ISyE 6203 Transportation

1
ISyE 6203Transportation Supply Chain Systems

• John H. Vande Vate
• Spring 2012

2
My Approach

• What aspects of the financial goals of the
  organization do Supply Chain activities
  contribute to?
• How do we measure these aspects of Supply Chain
  activities?
• Financial goals often conflict. What tools are
  available to help Supply Chain find the right
  balance
• What tools are available to help improve SC
  performance
• Motivate by simple examples
• Integrate via an industrial project

3
Goals

• That we understand the main SC objectives
• That we can assess the effects of proposed
  initiatives on those objectives
• That we develop some skill and intuition for
  identifying effective initiatives
• That we are armed with some practical tools for
  designing, balancing and optimizing SC
  activities.
• That we have some real experience doing all of
  these

4
Deterministic vs Stochastic

• Organizations are adept at managing forecasted
  flows
• Most still struggle with forecast (in)accuracy
  and unforecasted variability
• We will start with a deterministic view through
  the mid-term.
• Focus on managing variability after the mid-term

5
Class Presentation Teams

• We will work in teams of 4-5 on a project and on
  improving Our Company performance
• You should select your team members by Friday,
  January 13th end of business day
• One person from each team should send me an
  e-mail with the subject line 6203 Teams with
• The names of the team members
• A designated contact (with e-mail) for the team
• I will refer to the team by the contacts last
  name

6
Class Presentations

• Each Tuesday I will call on one or two teams to
  present their solutions to assigned Challenges
• I expect a brief presentation that explains
  briefly how you answered the challenge (what
  method you used), shows your answer and explains
  the impact
• Remember, we will be improving the performance of
  Our Company so relative improvements are of
  primary interest

7
Projects

• Around the mid-term we will stop working on
  Challenges and change our focus to industrial
  projects
• I will be announcing these over the coming weeks
• You will work with a team (possibly different
  from your Class Presentation Team) on 1
  industrial project

8
Project Structure

• 3 Steps (Adaptable)
• Step 1 Formal project statement, summary of the
  data and rough estimates of the potential impacts
  of various alternatives.
• Step 2 Analyze and optimize the top alternatives
  and develop detail assessments of their cost and
  service impacts
• Step 3 Present your assessment and
  recommendations to management, including an
  evaluation of more qualitative risks and
  opportunities associated with each strategy.

9
Deliverables

• Each team will make a presentation to the class
  during the last couple weeks of the semester
• Each team will present to the client (probably
  via phone or internet)
• An organized CD or T-Square files that facilitate
  the transfer of your project.
• I will set up Team Project Forums on T-Square and
  invite your sponsor to join

10
Project Grade

• Presentations Content, Clarity and Quality of
  your presentations
• Project management
• Coordinating, attending, managing meetings
• Clarifying project scope and direction
• Managing information, meeting minutes, data
• Staying ahead
• Initiative
• Integrity

11
My Role

• As much help as you want
• Eager to meet with you and hear about your
  progress and questions at your request
• Strongly recommend you share your presentations
  with me well in advance for advice.
• Will attend initial conference calls to establish
  the project, but will step back after that

12
First Steps

• I will share brief project overviews
• You will organize your project team (may be the
  same as Class Presentation Team) and send me
  preferences
• I will assign projects and organize initial
  conference call with sponsor
• You will take it from there.

13
Conference Calls

• Usually in 226 (arranged via Meka Wimberly
  meka.wimberly_at_isye.gatech.edu)
• Not necessary that everyone be there, but its
  better.
• Someone from you team should take careful notes
  and post them as meeting minutes on your Project
  Forum
• You are responsible for organizing conference
  calls after the first one or two.

