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Supply chain diagnostics

 

The two largest cost elements in the logistics area are usually freight and the finance cost of holding inventory. AdvisorBase has powerful diagnostic tools to assess the performance of these crucial areas. Supply chain diagnostics can be undertaken as either face-to-face consulting projects or by client staff in-house using a coached project approach.

Freight efficiency

Experience is that guided by a freight diagnostic most FMCG suppliers may be able to reduce freight costs by around 20%. That is a lot of money, so what is freight efficiency? As an illustration of freight efficiency try a simple test.

1.

Check your freight contract. What is the lowest contract freight rate you could pay to a particular customer location, as a $ per cubic or $ per weight measure?

2.

Check your freight invoices and find the lowest rate as $ per cubic or $ per weight measure (biggest consignment) and highest rates (smallest consignment).

 

Effective freight rate

= what you have paid ($ paid) divided by total product cube or weight for the consignments

3.

Calculate your single destination freight efficiency as:

 

Worst

= 100 x Lowest Contract Rate / Highest Actual rate paid

 

Best

= 100 x Lowest Contract Rate / Lowest Actual rate paid

 

How to interpret? If:

You don’t have the data to calculate the efficiencies, you don’t know how big your problem is. It is likely that by not monitoring this key performance measure you will be paying too much in freight charges.

‘Worst’ is not 100%, then there may be scope to significantly reduce your freight costs through a number of techniques – not just beating up on your freight contractor!

‘Worst’ is equal to ‘Best’ and there is a significant difference in consignment size between ‘Worst’ & ‘Best’, then your large consignment is subsidising the small one – not good news if you are planning to grow the business.

Your total freight costs multiplied by (1- ‘Worst’) = a number you would like to target as a saving, you should consider undertaking an AdvisorBase Freight Diagnostic, because the full story is a lot more complex than the illustration.

 

Saving Target

= Freight costs x (1-’Worst’)

This saving target is just that, a target. Achieving 100% freight efficiency is rare. For more information see our white paper on Achieving Freight Efficiency.

Inventory effectiveness

Companies may either carry too much inventory and incur too high a cost of holding inventory, or too little inventory and lose sales due to unavailable lines or through a reputation for poor service levels.

What does inventory cost you? Not having product in stock costs sales, especially if your FMCG sector does not operate on backorders. The cost of holding inventory is your cost of finance (the interest on borrowing money) multiplied by the average value of your inventory. Experience tells us that this cost can often be reduced by 10%, or even 30% - and service levels improved. How?

The AdvisorBase Inventory Diagnostic uses rigorous analysis to test each inventory line to see if it adds to or subtracts from your business objectives of:

Customer service levels

Product ranging

Profitability.

Where our diagnostic identifies problem lines, we recommend solutions and can work with you develop implementation strategies. The solution is not likely to be a simple ”reduce inventory”. Most likely the diagnostic will recommend some inventory levels be increased, some decreased, or some items be deleted. Working together we will find the path ahead that best suits your business.