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PUBLIC
PERFORMANCE BASED
CONTRACTING AS SEEN FROM
THE LSP’S PERSPECTIVE
ESCF Workshop
Eindhoven, 11 June 2014
PUBLIC
Agenda
1 DHL Introduction
2 DHL Value propositions – Contract types
3 Case study
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DHL at a Glance – “A Test”
1.
Do you know the mother company of DHL
2.
What size is the company
3.
What are the main services offered by DHL
4.
DHL is market leader in contract logistics, what is the market share
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DHL Supply Chain is part of the DPDHL group with a global network
and an extensive logistics portfolio
Employees: ~ 475,000/Revenue: EUR 55.5bn1)
Employees: ~ 285,000/Revenue: EUR 42.8bn
Employees: ~ 175,000/Revenue: EUR 13.9bn
The postal service for Germany
The logistics company for the world
EXPRESS
GLOBAL FORWARDING & FREIGHT
SUPPLY CHAIN
International
Express
Air and Ocean
Freight
Contract Logistics &
Business Process Outsourcing
Road
Freight
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DHL at a Glance
DHL Revenues: 42.8 bn€
(2012)
World's
largest ocean
freight forwarder
(in both FCL & LCL1))
Global Market
Share 2008
World's
largest
contract
logistics
service
provider
12.9%
8.4 %
DHL has
a global presence within
over 220 countries and
territories
World's
largest air
freight forwarder
Global Market
Share 2008
9.1%
Global
Market
Leader
2.3%
~37%
Global
Market
Share 2009
DHL’s customer base
includes 50% of Forbes
top 500 companies
One of
Europe's
leading
road freight
forwarders
European
Market
Share 2009
One of the world's leading courier
and express service providers
European International Express
Market Share 2009
DHL employs
approx. 285,000 people
1) Full-container load; Less-than-container load ; 2) All Market Share Data and revenue figures as per DP DHL Media Mail 2011
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Agenda
1 DHL Introduction
2 DHL Value propositions – Contract types
3 Case study
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Varied Value Propositions to suit our Customers Demands
Customer value propositions of LSPs beyond lower freight rates
Customer value proposition
Direct
logistics cost
1 Lower direct logistics cost (beyond lower rates)
.
•
•
•
•
•
Mode switch
Direct transportation
Reduction of warehousing legs, lean warehousing
SC reconfiguration (e.g., postponement)
Backhaul optimization
2 Lower inventory carrying cost
.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Inventory optimization/stockholding location optimization
SC transparency
SC reconfiguration (e.g., postponement)
Warehousing process optimization
Customs process streamlining
Mode switch (e.g., move from OFR to AFR)
Direct transportation
Reduction of warehousing steps
Warehousing process optimization
SC reconfiguration (e.g., postponement)
Inventory optimization
Customs process streamlining
Increased delivery accuracy and quality
SC reconfiguration (e.g., postponement)
Inventory optimization
Taking assets/resources of shipper's balance sheet/payroll,
charging variable fee
Reducing complexity for shipper
3 Lower obsolescence cost
.
Indirect
logistics cost
4 Lower lost sales/additional revenues
.
Operating
resources/
complexity
Key levers
5 Reducing asset/resource intensity of shipper's business,
. variablising fix cost, reducing complexity for shipper
•
SC risk
6 Reducing shipper's SC risk
.
•
•
Reducing SC risk (e.g., through better transparency)
Transforming/carrying part of SC risk for which LSP is
better owner
Transparency
7 Transparency on direct and indirect logistics cost as well as on
. current SC setup
•
Rapid SC mapping and analysis capabilities
•
Holistic analysis of SC setup options
Integrated SC 8
optimization .
