t iffany & c o. transportation analysis presented by: ping-chun chang hsi-chuan chen satish...
TRANSCRIPT
TIFFANY & CO. Transportation AnalysisPresented by:
Ping-Chun Chang
Hsi-Chuan Chen
Satish Mallya
Chris Offensend
Antonio Rodriguez
Overview
• Background and Current Operations• Transportation Cost Model• Proposed Framework• Analysis of Results
2
Objective
Reduce total transportation cost considering the tradeoff between cheap, but risky
transport, and an expensive, but secure alternative
Targeting a 20% reduction in annual transportation cost
3
Deliverable
A decision logic for determining optimal carrier and insurance coverage (if any), as well as ensuring
shipments meet carrier restrictions
4
Background and Current Operations
5
1
Tiffany & Co.• Products
• Not just jewelry…• Leather goods, fine china, crystal and watches
2 43
6
Tiffany & Co.1
• Annual Sales• 2010: $3.1 billion• 2011: $3.6 billion
• Gross profit is 59% of net sales• About $1.6 billion in inventory• 87 locations within the U.S.• 160 locations abroad• Shipments originate from
production facility in Parsippany, NJ
7
5
Transportation Options• We are only considering
shipments to stores• UPS
• Cheap and easy, but comes with risk of loss
• Loss rate: < 0.5%
• Brink’s • More expensive, but effectively
100% reliable
8
6
7
Insurance Coverage
• UPS• An convenient, but expensive option
• AIB• Lower rates• 3rd party insurance company
9
Current Operations (Domestic)• Brink’s
• Shipments usually delivered within one to two business days• Rates depend on weight and value of the shipment• Rates are independent of distance
• UPS• Rates depend on shipment weight and destination zone• Three shipment methods
• Ground• Next Day Air Saver• 2nd Day Air Saver
10
Current Operations (Domestic)
12
Ground
Next Day Air Saver
UPS
2nd Day Air Saver
Current Operations (International)• Brink's
• Primary carrier for shipments to international stores• It can be assumed that all goods are shipped to one store within a
country and then distributed locally
• UPS• Only used to ship to countries that Brink's International does not
cover
• Customs Clearance• Shipments by both carriers are subject to holding periods upon
entry into a country
13
Transportation Cost Model
14
Transportation Options Considered
• Applicable to domestic and international shipments
• Brink’s• UPS
• Types of insurance coverage• Tiffany & Co. self insured (no insurance)• UPS insurance• AIB insurance
15
Costs Associated with Lost Packages
• Lost goods• Administrative handling
• Cost per unit: $3.56
• Opportunity cost of delayed insurance payout• Premium
16
Premium
• A variable that describes the overall averseness to risk
• Incorporates the intangible costs (Brand name, operational delays, etc.) associated with lost shipments into the total cost to Tiffany & Co. for shipping product
17
Expected Loss
18
),(56.3$* lueShipmentVaPayoutTimetHoldingCosPlueShipmentVaeUPSLossRatLossE
100$56.3$1* PlueShipmentVaeUPSLossRatLossE
Self Insured Shipments
Fully Insured Shipments
Pipeline Costs
• Due to differences in transit time, holding costs vary by carrier
• Cost of capital: 15%PA• For higher value shipments, the increase in speed can offset the increase in transport cost
19
Insurance Limits• Maximum declarable value
• AIB insurance: $100,000• UPS insurance: $50,000
• No shipments through UPS may be insured for more than these amounts
20
UPS Insurance Convenience
• We consider a variable “convenience” parameter that can represent the reduced complexity (non-monetary) of choosing UPS insurance over AIB insurance
• “Convenience” may be expressed as a percentage above the AIB rates that Tiffany & Co. is willing to pay to avoid involving a third party
21
Splitting Shipments
• Some large Brink’s shipments can be split into smaller ones in order to take advantage of the lower UPS rates
• Split shipments must meet certain criteria:• Maximum declarable value (if insured)• Maximum handling weight
22
Proposed Framework
23
Framework Overview
• Considering the various parameters of a shipment, find the optimal carrier, insurance coverage and number of sub-shipments• Weight• Destination• Value• Carton count (splitting)
24
Decision Making• Each shipment is analyzed individually
25
Analysis of Results
26
Domestic Costs and Savings
27
• Shipment allocation by carrier• Domestic data only available for a period of 10 months
Optimized Shipments
UPS Self Insured
UPS with AIB Insurance
Brink's
Initial Shipments
Domestic Costs and Savings
28
Initial Spend Optimized Spend$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
$1,600,000
UPS Self InsuredBrink'sUPS with AIB Insurance
• Total domestic transportation spend• Domestic data only available for a period of 10 months
Domestic Premium• Optimal domestic cost at various levels of premium
29
$0 $300,000 $600,000 $900,000$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$1,400,000
0
.5
11.5
22.5
33.54
5
.1
Optimal Costs at Premium = X
UPS Transportation Cost
Bri
nk’
s T
ran
spo
rta
tion
Co
st
Assessment of Financial Risk• Currently, Tiffany & Co. can expect to cover domestic
losses in excess of $160,000 a year from lost packages since they self-insure packages.
• By including the option for insuring packages via AIB or UPS, Tiffany & Co. can reduce the expected self-insured losses to <$5,000.
• We calculated a 97% reduction in expected losses that Tiffany & Co. would have to cover.
• Note that this is in addition to lowering the overall actual transportation cost.
30
International Costs and Savings
31
• Shipment allocation by carrier• International data only available for a period of 8 months
Optimized Shipments
UPS Self Insured
UPS with AIB Insurance
Brink's
Initial Shipments
International Costs and Savings
32
• