Welcome to the Winter 2011 edition of LOGISTICS TEAMtalk, the Newsletter and Digest of the Expense Reduction Analysts’ Logistics Team. As well as our usual selection of topical comment to help keep you informed of some of the underlying factors affecting the cost of moving and storing goods for British Industry, we are pleased to announce our new website:

www.eralogisticsteam.co.uk

Within the site, you will find more comment on the sector, case studies of the Logistics Team’s successes in driving down Client costs, a complete archive of blogs and other articles by the team, and a contact and comments form.

All of the topical articles below are available to be read in full on the website, as well as our monthly market reports on the logistics sector.

Get notifications of new articles and reports by following us on Twitter @eralogistics

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Fuel Consumption is getting worse !

That is one of the most surprising key findings from the Office of National Statistics latest report into the Road Haulage sector in the UK.

The Report also shows that there has been marked growth in goods movement across all sectors, which is rather opposite to general perceptions today. Admittedly, the statistical base is now nearly one year old. Read more at www.eralogisticsteam.co.uk or click here

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Export success is leading to increased costs.

Suddenly the traditional imbalance between imports and exports is changing. This is having a significant impact on exporters costs, just as they are beginning to see volume growth. Kevin Fryer reviews the situation at www.eralogisticsteam.co.uk – click here

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Large warehousing projects have high failure risk.

Fergus Smith has been reviewing the inauspicious track record of warehouse initiatives, and offers some tips on how to reduce the risk exposure when your business has to make changes.

There have been a number of high profile warehouse implementations that have seriuosly impeded the ability of some UK businesses to function. Read more at www.eralogisticsteam.co.uk or click here

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How do carriers plan networks in recessionary times?

Kevin O’Neill explains some of the strategic process of adapting depot networks to reducing volumes and a more competitive marketplace  – read the full story at www.eralogisticsteam.co.uk or  click here

So what can be done to reduce this cost during this high period and beyond?

1. Be aware when your contract renewal date is. If you do not take action to renew at the right time then the contract will automatically roll over into a new contract of up to 3 years on above standard market pricing.

2. Give adequate notice. Notice requirements can be up to 3 months before the renewal date and well before you have received your renewal offer. Failure to act within the prescribed period will mean once again that you will be forced to roll over and become locked in to another contract for the same period with your existing provider at higher costs.

3. Once your renewal offer is received, then test the market either yourself or with the help of consultants or a broker. The above actions will only result in providing you with the best market tariff for your usage. Additional action can be taken to reduce electricity consumption for large users. This usually means some capital investment, but often the payback is less than 5 years and the benefit is received for long after.

A. Voltage Optimisation Businesses waste energy without realising it. Imagine a pan cooking on a hob with the heat on full. Any heat not directly hitting the bottom of the pan is wasted. Because of the way the distribution system works, it is the same with electricity supply. Voltage optimisation equipment reduces your supply to the optimum level saving energy, money and reducing carbon footprint.

B. Voltage Stabilisation Electricity is not delivered in a smooth steady stream. It contains waves, surges, peaks and troughs which cause quality problems. Voltage stabilisation equipment stabilises supply which is much better for equipment which is generally designed to run on a steady supply.

C. Harmonic Filtration Every power supply is inherently “dirty” because of harmonics, which are disruptive waves. The “dirty” supply means that the lifespan of equipment could be reduced resulting in premature failure, increased downtime and higher maintenance costs. Use filtration technology to remove the “dirty” harmonics for a cleaner and more efficient supply.

D. Power factor Correction Power factor, an itemised charge on your electricity bill, is a measure of the efficiency of an electrical supply and how efficiently the power is consumed. The charge is targeted against companies who do not demonstrate clear energy efficiency use and who therefore have a low power factor. Power factor is reduced by motors, welding sets, fluorescent and high bay lighting which creates inefficiencies. Power factor correction technology reduces load and minimises wasted energy, improving the efficiency of the site and reducing bills.

Far East & Indian sub-cont westbound (import) rates/space/equipment

Half year losses declared by some carriers are causing concern and some ships have been withdrawn from service. Demand has increased over recent weeks and utilization has returned to more acceptable levels. It does appear as though some lines will apply Peak Season Surcharge from 1st September 2011.