14
Potential Projects

• Halstead/Vertex
• Acumen Fund ZHL Ziqitza
• Tiffanys
• VW/Audi
• Projects you organize

15
Course Organization

• Two Exams
• Mid-term Thursday, March 1st
• Final Tuesday, May 1st from 250 to 540
• Grading
• Project 30
• Mid-term 30
• Final 30
• Team Presentations 10
• Warning People struggle with my exams
• Academic Honesty

16
Text

• No text book.
• Ive listed some good resources on the class web
  page (see T-Square)
• I will provide selected readings and links to
  additional information
• Radical Tools (an Excel Add-in) in the Labs
• MapPoint available in the labs. May also be
  available for free from http//msdn08.e-academy.c
  om/gatech_isye
• Also available for free as a 60 day trial on
  the internet.

17
Questions?

• Feel free to send questions via e-mail
• Or drop by my office 222 of old ISyE bldg
• Feel free to schedule a meeting via e-mail
• Anonymous feedback on each lecture via T-Square
  (under Tests Quizzes I used Anonymous
  grading only so I dont see your identity).

18
Travel

• I have to be out of the country from February
  20th through March 2nd
• Guest lectures during that period
• HDT Case on Cash Flow
• Air Freight 101 Over-the-Road 101 with Greg
  Andrews EMIL-SCS Managing Dir.
• Mid-Term Exam
• Be sure to ask questions by Thursday, Feb 16th
• I will be available via e-mail, but expect delays

19
Our Company

• Today Introduce Our Company and evaluate its
  performance
• Coming Weeks Develop a distribution strategy to
  improve Our Companys financial performance
• These will be Team Presentation Assignments

20
Overview

• Products
• Computers CPU, Monitor
• Televisions TV and Console
• Stores
• 100 across the US
• Sell 10 TVs and 10 computers per day
• 250 days/year

21
Components
We assume a truck holds 30,000 lbs and travels
500 miles/day
CPUs TV/Monitor Console
Cost 300 400 100
Weight 5 lbs 10 lbs 30 lbs
From Green Bay Indianapolis Denver
22
Current Operations

• All direct shipments in full truckloads

23
Simplification

• Shipments on the order of 1,000 miles

Use your head! Make an estimate. Refine it.
Averages Green Bay 969 Indianapolis
854 Denver 1,006
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Our Company.xls

• Enable Macros
• ArcCos
• Distance Computes the distance in miles between
  two latlong coordinates
• Or you can use the Radical Tools add in available
  in the labs. (We wont work with distance much
  initially)
• Components Cost, weight, source
• Products BOM, Selling price
• Locations LatLongs of stores and plants,
  distances
• Financials Income Statement, Balance Sheet,
  Metrics

  CPUs TV/Monitor Console
Cost 300 400 100
Weight 5 lbs 10 lbs 30 lbs
From Green Bay Indianapolis Denver
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Our Company.xls
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Our Company.xls
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Arrow Electronics Annual Report

• Operating efficiency and working capital
  management remain a key focus of the company's
  business initiatives to grow sales faster than
  the market, grow profits faster than sales, and
  increase return on invested capital.

Market Share
Profitability
Return on invested capital
28
SC Finance
Corporation managers generally claim that they
have four broad responsibilities to consumers,
to employees, to stockholders, and to the general
public each group is on an equal footing the
function of management is to secure justice for
all and unconditional maxima for none.
Stockholders have no special priority they are
entitled to a fair return on their investment,
but profits above a fair level are an economic
sin.
Sutton et al. The American Business Creed 1956
29
Financial Goals
30
Revenue

• SC helps drive revenue
• Superior service commands higher price and
  loyalty
• Product availability drives sales
• Integrated operations can become a barrier to
  changing suppliers
• Speed of product introduction can win market
  share
• Our Company Revenues 450 Million

31
SC Financial Goals
32
Income Stmt Profitability
33
Profitability

• COGS Cost of Goods Sold
• Includes all costs of material, labor, and
  allocated overhead, purchase, conversion and
  other costs incurred in bringing the inventories
  to their present location and condition.
• Prices change. So there are various methods for
  reconciling
• specific identification,
• first-in first-out (FIFO)
• average cost
• Thats accounting, we wont worry to much about
  the accounting standards.