Integrated optimization of direct and indirect logistics cost
(also on global level)
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DHL can take on different roles in customers' supply chains, offering
different value propositions
Potential SC roles
Value proposition
Contract types used
The commodity service provider – • Provide high-quality executional
logistics services at a competitive price
A/B get a big share of wallet for
(e.g., FF, EXP business, warehousing)
executional services
• Unit rates for standard services
(fix or quoted)
• Open book cost plus
C
The SCM consultant – get
consulting fees for service
• Consult customers to improve efficiency
and effectiveness of their SC setup
(project based)
• Consulting fee
D
The SC Manager – get
management fees for service
• Manage parts of customers' SC to
improve efficiency and effectiveness
(for longer period of time/ongoing)
• Management fee
E
The gain sharer – get part of the
impact achieved
• Take over and optimize parts of the SC
• Open book gain share
– Reward/penalty
– Gain share
– Value share
• Enhanced unit rates/closed book
(value/gain sharing component)
• Commercial JV
• Take over and guarantee service level
and cost reductions for parts of
customer's SC
• Closed book/unit rates for
integrated logistics services
The end-to-end SC solution
F provider – deliver an integrated/
end-to-end service and bear cost
and/or performance risk
Examples provided
on next page
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For reference only
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Multiple Case Studies for Each Value Proposition (1/2)
D
The SC Manager – get management fees for service
• Management fee
E
• E.g., Jaguar , Erricson , Unilever, Airbus
– SCM related services (e.g., transport planning, customer service, control tower
management, material call off management, inventory management)
– Compensation via open book plus management fee (esp. for transport related services)
or variabilized in service rate (esp. for warehousing related services, e.g., per order-line)
The gain sharer – get part of the impact achieved
• Open book gain share
– Reward/penalty
• DESC Reckitt Benckiser contract
– Warehousing and value added activites (e.g., co-packing)
– Open book with reward/penalty scheme based on service level; significant
proportion of management fee offered as incentive for ongoing improved
service, no reward/penalty for average service
– Gain share
• DESC Ford LLP contract
– Redesign the inbound flow into 12 plants from 1,500 suppliers, including
return flows of packaging
– Open book contract with shared savings; Each gain share was timebound
so that all of the saving would be retained by Ford after 3 years.
– Value share
• DESC PDO contract
– Managing movements of oil rig derricks for drilling
– Compensation based on management fee plus value share based on
equipment uptime if outperformance of uptime targets
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For reference only
DHL has ample experience with advanced value propositions
and suitable contract types (2/2)
F
• Enhanced unit
rates/closed book
(value/gain sharing
component)
• DESC Intel contract
– AFR shipping of semiconductors from Hong Kong with additional end-toend service to reduce damages
– AFR rates plus cargo packing charge based on improvement of damage
rate
– Open book with reward/penalty scheme based on service level; significant
proportion of management fee offered as incentive for ongoing improved
service, no reward/penalty for average service
• Commercial JV
• DESC Goodyear SCM partnership
– SC partnership including warehousing, transport management and value
added activities
– DHL formed a JV with Goodyear and is rewarded with a share of the entire
value created through the SCM partnership
The end-to-end SC solution provider – deliver an integrated/end-to-end service and bear cost and/or
performance risk
• Closed book/unit rates • DESC Sun SPL
– E2E SC mgt for service logistics (call centre order management,
for integrated logistics
warehousing, transport management, forward inventory positioning ,
services
reverse logistics incl. parts screening, testing)
– Unit rate depending on service level (e.g., 2h, 24h, …) covering cost of all
services
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For reference only
PUBLIC
DHL is not Risk Adverse! …but the returns have to be propotionate
Risk type
Description
Best ownership
Cost risk
Risk of incurring higher cost
than expected to achieve an
agreed service level
• LSP in general best owner as higher
expertise than shipper
• Shipper best owner for risk of fluctuation
of inputs (e.g., fuel cost)
Performance
risk
Risk of not delivering the
expected performance
• LSP best owner for part under his
control
• Shipper best owner for aspects beyond
LSPs control (e.g., force majeure)
Utilization risk
Risk of underutilizing logistics
infrastructure
• LSP best owner if assets can be
utilized for other customers as well
(portfolio effect)
• Shipper best owner if assets are
dedicated/specific to customer
Shipper's
business risk
Risk of customer's business,
e.g., declining prices/margins
• Shipper best owner
Compensation
logic risk
• To be minimized
Risk of overlooking a key
determinant
LSP potential to take on risk not fully
leveraged in most contracts today
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There are suitable contract types for all value propositions,
implying different levels of risk
Risk by exposure*
Value propositions
Suitable contract types
(not comprehensive)
Cost risk (e.g.,
overshooting cost in highseason)
Performance risk
•
Unit rates/closed book
•
Open book cost plus
•
Consulting fee
•
Management fee
-
If performance
penalties
agreed
•
Open book gain share/JV with performance penalties
-
•
Unit rates/closed book plus
performance incentives/penalties**
-
Not realizing
gains/incurring
penalties
•
Closed book/unit rates for integrated
logistics services combined with strong
bonus/malus system
Commodity
B service provider
C
D
E
-
Utilization risk
If performance
penalties
agreed
If performance
penalties
agreed
SCM consultant
SC Manager
Gain sharer
End-to-end SC
F solution
provider
* Beyond risk of losing contract/damaging other business
Source: DHL SCO team
-
Not realizing
gains/incurring
penalties
-
-
** Performance incentives as gain share on indirect cost savings
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A careful assessment is required before taking risks on
Assess …
Implement ability of
scenarios
• Can we build
the solutions?
Stability of
scenarios
• What if we
change key
parameters?
