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Calculating Your Cost to Deliver: A Supply Chain Analysis Case Study

Are you currently considering supplying a new retailer? IGD Supply Chain Analysis can help you calculate your cost to serve…. Calculating Your Cost to Deliver: A Supply Chain Analysis Case Study. What are the questions to ask?. Example cost to supply calculation.

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Calculating Your Cost to Deliver: A Supply Chain Analysis Case Study

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  1. Are you currently considering supplying a new retailer? IGD Supply ChainAnalysis can help you calculate your cost to serve… Calculating Your Cost to Deliver: A Supply Chain Analysis Case Study

  2. What are the questions to ask? • Example cost to supply calculation. • You are a supplier based south of London, UK and you currently supply Asda Wal-Mart. You have secured a meeting with Tesco and have to calculate the potential cost to deliver to Tesco in the UK. • Your product is imported premium biscuits. • Your cost to distribution can be calculated by answering the questions above, utilising Supply Chain Analysis, as shown in the following slides…

  3. Calculating the Cost to Deliver – Questions explained • Where is the product produced? • In this example case study, we’ll assume the products are imported from Germany. • Where is the best docking point (if importing)? • You can use the map of the distribution network of Tesco [From Supply Chain Analysis – Tesco profile – Warehousing – Depot Location Map] to quickly and easily see that Tesco has the majority of their warehouses in the central and southern parts of the UK, so a docking point in Kent for example would be the most likely location. • As an existing importer into the UK, it is likely that you will use an existing transport route to achieve cost and operational efficiencies, but from the information on Supply Chain Analysis you can better calculate the onward delivery costs from point of entry to final destination.

  4. UK Warehouse Locations • Note: In late 2007, Tesco opened a new RDC at Lichfield, Staffordshire, a new NDC at Goole in the North-East, and a new replacement site at Livingston. Subsequently, the Dundee, Middleton 1, Crick depots and the Nettlehill, old Livingston TDC and Trunking station sites were closed. Source: Tesco, IGD Research 2008

  5. Calculating the Cost to Deliver – Questions explained • What is the annual forecast in total / per store • Initially you have to decide which formats you are going to propose to Tesco for distribution and the number of stores in that format. This information is available from IGD’s Retail Analysis [Retail Analysis – Tesco profile – Company Summary – Portfolio statistics] . Source: Tesco

  6. Calculating the Cost to Deliver – Questions explained • What is the annual forecast in total / per store • If we assume that we are going to propose all Tesco Extra hypermarkets and all Tesco superstores/supermarkets, that equates to 580 stores in total. • The current rate of sale (ROS) in Asda (a contract you already supply) is 14 cases per store per week, equating to 2 cases per day per store • If we assume that the ROS will be similar, the annual forecast for Tesco will be: • Annual forecast = No of stores x cases per day x days of the year • Annual forecast = 580 stores x 2 cases x 365 days = 423,400 cases • Note: This will not be you final forecast as it needs to be put into full loads and full pallets • Cases per store annually = Daily ROS x No of days • Cases per store annually = 2 x 365 = 730 cases • Note: This assumes that the ROS for Tesco Extra and Superstores is the same.

  7. Calculating the Cost to Deliver – Questions explained • What is the forecast in pallets? • Annual no. of pallets = Annual Forecast cases/no of cases per pallet • In this example there are 54 cases on a pallet • Annual no. of pallets = 423,400/54 = 7,841 pallets to be delivered. • Which depots in the network can take the product? • IGD’s Supply Chain Analysis [Supply Chain Analysis – Tesco profile – Replenishment - Throughput Volumes], shows you that your type of product is typically designated by Tesco as slow moving ambient grocery: • Fast-Moving Grocery (FMG) is defined as products delivered to store 4-7 days a week, and will include products such as grocery, impulse, petcare, health & beauty and laundry and paper. • Slow-Moving Grocery (SMG) is defined as products delivered to store 2-6 days a week, across the same product categories as above.

  8. Calculating the Cost to Deliver – Questions explained • Which depots in the network can take the product? • Products categorised as product type ‘C’ (slow-moving grocery) within the s table from [Supply Chain Analysis – Tesco profile – Replenishment – Throughput Volumes]: • Comment: *Fastway Hanging figures are included in the Fastway numbers; excluding Lichfield, new Livingston and Goole, but including Crick, Dundee, old Livingston and Middleton 1 • The above table is edited from a larger table to show all depots that will be able to stock your product. You now have to decide which depot/depots would be the most cost effective for delivery and calculate the associated distribution costs. Source: Tesco, IGD Research 2008

  9. Calculating the Cost to Deliver – Questions explained • Which will be the most cost effective depot for you to propose? • Supply Chain Analysis also shows you the regions and stores served from each Tesco depot [Supply Chain Analysis – Tesco profile – Transport – Network]. It has been edited to show all locations that service All UK (Region code 1): • Comment: *(Fastway Hanging figures are included in the Fastway numbers; excludes Lichfield and Goole, but includes Crick, Dundee, Middleton 1, new Livingston and Nettlehill sites). Source: Tesco, IGD Research 2008