Far East & Indian sub-cont eastbound rates/space/equipment (exports) – Ocean freight rates remain at an all-time low and there is a significant volume of empty containers being returned to the Far East.

UK Terminal Handling charges – generally remain at £120 except Maersk and SafMarine where THC is £131 per container and MSC where THC is £125 per container.

Heavyweight Container Surcharges – continue for westbound traffic only with each carrier having slightly different weight break points. It should be noted that this surcharge is not part of any ‘all-inclusive’ rate.

North China 20ft Equipment Premium (westbound only) – This charge continues to be applied by all lines on 20ft containers ex Dalian, Qingdao, Tianjin, Xingang, Yantai and Lianyungang at $250 per 20ft container only.

Suez Canal Surcharge – remains at $25 per TEU except Evergreen ($47 per TEU) and CSAV ($50 per TEU).

Gulf of Aden Emergency Risk Surcharge – this surcharge is now $55 per TEU.

Equipment Inspection Fee – Hapag Lloyd has introduced a surcharge of £6.00 per container as the result of packaging being dumped inside ‘empty’, returned containers. No other carrier has yet applied this surcharge.

Port Congestion – Some carriers have announced this charge from several Far Eastern ports including Qingdao, Haiphong and Chittagong. General advice is that such charges should be pais by suppliers of goods and included in FOB charges.

UK Landside Charges/Haulage/Fuel/Port Congestion – Fuel Surcharge remains at 25.5% (against a base price of £0.90 ppl) on most published indices. An infrastructure charge of £3.00 per container continues at Southampton.

Airfreight – fuel/security surcharges are expected to continue. Current rates:

Hong Kong  8.80 to 9.20 HK$ (combined) per kg.

Shanghai     9.20 CNY (combined) per kg.

Kevin Fryer 8th August 2011.

See all Logistics Team Blogs – Click Here

Please find the link below to download our April 2011 edition of Profit News, featuring the most recent updates and money saving tips for dealing with waste management, communications and business rates.

Within this latest edition of the Profit News you can also find some of our recent success stories, demonstrating how we have been able to help a variety of organisations uncover significant savings within their businesses, including Aston Villa FC, The National Pharmacy Association, and Mono Pumps.

Click here to download a copy of the Profit News for free

The National Pharmacy Association (NPA) is the representative body for the community pharmacy trade in the UK and, in addition to supplying a range of ancillary pharmacy support products at competitive prices, it seeks to support its members by influencing government policy and consumer opinion. It is also a leading provider of indemnity insurance and legal advice for community pharmacies.
The NPA wanted to ensure that it was achieving value for money across all areas of the business. Adrian Palmer, Director of Finance and Commerce at NPA, decided to call in Expense Reduction Analysts to undertake this wide-ranging review.

David Keating, the client relationship manager for the NPA, takes up the story: “Adrian asked us to conduct the review of many areas of expenditure simultaneously and to phase implementation, if complexity or supplier change dictated, over a longer period. We agreed an overall target of just below £300,000 of savings with no reduction in quality or service levels. We were able to form a bespoke team of analysts – all specialists in the industries that we were engaged to review – to perform the work in each area.

An objective and informed view of the expenditure being made

“At Expense Reduction Analysts, as part of our supplier management process, we work closely with the incumbents to determine if they are providing value for money and if there are opportunities for them to develop their solutions to the benefit of our client. And that is what we have achieved with the NPA in many cases. There have been limited changes to the suppliers, and we are continuing to work with them on an ongoing basis to ensure that the enhanced value – as well as the quality of product and the service provision – is maintained and enhanced over time.

“We judge supplier performance through the purchase data from invoices, in conjunction with stakeholder interviews to determine the required quality and service levels. This allows an objective and informed view of the expenditure being made, and the quality and service levels thereby procured. In fact, in three or four categories, we concluded that the NPA were already achieving best value – so they received the peace of mind of a positive outcome from this independent audit. In some categories, though, we found that a new approach was warranted: in Copiers, for instance, we recommended restructuring the contract, which led to a 59% saving.

