations -Packaging and export documentation -Delivery services • Local sourcing and purchasing • International trade management and compliance • Global transportation optimization • Supply chain planning • Export packaging services

3PL Advantages

-Economies of scale and increased flexibility -Improve service performance levels -Release capital from sale of assets -Release running costs -Concentrate on core business activities

Competition pricing model

-Focuses on reacting to actual or anticipated competitor pricing

Price volume model

-Maximizing profit -Leveraging volume across units can yield savings in tooling, setup, and operating efficiencies

A New Role for Supply Management

-More active in sourcing most, if not all, transportation services, not just inbound -Carrier selection -3PL provider selection -Negotiate long-term freight agreements -Evaluate carrier performance • Arrange pickups and deliveries • Processing damage and loss claims • Tracing and expediting shipments • Coordinating inbound, interplant, and outbound movements • Auditing freight bills for accuracy • Determining plant and warehouse locations

Revenue pricing model

-Obtain sufficient current revenue in market downturns. -Supplier concerned with generating revenue to cover out-of-pocket costs

"10 + 2" Rule

-Originated from Security and Accountability for Every Port Act of 2006 (SAFE) -Overseen by U.S. Bureau of Customs and Border Protection (CBP) -Importer Security Filing (the "10") -Additional Carrier Requirements (the "2")

Promotional pricing model

-Prices set to enhance overall product line profitability, not individual products within line -Need to utilize total cost of ownership (TCO) analysis

Conditions favorable to supplier

-high level of capacity utilization -tight supply -strong demand

Conditions favorable to buyer

-low level of capacity utilization -high level of supply -weak demand

Effects of Deregulation

-lower fares -high load -complex pricing -initially, 75 new airlines form, highly unstable, mergers, bankruptcies, bailouts -TODAY- safety still highly regulated, financial info and performance still required by DOT, international aviation service still regulated, labor practices still highly regulated by Railway Labor Act

Elements of Price and Cost Drivers

-profit margin -Selling and administrative cost -production overhead -direct labor cost -direct material cost

Steps to a Should-Cost Model

1. Conceptual design 2. Refine and derive elements of the cost model 3. Design and construction of the model 4. Identify data sources for the model

Cost-Based Pricing Models

1. Cost markup pricing model 2. Margin pricing model 3. Rate-of-return pricing model

Building a TCO Model

1. Map process and develop TCO categories 2. Determine cost elements for each category 3. Determine how each cost element is to be measured (metrics) 4. Gather data and quantify costs 5. Develop a cost timeline 6. Bring costs to present value

Exempt carrier

A trucking company that is free from direct regulation of rates and operating procedures

Cash discounts

Incentives to buyer who pay invoices promptly

Purchase price

Invoice amount paid to supplier

Oligopoly

a market structure in which only a few sellers offer similar or identical products

Common carrier

a party that agrees, for a fee, to transport goods for anyone who applies, provided the goods are lawful and fit for shipment

Contract carrier

a transportation service provider that handles shipments for other firms based on long-term agreements or contracts

Intermodal Transportation

combining two or more modes of transportation

Supply chain security

efforts made by companies to protect their in-transity inventory or value-transforming assets from external or internal threats

Market Structure Analysis

factors which define the intensity of competition in an industry

Private carrier

not subject to economic regulation & typically transports goods for the company owning the carrier.

Logistics Management

the practice of organizing the cost-effective flow of raw materials, in-process inventory, finished goods, and related information from point of origin to point of consumption to satisfy customer requirements

Infrastructure condition

• Ability of ports to handle mega-container ships and mega-tankers − Deeper draft and increased width • Limited size capabilities of Panama and Suez Canals − Reconfigured Panama Canal

Target and Cost-Based Pricing

• Agreement on supplier's full costs • Need to manage risks associated with target pricing • Requires high degree of trust, information sharing, and joint problem solving

Traffic congestion

• Airport ground congestion − Additional cargo screening − Air traffic control system • Highway traffic congestion • Rail freight vs. high-speed passenger rail • Container handling capacity • Antiquated river locks and dams system • American Recovery and Reinvestment Act of 2009

Water Carrier Advantages

• Can handle very large quantities of bulk commodities and raw materials − Extremely large volume of freight per shipment • Relatively low cost per pound

Rail Carrier Advantages

• Capable of hauling wide range of goods • Relatively low cost on per-pound basis • Low variable cost • Excellent economies of scale