34
COGS

• You can read more about COGS at
• http//en.wikipedia.org/wiki/Cost_of_goods_sold
• Or for a quick practical overview,
• http//learndirecthmmdemo.lmmattersonline.com/cour
  ses/hmm10/budgeting/documenting_revenue_forecasts.
  html
• Our Company COGS consists of
• Raw Materials 300 Million
• Labor 1.41 Million
• Transportation ?

Not required
Not required
35
Gross Margin

• Gross Margin Revenue COGS
• Gross Margin as of Sales
• Our Company Low transportation costs ensure high
  Gross Margin
• For more details see
• http//en.wikipedia.org/wiki/Gross_Margin

Not required
36
SGA

• SGA Selling, General Administrative includes
  costs for research and development, product
  design, marketing, distribution, customer
  service, commissions, administration, and
  overhead.
• Our Company SGA 26.2 Million
• For more discussion see, for example,
• http//www.investopedia.com/terms/s/sga.asp

Not required
37
Depreciation Amortization

• Typically not a major SC consideration for us.
  Has to do with expensing large capital asset
  investments like plants and equipment
• Except for Depreciation, Profitability is driven
  by revenue and operating EXPENSES

38
Operating Income (EBIT)

• Earnings Before Interest Taxes
• Gross Margin minus
• SGA
• Amortization Depreciation
• Impairments and other expenses
• Non-Operating Income

39
Balance Sheet Capital Utilization
40
Why Capital Utilization?

• Might find Capital Productivity Why the US
  Leads and Why it Matters interesting.
• McKinsey Quarterly, 1996 Issue 3
• Available from eJournals at www.library.gatech.edu
  
• Focus on Why it Matters. Might be interesting
  to reflect on the Why US leads aspects in light
  of financial crisis.

Not required
41
Digression on US vs German Capital Utilization

• Differences in capital markets
• Differences in employment models
• Differences in political economies
• A broader perspective on goldplating

42
Capital Utilization

• Productivity of capital
• How well capital investments are employed to
  deliver goods and services
• From an investor perspective, related to the
  return available from investment
• Note the INVESTMENT perspective.
• Capital Utilization driven by Revenue and
  INVESTMENT

43
Productivity of Capital

• Productivity of Capital (SPEED)
• Return on Invested Capital (ROIC)
• Our Company Reducing Inventories improves SPEED
  and ROIC
• For more information see
• http//news.morningstar.com/classroom2/course.asp?
  docId145095page9CNCOM

Not required
44
NOPAT NIBCLs

• NOPAT Net Operating Profit After Taxes
• NIBCLs Non-interest bearing current liabilities,
  eg., accounts payable

45
Two kinds of Capital

• Fixed Capital Assets
• Plants and Equipment
• Working Capital
• Inventories or raw materials and finished goods
• Accounts receivable
• Accounts payable
• For more on Working Capital see
• http//en.wikipedia.org/wiki/Working_capital

Not required
46
Working Capital

• The cash required to finance operations
• The Cash-to-Cash cycle
• Organization must have capital to fund raw
  materials, etc. from the time it pays for them to
  the time its customers pay for the corresponding
  finished goods

47
Working Capital
What our suppliers finance for us
What we finance for our customers
48
Working Capital AR

• Typically most meaningful when expressed in terms
  of time
• Days Sales Outstanding
• Example Our Company
• Receivables 18.493 Million
• Sales 450 Million or about 1.233 million/day
• DSO 15 days

49
Working Capital AP

• Days Payables Outstanding
• Example Our Company
• Accounts Payable 24.733 Million
• COGS 301.4 million plus transportation or about
  826 thousand/day avg daily transportation
• DPO 30 days (ignoring transportation)

50
Working Capital Inventory

• Days in Inventory
• We will have to do some work to estimate
  Inventory
• Normally this would be an accounting process How
  much inventory do we have?
• We will estimate inventory. Why?