“In fact, we completed the programme of work in six months, implementing these projects to a schedule that allowed the NPA to accommodate the changes smoothly into their workflow. This has also allowed the NPA to consolidate their supply base, thereby achieving further economies as a result.

“We see the successful completion of these projects as the first step in a long term partnership with the NPA, who have now engaged us on a number of other areas of their business. We take this as a compliment to our work so far and look forward to working with the NPA in the coming months and years.”

Click here to download a copy of this delighted client case study

1.     Standardise and document procurement processes

Align procurement with enterprise goals, assess what stages are currently involved in your purchasing process and why they are being taken, then determine whether each of these is necessary and make sure the same stages apply to all procurement. Pre-negotiated early payment discounts were 32% higher for respondents with standardised processes while they also achieved supplier on-time delivery on 5% more shipments.

2.     Introduce employee incentives

Formalised processes will not produce the desired results unless they are being adhered to. It seems that in organisations which have tied their staff’s compensation to some extent to the attainment of set goals, the buyers have identified 18% higher savings than their non-incentivised peers. The study, nevertheless, cautions that non-conformance may be a result of deficient policies rather than unmotivated personnel.

3.     Seek external guidance

Trade associations and professional publications are great starting points to begin the learning process. Alternatively, the use of external consultants reported a 76% better budgetary performance (6% under budget vs. 3.4%).

4.     Automate the approval process

Eliminate paper where possible. Assuming that the necessary data is available electronically (i.e. inventory checks, application of approval thresholds), considerable time savings of up to 19% can be achieved for the cycle from the initial needs identification to the final supplier selection and negotiation.

5.     Increase internal collaboration

There is much to be gained from inter-departmental information and data sharing, whether that be with finance to provide visibility into upcoming cash needs or accounts payable to maximise discount capture. Organisations with cross-functional collaboration have been found by the study to report 34% higher savings than its non-collaborating peers.

6.     Improve compliance monitoring

The Aberdeen Group research interestingly also found that of all the metrics regularly assessed, supplier price and delivery compliance were generally the least likely to be measured. Hence, once the internal fundamentals are in place, it is time to look at supplier relationships and ensuring compliance with agreements.

7.     Efficiency improvements in Accounts Payable

Another study by the Aberdeen Group carried out in 2009 has found that an automated accounts payable process improved invoice processing times by a staggering 37%, leading to prompter payments and, thus, reinforcing a virtuous circle where a supplier who has his invoices paid on time will be more inclined to grant a prompt payment concession.

8.     Improve data quality

Procurement leaders will rely on sets of painstakingly accumulated and cleansed transaction data, allowing them to make informed decisions. As this benchmarking process can be time consuming, external consultants such as Expense Reduction Analysts can assist with the necessary tools and expertise to collect as well as analyse the information.

9.     Provide executives with spend information

The procurement function is only gradually making its voice heard in the Boardroom. However, executives will need accurate and comprehensive data to plan for all eventualities. In this respect, the purchasing function has an increasingly important role to fulfil, not only with regard to maximising value for money from its suppliers, but also as far as the provision of meaningful data to the executive is concerned.

Expense Reduction Analysts are leaders in the field of procurement and cost management advice with some £350 million of expenditure being negotiated on our clients’ behalf every year. Our experts cover some 100 areas of spend and offer our clients completely supplier independent advice. Moreover, we carry out the benchmarking and RFP process on our clients’ behalf, allowing their staff to focus on the core task of running their operations.

The research, for example, shows that standardised sourcing processes and regular tracking of supplier compliance with service level agreements are much more likely to be well established within procurement leaders, and that best-in-class organisations keep a close eye on an agreed set of KPIs to ensure not only that the negotiated savings do materialise, but also that they are being preserved over time.

So which strategies do the leaders apply? The Aberdeen Group’s research shows that 41% of leaders as opposed to only 18% of laggards have increased the volume of spend managed by a dedicated Procurement function.  This certainly makes sense, as in most organisations the same or similar goods and services may be sourced by different functions, often even from the same suppliers, missing out on any volume discounts that could be negotiated. On the other hand there is the automation of manual procurement processes: While favoured by 28% of laggards, only 13% of best-in-class buyers have taken such measures. What does this tell us? While eProcurement solutions potentially have an important role to play in corporate sourcing processes, the technology available cannot be a substitute for alignment of procurement with the overall corporate strategy, old-fashioned market research and one-to-one supplier negotiations.