• Determine im• Sensitivities
plementation
reg. contract
complexity/viaparameters
bility (consulting, (e.g., cost for
logistics sercost-plus)
vices) and (risk, • Sensitivities
scope complexreg. scope
ity, innovativeparameters
ness, …)
Source: DHL SCO team
Sustainability
of scenarios
Determine
payout range
of possible
outcomes
Decide on
viability of
proposal
• Will the solution • How high
fall down a few
(or low) can
months/years
we get?
down the road?
• Shipper's per- • Determine
spective – maxi- payout matrix
mize savings
of scope/contracting options
• LSPs perspective – achieve
"good" margin
Due diligence can be extended to a
'honeymoon' open book period to gain
a better understanding of customer
situation and risks
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Agenda
1 DHL Introduction
2 DHL Value propositions – Contract types
3 Case study
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BAT – DHL Lead Logistics Provider case study
In 2010 DHL started a relation ship with BAT, in this case study we like to
elaborate on the following
History
• What were the challenges?
• How did the relationship
develop?
Relationship
• How does the contract
look like?
Implementation
• How can we make sure the
value is actually shared?
• Structure: 2 parties 1 team
• Benefits BAT
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Where have BAT come from?
Strong relationship
with procurement..!
A clear focus on
optimisation..!
Full alignment with
TM&D..!
Joking aside, in short, logistics had not been a major focus for the business
and there was (and still is) significant scope to improve, integrate and optimise
how we plan and execute our network
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How did Logistics WE BAT look like when we started?
28,000+ primary
movements per year,
covering 12.5 million km
Significant primary cost
base linked to complex
route to market supply
models
75+ different freight
carriers, multimodal sea, road, air
Total warehouse estate of
over
220k sqm,
All commodities from leaf
to finished goods,
inbound & outbound
Core BAT Logistics team
in partnership with DHL
LLP
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What were BAT’s Key Business Challenges?
Key business challenges
Where BAT sees these challenges…
Buy
Plan
1) Lack of supplier
management
2009 – Gross
WMS write off’s of
£14m
2) Commercial integration
and understanding
No joint S&OP –
clock speed is
different
(2
month lag)
No formal
contracts or
performance SLA’s
in place
5 different plan
processes
4) The cost we incur to
deliver our service levels
Inefficient &
manually intensive
processes
6) The degree and speed of
change
SKU schedule
adherence < 50%
over 3 wks (Bay)
Move
Service
Only 50% of
inbound on time,
plus up to 21 days
early (Plo)
Separate networks
between primary &
secondary
Forecast accuracy
at 62%
Duplication &
policing of data
GOM is only a framework – we have to operationalise processes, standards, governance & controls
3) Process standardisation
and maturity
5) Visibility of information and
exception management
Make
Demand decline
outstrips capacity
reduction
All manual
processes
20% vol x regional
– GOM unclear
Duplication of
effort across
networks
Commercial
relationships are
reactive, not
responsive
Running a mature thinking supply chain set up on manually intensive reporting & analysis
No real scenario
plan capability
No EDI links for
real time info
Manual status &
order tracking
We are executing 18 regional transformation projects / Average time in G36 role (& below) is 18 months
Closure of manuf.
sites
BAT’s business suffered from some traditionally complex supply chain challenges
– “we know the problems and that the solutions require an integrated approach”
Average SKU life is
9 months
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Solutions Framework
Customer
Supply Chain Strategy
DHL - Lead Logistics Provider
Supply Chain Transformation
DESIGN
World class systems and
people to optimise your
supply chain
MANAGE
Freight Control
Towers
Supply Chain
Visibility
OPERATE
DHL Managed 3rd
Party Operations
Continuous Improvement across all layers
Presentation title | Location | xx Month 20xx
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Workshop questions
1.
What type of contract would you go for?
2.
What KPIs to include in contract?
3.
Would you include penalties and/or incentives and if so how?
Break out in 3-4 groups
Presentation title | Location | xx Month 20xx
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Western Europe Control Tower – The Beginning
•
BAT European SC Steering Committee 2003
•
Western Europe Control tower Implemented in 2006 (DHL)
o
•
5 factories
Establishment of routes and look to optimise and develop network savings
o
Load Fill
o
Vehicle Reduction
•
Transport planning via Ethos and manual spread sheets
•
Lead Logistics Provider (LLP) for BAT in Western Europe
o
•
Local Services Agreement for WE
Move from a Control Tower to a Transport Service Centre (TSC)
•
System led operation
•
Continuous improvement culture
•
Challenging BAT ways of working
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Expansion of LLP
Factory
Reviews
Proc’men
t
Shared
Proc’me
nt
Multi
User
Control
Tower
WMs
Proc’me
nt
WMs
Contract
Mgmt
and
Handlin
g
Solution
Design
Contract
Novatio
n of 3PL
Contract
s
Project
Mgmt
Primary
Transpo
rt
Second
ary
Inventor
y Mgmt
Factory
Reviews
Factory
Reviews
Proc’men
t
Solution
Design
Solution
Design
Solution
Design
Contract
Novation
of 3PL
Contracts
Primary
Transport
Primary
Transport
Primary
Transport
Secondar
y
2010
2011
2012
2013
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Our Solution - 2 partners 1 team
BAT
Finance
TLCM
SC
Developme
nt Mgr
Solution
Design
WE
LLP
Transport
Service
Centre
WE
Freight
Ops Mgr
Carriers &
Procureme
nt
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How does a contract like this look like?