51
Cash-to-Cash Cycle

• Days Sales Outstanding 15 days
• Days in Inventory ? days
• Days Payables Outstanding?30 days
• Cash-to-Cash Cycle ? days
• Our Company Net net, our suppliers fund 15 days
  of operations. Depending on inventories, we must
  fund the rest.

52
Dells Cash-to-Cash Cycle
Dell 2011
Accounts Receivable 6.493 Billion
Inventory 1.301 Billion
Accounts Payable 11.293 Billion
Sales 61.494 Billion
COGS 50.089 Billion

DSO 38.54 Days
DII 9.48 Days
DPO 82.29 Days
C2C (34.27) Days
Thats about 4.7 billion
Dells suppliers finance a month of Dells
operations
53
Discussion

• SC can influence DSO by providing perfect order
  delivery, prompt accurate billing, etc,
  integrating with customer accounting systems,
• SC can influence DSO and DPO by negotiating terms
  of sale, e.g., when title transfers, mode of
  delivery, etc.
• We will mainly focus on Inventory. How can SC
  influence Inventory?

54
Fixed Asset Utilization

• Utilization of Capital Equipment
• Sometimes at the expense of working capital See
  The Goal
• Recent story Intel SC Transformation
• http//www.supplychainbrain.com/content/headline-n
  ews/single-article/article/through-its-complete-cu
  ltural-shift-intel-takes-top-spot-in-supply-chain-
  innovation-awards/

Not required
Required
55
Inventory

• Inventory is an INVESTMENT, not an expense
• Can speak of inventory in terms of
• Units
• Days
• The latter are more common except when dealing
  with very specific operational details

56
Apples Oranges

• How to balance inventory INVESTMENT against
  operating EXPENSES?
• Should I INVEST more in a hybrid to reduce my
  weekly fuel EXPENSES?
• Cant compare the difference in weekly or annual
  operating expenses with the difference in the
  investment!
• Associate an operating EXPENSE with the
  INVESTMENT

57
Inventory Carrying Cost

• Usually expressed as a of the value (at COGS)
• Many companies dont have a good handle on this.
• Two components
• Average Cost of Capital
• Operational Expenses associated with Inventory

58
Average Cost of Capital

• Sources of Capital
• Shareholders Equity
• Bond holders and Creditors Debt
• Question
• Which gets a higher return?
• Why?

59
Average Cost of Capital

• of Equity Cost of Equity,
• of Debt Cost of Debt (1-Tax Rate)
• Example Our Company
• From the Balance sheet
• Total Assets 287 million (ignoring inv.)
• ? NIBCLs 25 million
• 262 million
• Long Term Debt 130 million at 5
• Short Term Debt 0 million at 5.5
• Equity 132 million at Cost of
  Equity?

60
Average Cost of Capital

• of Equity Cost of Equity,
• of Debt Cost of Debt (1-Tax Rate)
• Example Our Company
• Debt 50 Cost of Debt 5(1-24.9)
• Equity is 50 Cost of Equity 9
• Average Cost of Capital 6.39
• This will change when we include inventory in our
  capital and financing for inventory in our
  liabilities
• Dont worry about its changing.

61
Cost of Inventory

• Non-Capital Charges as of Inventory
• Warehousing
• Obsolescence
• Price Erosion LCD TV prices fall 24/year
• Pilferage
• Damage
• Insurance Taxes
• Other
• Does this depend on the SKU?
• Typical charge is 10
• These are PRE-TAX costs
• Capital charge was AFTER TAX

62
Total Cost of Carrying Inventory

• Total (Pre-Tax) Cost of Carrying Inventory
• Non-Capital Charge (e.g., 10)
• Capital Charge/(1-Tax Rate)
• Our Company
• Non-Capital Charge (we will guess 10) 10
• Capital Charge 6.39/(1-24.9) 8.5
• Total Cost of Carrying Inventory 18.5
• What does this mean?
• For every 100 million in inventory we carry
• The annual cost of carrying that inventory is
• 18.5 million
• We can compare THAT with annual operating
  expenses