Standardisation of sourcing processes and contracts are other key ingredients which distinguish the leaders. 72% of the most successful procurement teams have adopted such measures. And the results achieved, according to the study, seem to speak for themselves: Organisations with standardised sourcing processes achieve savings almost a quarter higher than their peers, while standardised contracts resulted in 42% higher savings, since this directly relates to contractually agreed discounts being correctly quoted on supplier invoices and on variations being detected during the invoice approval process.

Another vital aspect to purchasing performance improvement is the spend analysis. While this is likely to be time consuming, the collection and systematic assessment of actual procurement data allows to identify the areas in which focussed negotiations and standardised processes are likely to yield the best results. In the Aberdeen Group survey, organisations that had the ability to classify and cleanse their spend data subsequently identified 23% more savings than their peers. It can’t surprise, therefore, that spend analysis achieved a score of 3.51 on a scale of 1 to 5 as the second most important area for performance improvement, beaten only by interdepartmental collaboration with 3.57.

In part II of this blog I will outline 9 steps which, according to the Aberdeen Group study, will help transform underperforming procurement teams.

There is widespread evidence that most of the major merchant acquirers are imposing – or trying to impose – price increases across great swathes of their customer bases. The reasons given to justify the hikes are real enough, with the acquirers facing external cost increases that I will discuss below, but Expense Reduction Analysts banking Team commonly find:-

i.            That the new tariffs often represent more than cost increases being passed on, with acquirers – and I am being diplomatic here – putting a “spin” on their explanation that disguises increases in their margin.

ii.            Increases apparently imposed without any specific notice at all, with claims that “a standard letter was issued” or the increase was detailed in a statement message. (Who, in a position of authority in any business of any scale reads statement messages from acquirers?)

iii.            Justifications alluding to cost increases that occurred before a particular tariff was agreed.

I mentioned that the reasons for the increases are real enough. In a bit more detail these include:-

1. The two major card branding schemes (Visa and MasterCard) are both increasing the underlying cost to acquirers of secure mail-order/telephony transactions. The scale of these increases is staggering and varies between 44% and 69%. This level of imposed increase represents a step change in the acquirer’s costs of these transactions and in many cases mean that they would be facing losses on them. The increases kick in next Spring but – in the scheme of things – one can understand pricing impacts for businesses being negotiated or advised right now.
2. Many credit card issuers are upgrading standard accounts to premium accounts (such as MasterCard World) at renewal. Acquirers face a significantly higher interchange cost from the schemes for processing these types of card. Tariffs often incorporate a single fixed price for “credit cards” and – given the increasing proportion of premium account holders within the transaction mix – acquirers will at best be facing diminishing margins unless they adjust.
3. Some acquirers have very sophisticated back office systems which allow them to differentiate between secure and none-secure cardholder not present transactions (where “secure” means correct application of either 3-digit signature strip protection for mail-order/telephony or the password-based 3D Secure system for e-commerce transactions). Some cannot differentiate. The penalty costs faced by the acquirers (for non-compliant transactions processed by their merchants) are hefty and increasing.

So, in our projects what do we do about these increases if they are “justified”? After all I do concede that underlying pressure on acquirers is being caused by external elements and they could even be facing potentially unsustainable losses on some transactions.

-          The first part of the answer – at its simplest – is to ensure that the reasons given are actually justified. Negotiated tariffs/margins are negotiated tariffs/margins in my book and cost features in existence at the time of (or prior to) negotiations cannot be used to justify subsequent unit price increases. And because, whether we like it or not, card acquiring is a numbers game, mistakes like that do creep in. I ought to add here, in the interests of fairness to the professionals I deal with in the acquirers, instances like this are swiftly apologised for and corrected.