•
Open and transparent cost base
•
Open book
•
Cash neutrality
•
Management fee plus gain share
•
Gain share only paid on actual savings
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Benefits to Date for BAT
•
2010 – 2013 savings totalling +20% original baseline
•
Increased V1 security carrier base equals 20% increase in transport capacity
•
Average finished goods vehicle fill increase of +15%
o
7.35 million (2011) – 9.11 million (2013)
•
Significant reduction in truck re-positioning
•
Visibility and control across the supply chain
•
One Standard Carrier Agreement for all suppliers
•
ISO 9001 accreditation
•
Short listed for CILT award 2013
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KPI Dashboard
•
Full KPI suite available to direct operational focus and
continuously improve supply chain efficiency
Pallets Loads Monthly
Trend
500
450
400
•
Information availability is providing the backbone of
operational excellence and identifying project initiatives
350
Dec
Jan
Feb
Mar
Apr
May
Loose Loads Monthly Trend
50
KPI Highlights
• Decreased Cost per Mille
• Improved vehicle Fill despite optimum stretch
• Increased OTIF deliveries
• Reduced cost of poor quality due to improved and ingrained
process
• Production volatility proactively used to plan fleet
• Reduced re-positioning to zero for 3 consecutive months
40
30
20
10
0
Dec
300
Jan
Feb
Mar
Apr
May
SlipSheet Loads Monthly
Trend
250
200
150
100
50
0
Dec
Jan
Feb
Mar
Presentation title | Location | xx Month 20xx
Apr
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May
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Look after your Idea Pool
Pipeline to Profit
STOP
Customer’s own Tactics
Reasons
Political
Practical
Financial
Too Far Too
Fast
Monthly
Blue Sky Meetings
DHL Development Team Meetings
Hold
Knowing the customer’s business
Back Burner
Other
priorities
‘Next Year’
LLP
Personal experience & ideas
Customer Head of Function (HoF)
Customer Logistics
DHL Head of LLP
DHL Development GM
Support as needed
Customer non-Logistics Functions
manufacturing, sales , planning, finance
Stealing with Pride !
Go !
Produce
Charter 1
Charter 1
•
•
•
•
•
•
Progressed thru
Dragon’s Den
Overview of idea
Success Criteria
Savings Estimate
Resource indication
External costs and time
Data Requirements
LSA Review Board
•
•
•
•
•
•
Customer HoF
Customer Procurement
Customer Finance
DHL Global LLP
DHL Head of LLP
Support as needed
Go !
Produce
Presentation title | Location | xx
Month 2
20xx
Charter
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Pipeline to profit
Charter 2
Complete Analysis
& Business Case
Timeline
Implementation plan
Costs
Resources
Benefits
Measurement Criteria
Base Line
Gain Share
Programme members include LLP and Customer owners
of Operations, Finance & Development. Agree at each
stage of development.
DHL LLP own the process
LSA Review Board
Track Results to Base Line
• Customer HoF
• Customer
Procurement
• Customer Finance
• Customer Country
Mgrs
• DHL Global LLP
• DHL Head of LLP
• Programme Lead
• Support as required
Go !
Implementation
DHL Exclusivity
Gainshare Approved
Track Results to Baseline
Implementation to plan
Costs on target
Resources in place
Benefits Delivered
Gain Share Signed off
Gain Share Realised
Presentation title | Location | xx Month 20xx
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Summary
“Performance based contracting as seen from the LSP’s perspective”
 DHL as an LSP can offer different value propositions, taking different
roles in the supply chain and taking different types and levels of risk
each having their own type of contract.
 The LLP model gives BAT access to world class supply chain
professionals with a flexible cost effective commercial model.
This has led to a true WIN-WIN relationship.
 DHL has developed a methodology to be sure the value is accurately
recognized and shared.
 Today DHL is led by our customers demand for services however
tomorrow we recognize our customers will look for more and more
partnership to shape future solutions together
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Contact
Jeroen Martens
Director of Network Design & Supply Chain Consulting
DHL Supply Chain
BD Europe
Phone +31 611 317462
[email protected]
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