  10. Calculating the Cost to Deliver – Questions explained • Which will be the most cost effective depot for you to propose? • By combining the two tables summarised above from the Tesco profile on Supply Chain Analysis you can determine that you can deliver nationally from Fastway and Fenny Lock. However, when comparing the number of stores delivered into from each depot (848 versus 1,582), Fenny Lock delivers into the whole estate where as Fastway is only around half. • Fenny Lock would therefore probably be the initially proposed depot if you want to try for distribution from a National Distribution Centre to reduce your delivery costs. In addition, Fenny Lock has the highest throughput volumes delivered in the Tesco network. • Note: It is important to note that Tesco may want deliveries into several Regional Distribution Centres, as opposed to just one National Distribution Centre, and so the cost implications of having several delivery and storage points also need to be calculated. Source: Tesco, IGD Research 2008

  11. Calculating the Cost to Deliver – Questions explained • What is the cost of delivering into each depot? • You have to make certain assumptions: • From the profile [Supply Chain Analysis – Tesco profile - Replenishment – Level of Stock] we know that Tesco’s average warehouse stock holding on grocery is 3.8 days and the average store stock holding is 6.9 days. We can therefore work out what the initial shelf fill should be, and then how much you should deliver based on a twice a week delivery. • Initial order for shelf fill and warehouse stock, for 580 stores to satisfy 2 cases per day - We have to make certain assumptions for initial shelf fill: 2 facings of product, 2 cases back on shelf - Therefore 4 cases per store. • Initial shelf fill will be = cases per store x no of stores • Initial shelf fill = 4 cases x 580 stores = 2,320 cases

  12. Calculating the Cost to Deliver – Questions explained • What is the cost of delivering into each depot? • In-store stock = 6.9 days (from average Tesco ambient stock holding) • In-store stock = No of stores x cases per day x no of days stock held • In-store stock = 580 stores x 2 cases x 6.9 days = 8,004 cases • This is 8,004 cases for in-store stock for 6.9 days • The warehouse stock held we know from the Tesco profile is 3.8 days, therefore the initial warehouse stock will be: • Warehouse stock = No of stores x no of cases per day x no of days stock held • Initial Warehouse stock = 580 stores x 2 cases x 3.8 days = 4,408 cases • Initial order = shelf fill + in-store stock + warehouse stock • Initial order = 2,240 cases + 8,004 cases + 4,408 cases = 14,732 cases • 14,732 initial cases = cases/no of cases on a pallet = 14,732/54 = 273 pallets

  13. Calculating the Cost to Deliver – Questions explained • What is the cost of delivering into each depot? • We assume that this will be delivered into Fennylock in full loads. • 26 pallets per load (dependent upon weight this is usually full loads). • No. of loads = 273 pallets /26 pallets = 10.5 loads – you would probably round this to 11 loads. • What will the ongoing delivery pattern be? This will change dependent upon season, however as an average: • If we assume that the stock holding will be 3.8 days, we can make the assumption that deliveries will be approximately twice per week. • Total no. of cases = no. of stores x cases sold per store per week • Total no. of cases = 580 stores x 14 cases per week = 8,120 cases per week • Total no. of pallets = no. cases per week / cases per pallet • No. of pallets = 8,120/54 = 151 (rounded up) • Assume full loads of 26 pallets = 151/26 = 5.80 loads • This would be rounded to 6 full loads per week.

  14. Calculating the Cost to Deliver – Questions explained • What is the cost of delivering into each depot? • From your own internal departments you can find the distribution cost to Fenny Lock (which is in Bletchley, Milton Keynes, Buckinghamshire) by sourcing a spreadsheet as per below; • If we assume an initial order of 11 full loads, and then an ongoing 6 full loads per week within 2 orders for the rest of the year, Initial order = 11 loads of 26 pallets • Cost to deliver = No of weeks x no of deliveries x no of pallets x cost per pallet • Initial cost to deliver = 1 week x 11 deliveries x 26 pallets x £24 = £6,864 for the initial order • Then we will have to make an assumption that for the remaining 51 weeks: 51 weeks at 6 full loads per week - What is the cost? • Cost to deliver = No of weeks x no of deliveries x no of pallets x cost per pallet • Remaining cost to deliver = 51 weeks x 6 deliveries x 26 pallets x £24 = £190,944 • The total cost to deliver for a year would be: Initial delivery costs + next 51 weeks cost • Delivery costs = £9694 + £190,944 • Annual delivery costs = £197,808 – which is a significant proportion of the costs associated with this customer.

  15. Calculating the Cost to Deliver – Questions explained • What is the distribution cost per case? • Distribution cost per case = Cost of annual distribution/annual number of cases • First we need to work our how many cases would be delivered via full pallet and full load ordering; • Initial order in cases = no. of full loads x no. of pallets x no. of cases • Initial order in cases = 1 wk x 11 full loads x 26 pallets x 54 cases = 15,444 cases • For the rest of the year; Ordered in cases = no. of weeks x no. of full loads x no. of pallets x no. of cases/pallet • Ordered in cases = 51 weeks x 6 full loads x 26 pallets x 54 = 429,624 cases • Total annual delivered will therefore be = 15,444 + 429,624 = 445,068 cases • Cost per case =Cost of annual distribution/annual number of cases • Cost per case = £197,808/445,068 • Cost per case = 44.4p per case. This would have to be built into the cost price .

  16. Calculating the Cost to Deliver • Points to remember • This Supply Chain Analysis case study is illustrative and based on forecast numbers • The retailer may decide that this is not the correct depot for their requirements; make sure that you calculate for several depots and then average or take the highest potential cost • You may not be able to deliver in full loads – but this definitely should be your starting point and what you work towards – so calculate based on half loads also • Your distribution costs and product costs might change over the year • The retailer may change the way it receives your product over the course of a listing (stock cover, number of depots etc).

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