-          Secondly it’s about making sure that the impact of the increases is limited to no more than passing on the cost changes that the acquirers themselves face. I cannot add an “in fairness” comment here because my experience is that a rise in external costs is often used to mask margin increases. That is the case now in many of the standard tariff increase letters that I have seen and that I am robustly challenging.

-          Thirdly, if an increase is unjustified and – really critically – results in a client facing tariffs that become uncompetitive, we will recommend the activity is tendered. Card acquiring remains a very competitive industry and whilst that should be a last resort, it is actually often straightforward.

The above actions really do rely upon detailed analysis, modelling and current market knowledge both to assess their potential value, but also crucially, to negotiate the optimum outcome. For example I mentioned a rise of 44% to 69% in acquirers’ own major external costs for transactions processed via mail order or telephone. This does not mean a 44% to 69% increase in retailer’s tariffs is justified as that is precisely the way that margins are unfairly increased at times like these. Our aim is to ensure that the actual cost….and no more….is passed on.

Virtually every business that accepts cards will already have received – or will receive over the next few months – an increase in their card processing costs….whether advised or unadvised. And if they don’t, I would suggest that they are already paying too much as otherwise it is hard to see how the acquirer can absorb their “hit” without comment!

Diesel fuel now represents up to 40% of the cost of operating transport fleets, and should therefore be an area attracting serious attention to anybody responsible for the costs of such an operation. However, there remains very little understanding of how the fuel markets actually work, and therefore establishing whether best prices are being achieved.

Nevertheless, the largest part of the cost is in duty, and nobody has yet successfully negotiated a decrease with the Chancellor of the Exchequer! After allowing for the net price of diesel being set on international markets (Rotterdam) and duty, the net sums available on which to base negotiations with fuel suppliers are limited. Typically, the pump price in the UK averages at about 6 pence per litre over the Rotterdam price. Whilst a couple of pence price reduction can be significant in absolute terms, in percentages, it has only a small effect on that 40% !

Some managers (probably a minority) have invested more time in investigating the potential to achieve reductions in actual consumption. In many cases, such attention has resulted in short term initiatives, for example in trying alternative fuels, or driver training programmes. Very few have however, been matched to long-term management and monitoring programmes with continued actions to ensure that short term gains are maintained. There almost needs to be a leap of faith in investing up-front in more expensive fuels or intensive driver training such as the SAFED programme, without any guarantee of long term gain.

It is easy to measure short term improvements on the same day that a driver is trained, but what is really happening 6 months down the road, when other priorities are demanding management attention at the operational level. The Freight Best Practice Programme has identified that a typical 10% consumption saving on the training day can have disappeared within half a year unless there is a rigorous programme of monitoring and appropriate intervention. But how many companies have the operational commitment or the in-house expertise to do this effectively ? Nevertheless, with a 10% long term savings goal, who can afford not to be doing so.

Fortunately, Expense Reduction Analysts are now able to include a review of fuel consumption in road transport fuel projects. This means that we can create an accurate benchmark of current consumption to give a firm basis on which to measure any future savings. Our objective  market expertise means that we can give an independent view of what is on offer and facilitate and monitor  the effective implementation of any consumption project.

See all Logistics Team Blogs

By way of example, I recently looked at a firm of Solicitors’ office stationery supplies.

They had four regional offices all obtaining their own supplies. They had 9 different suppliers and their accounts department were receiving an average of 20 separate invoices every month with 9 corresponding statements/request for payment meaning 9 payments had to be prepared and issued each month.

The average cost of processing an invoice is estimated to be £5, rising to as much as £50 if suppliers need to be contacted regarding exceptions or errors.

Orders were being placed in a variety of ways,  by telephone, fax and email.

As you might suspect, many similar items were being bought across the various offices at varying prices.

Taking the above example and figures, without errors or exceptions, the estimated annual cost of processing the invoices alone was £1200 (20 x £5 x 12).

By implementing a single supplier issuing one monthly consolidated invoice, these annual costs were reduced to £60 (12 x £5), a saving of £1140 (95%).

As it happens, by benchmarking existing costs and tendering to suitably researched suppliers, we also found them estimated annual savings of £10,367 (35.8%).

The Client now orders via the internet eliminating costs of telephone and fax as well!