Topics in Transportation Negotiation

• Carrier's service performance guarantees − Penalties and rewards based on actual performance • Shipper's commitment to minimum amount of freight volume • How parties handle freight loss and damage claims • Type and quantity of equipment • Frequency and timing of shipments • Establishment of information-sharing systems • Freight rates and discounts • Creative and innovative joint cost reduction

Rail Carrier Disadvantages

• Comparatively high fixed costs • Limited accessibility without using motor carrier for pickup and delivery • Limited door-to-door service • Long in-transit and handling times • Multiple switches and extra handling required

Economic Conditions

• Conditions favorable to supplier • Conditions favorable to buyer

Plan (3PL Selection)

• Define specific logistics service requirements and how they will be measured and evaluated • Confirm selection process • Involve key stakeholders to ensure internal buy-in • Remove barriers to success

Partner(3PL Selection)

• Develop supply chain alliances to agree to tradeoffs and share risks • Involve 3PL partners in joint strategic planning and decision making

Motor Carrier Advantages

• Direct door-to-door service • Ideal for smaller volume shipments involving multiple shippers and consignees − i.e., LTL shipments • Good speed and reliability, especially for truckload (TL) shipments

Improve(3PL Selection)

• Exchange performance measurements to identify improvement opportunities • Encourage cross-organization training and project activities

When and Where to Control Transportation

• FOB destination (delivered) • FOB origin (shipping point) • Use a preapproved or otherwise acceptable carrier list • Third party broker or intermediary − Consolidation with other small shipments − Value-added services

Air Carrier Disadvantages

• High freight cost per pound • Limited amounts and types of freight− Fuselage shape and dimensions limit container size and shape • High variable-to-fixed cost ratio• Requires combination with motor carrier for pickup and delivery for direct door-to-door movements

Water Carrier Disadvantages

• Limited shipping and receiving points • Seasonal limitations on inland waterways • Slow speed • Potential for natural disasters • Typically requires motor or rail carrier for pickup and delivery

Market-share model

• Long run profitability depends on level of market share obtained • Aggressive approach for efficient producers • Lower margins initially to increase market shareterm-192 • Eventually spreads out indirect costs over greater volume

Pipeline Carrier Advantages

• Low cost transportation for liquid petroleum products • Can handle very quantities of product • Low variable operating cost • Highly reliable • Not affected by weather conditions

Types of 3PL Services

• Merchandising • Marshalling • Postponement • Installation test fit • Cross-docking • Transport • Finished goods pull expediting • Inventory control • Vendor-managed inventory • Export packaging • Spares (returns and repairs) • Reverse flow

Market Structure Types

• Monopoly • Oligopoly • Perfect competition

An Effective Approach to 3PL Selection

• Plan • Select • Implement • Improve • Partner

Market skimming model

• Prices set for high profit margins on each unit • May be used through "backdoor" selling to non-supply management personnel • Need to carefully analyze price to ensure validity through greater benefits of product

Air Carrier Advantages

• Quickly satisfy short lead time or emergency requirements • Can support JIT inventory and manufacturing requirements • High level of competition helps hold down prices and increase service levels − Airlines may adjust capacity to stabilize prices

Motor Carrier Disadvantages

• Relatively expensive on volume basis • Limited ability to transport bulk commodities • Minimal economies of scale − Height, weight, and length restrictions • Higher variable costs • Subject to seasonal weather and infrastructure conditions

3PL Disadvantages

• Relinquish control, ownership, and expertise • Loss of integration between sales and supply • Changeover costs and operational problems • Loss of dedicated in-house management staff • Sacrifice key service differentiation

Outsourcing Logistics Services

• Select providers • Gain access to critical and timely data • Develop systems visibility to material shipments • Develop closer relationships with fewer providers • Establish companywide contracts

Implement(3PL Selection)

• Share supply chain information to deliver superior value • Build relationships • Work jointly to resolve start-up issues

Select(3PL Selection)

• Target best-in-class logistics service providers • Select 3PL, consolidator, or contractor • Negotiate mutually beneficial agreement

Analyzing Supplier Pricing Strategy

•Does the supplier have a long-term or short-term pricing strategy? • Is the supplier a price leader or a price follower? • Is the supplier attempting to establish entry barriers?