Lets be careful to distinguish. Shout if youre
confused!
63
Summary

• Income Statement focus on Profitability
• Usually think of increasing revenues or reducing
  expenses
• Balance Sheet focus on Capital Utilization
• Usually think of reducing working capital
• Inventory Carrying Cost
• Allows us to balance the two approaches
• No one writes a check for Inventory Carrying Cost

64
Questions?
65
Next Step

• Estimate Inventory
• Depends on how we operate
• Today we
• Minimize transportation costs by running full
  truckload direct (lowest rate and shortest
  distance)
• Maximizes Gross Margin
• Whats the effect on inventories?
• How well are we balancing our competing metrics
  of financial performance?

66
Types Of Inventory

• Pipeline Inventory Goods in transit
• Cycle Stock Goods accumulating or depleting from
  batch operations, e.g., accumulating or selling
  off a truckload quantity
• Safety Stock Goods held as a buffer against
  variability in demand and in replenishment
• Anticipation Stock Accumulated because of
  limited capacity

67
Cycle Stock

• Example Accumulated at a shipping dock awaiting
  full truckload
• Typically assume constant (long run average) rate
  of production

68
Cycle Stock
Truck Load
Inventory
Average Inventory? (Units or Value)
Average Inventory? (Days)
Time
69
Cycle Stock
Truck Load
Average Inventory? (Units or Value)
Average Inventory? (Days)
Time
70
Cycle Stock

• Units Half the size of the batch
• Value Half the value of the batch
• Time Half the time to accumulate the batch.
• Simple.
• We will see modifications of this simple model.

71
Pipeline Inventory

• Littles Law
• L l W
• Number of items in the system (L)
• Rate the items arrive (l)
• Time each item spends in the system (W)
• It doesnt matter how they arrive
• One at a time
• In parcels
• In truck loads
• Where have we seen this before?

72
Pipeline Inventory

• L, the items or value in the system
• l, the long run average rate at which items or
  value arrive (e.g., are shipped)
• W, how long (in consistent units) they stay in
  the system (e.g., the transit time)
• Example WalMart ships 60¹ (by value) of all it
  sells from Asia to the US on container ships
  taking 15¹ days
• COGs for 2010 305 billion
• Whats the pipeline inventory (value)
• ¹ Guesses

73
Pipeline Inventory

• l, the long run average rate at which items or
  value arrive (e.g., are shipped)
• 60 315 billion 189 billion
• 189 billion/365 517 million/day
• W, how long (in consistent units) they stay in
  the system (e.g., the transit time)
• 15 days
• L lW 517 million/day 15 days
• 7.767 billion

74
Pipeline Inventory

• Thats a 7.767 billion INVESTMENT
• It is always there floating on the water
• Sometimes more, sometimes less
• 7.767 billion on average
• Thats the revenues of the 330th largest company
  in the Fortune 500
• Eg. Eastman Chemicals, Dillards, Yahoo

75
Questions
76
Challenge 1

• In your groups, complete the financial statements
  for Our Company under current operating practices
• Transportation costs
• As indicated on Parameters page
• Inventory Costs
• We assume weight, not cube, floor space or
  maximum value determines the capacity of the
  vehicle.

77
Deliverables

• Completed Financial Statements
• Brief presentation outlining your calculations
• As VP of SC, what initiatives would you propose?
• We will be building on this example. Organize and
  keep your work.
• Avoid using values (e.g., Inventory carrying
  cost, truck load capacity, ) in formulas.
  Reference them so you can change them easily
  later
• Due Tuesday, January 17th
• I will call on 1 or 2 teams to present in class

78
Discussion

• Questions?
• Next week
• Team presentations on Challenge 1
• Begin to explore strategies for balancing
  operating expenses (e.g., transportation) and
  working capital (e.g, inventory)