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Robert Bianco is president of Menlo Worldwide January, 2006 | List all 3PL Line articles 650-378-5200

Minimize Total Landed Cost: Strategize, Model, Act

By Robert Bianco

T ot a l landed cost is the sum of a ll costs associated with m aking a nd delivering pr oducts t o the point where t hey produce r evenue -- u sually your custom er's door . So, if y ou em ploy tactics to r educe costs in a ll discrete functions from m anufacturing t h rough delivery, you'll have a lower t otal landed cost, r ight? T heoretically, yes. But in t he real world, cost savings in on e area often r esult in cost increases in another. Ra w m aterials and freight are cheaper in volume, for example. Bu t warehousing and in v entory costs go u p when that volume land s on your dock. Conversely, show me a w a rehouse that operates on just-in-tim e deliveries, and I'll show you a high freight bill. T o fin d the lowest total landed cost, you have t o think strategically. Rather than v iew y our supply chain as a series of discrete functions, think of it as a whole. Y our goal is t o r educe the cost of t hat whole. T h is approach h elps you think outside the box. Ra ther t han focus on lower w a rehouse costs, for example, you begin t o wonder if you need that warehouse at all. T h at idea, in turn, sets off a chain of t houghts -- t r ansportation changes, stable in v entory, different sources of raw material...you get the picture. On ce you'v e conceived a strategic approach for lowering total landed cost, it's t ime t o m odel it. Spreadsheets are cumbersom e, and m odeling software is expensive and h a s a steep learning curve, so ou tsourcing t he developm ent of y our m odel is often y our best bet.

W h en choosing som eone to dev elop the m odel, look for an expert in supply chain desig n and operations, not just a techie who knows h ow t o drive the software. Y ou n eed som eone who can create solutions from practical logistics experience. It 's g ood t o r un v arious "what-if" scenarios. Don 't sim ply m odel a pre-conceived solu t ion and a ccept the result. If y ou have a supply source in China, for example, run a m odel that com pares it to a source in t he United States. T his t ests and qu antifies t h e trade-offs between a longer chain t hat has lower unit costs but greater inventory, a n d a sh orter chain with less inventory but higher unit costs. It 's a lso g ood t o run sensitivity analyses to determine how robust the m odel's design is. T est it by m odelling transportation costs a gainst oil prices, or a t otal disruption in y our supply chain, such as a port strike. What are y ou r options in those situations? A s y ou m ight guess, a model's quality depends on the qu antity and quality of t he da t a it is built upon. Models are also t ime -dependent: the m ore com plex y our supply ch ain, the longer it takes to dev elop a model. The potentia l savings, however, are g r eat -- ty pical com panies save 6 percent t o 12 percent. A da pting the Model W it h a su ccessful model in hand, and continuing focus on the total landed cost, you ca n put on your t actical hat, and fuss ov er discrete t actical functions. W ork the su pply chain backward from the custom er, on e function at a tim e -- keep in m ind t h at ev ery supply chain process or function you com prom ise fr om the m odel a ffects ot h er processes, either positively or negatively. Rem em ber t hat supply chains are perpetually changing, so t he r ight m odel t oday ca n easily be wrong t om orrow. A n ew product introduction, a different vendor, in creased freight costs -- t h ese all im pact your t otal landed cost strategy. T h e g ood n ews is t hat a strategy is easier to m odify t han t o create. The m odel you u sed t o finalize t he first a pproach will still be there to t inker with.

TOMADO DE: http://www.inboundlogistics.com/articles/3plline/3plline0106.shtml Logistics Inbound, revista logstica.