Collaborative Cost Management

•Target pricing • Cost-savings sharing

FOB origin (shipping point)

− Buyer controls or directs shipment − Buyer assumes title and risk of loss at seller's shipping point − Buyer pays freight bill and files loss and damage claims − Title passes when shipment is tendered to carrier

Generics

− Competitive market with many potential suppliers −Emphasize total delivered price − No need for detailed cost analysis − Users order directly through supplier catalogs, p-cards, or eprocurement − Traditional bidding approach

Unique Products

− Few available suppliers − Relatively low value − Utilize reverse price analysis to determine whether price is "too high" − Try to move to generics quadrant over time

Commodities

− High-value products or services − Competitive market situation − Traditional bidding approaches − Identify competitive pricing through price analysis −Standardized products

Rule requires that

− Importers electronically transmit their 10 data elements to CBP at least 24 hours before loading any container onto ship bound for U.S. − Carrier must provide stowage plan and container status messages

Transportation affects

− Production and scheduling systems − Inventory levels and carrying costs − Warehousing − Packaging and materials handling − Customer order management

Seller has following responsibilities under U.C.C. (FOB origin)

− Put goods in possession of carrier − Make a proper contract for transportation − Obtain and deliver documents to buyer − Promptly notify shipper of shipment

Critical Products

− Requires majority of buyer's focus − Relatively few suppliers − Higher-value items

FOB destination (delivered)

− Seller is required to transport goods at own risk and expense − Seller retains title to goods until offloaded − Seller assumes title to goods and risk of loss until satisfactory offloading and delivery at consignee's facility − Seller pays freight bill and files loss and damage claims

Reverse Price Analysis

Process of analyzing a supplier's overall cost structure to ensure that costs are assigned in an appropriate manner

Total Cost of Ownership (TCO) Categories

Purchase price • Acquisition costs • Usage costs • End-of-life costs

Capability

Refers to ability of carrier to move material, including special materials, hazardous materials, etc.

Accessibility

Refers to whether carrier is capable of picking up shipment and delivering it door-to-door

Unique and critical products quadrants

Cost analysis

Cost Analysis Techniques

Cost-based pricing models -Product specifications -Estimating supplier costs using reverse price analysis -Break-even analysis

Acquisition costs

Costs of bringing product to buyer

Life Cycle Costs

Idea/Concept Generation, Design and Development, Prototype, Pilot, and Launch, Ongoing Production, Product End-of-Life.

Total cost

In addition to fees charged, includes extra inventory, warehousing, buffer stock, and international fees (broker's fees, customs, etc.)

Major U.S. Deregulation Legislation

Air Cargo Deregulation Act (1977) • Air Passenger Deregulation Act (1978) • Negotiated Rates Act (1993) • Motor Carrier Act (1980) • Staggers Rail Act (1980) • Transportation Industry Regulation Reform Act (1994) • ICC Termination Act (1995) • Ocean Shipping Reform Act (1998)

Reliability

Also know as fill rate; refers to ability to deliver on time; i.e., percentage of deliveries made within specified time window

Building a Should-Cost Model

An approach to estimating the different components that make up the supplier's per unit price in a theoretical world

Total cost analysis

Applies price/cost equation across multiple processes that span two or more organizations across a supply chain

Materials Cost Drivers

Commodity fluctuations • Handling difficulties • Tolerances • Lead times • Design limitations • Managed flow • Cost of poor quality

Usage costs

Conversion and support costs

Pipeline Carrier Disadvantages

Extremely slow High fixed cost Fixed routes and rights-of-way

Transportation is a major cost center

Logistics expenses are second only to material costs in terms of impact

Labor Cost Drivers

Many firms cross borders in search of lower factor costs, such as low-cost labor, capital, and land

Speed

Measured as time from when shipment is released at supplier's facility to time of receipt at buyer's receiving dock

End-of-life costs

Net of amounts received/spent at salvage

Should-Cost Definitions

Net sales − Gross sales - Returns and discounts • Cost of goods sold − Material + Direct labor + Factory overhead • Gross profit − Net sales - cost of goods sold • Operating expenses − Interest, miscellaneous expenses, and other non-operating expenses • Profit before taxes − Gross profit - Operating and other expenses

Commodities and generics quadrants

Price analysis

Current Transportation Issues

Supply chain security Infrastructure condition Traffic congestion

Reverse Logistics

The area of logistics that involves bringing goods back to the manufacturer because of defects or for recycling materials.

Transportation Modes

The means of moving goods from one location to another. The five major modes are railroads, trucks, waterways, airways, and pipelines.

Cost analysis

The process of analyzing each individual cost element that adds up to the final price

Price analysis

The process of comparing supplier prices against external price benchmarks without direct knowledge of supplier costs

All quadrants

Total cost analysis

Historical Cost Reduction Approaches

Value analysis/value engineering Process improvements Standardization Improvements in efficiency using technology

Carrier Selection

selecting the individual transportation service providers within the mode

perfect competition

the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product

Monopoly

the exclusive possession or control of the supply or trade in a commodity or service.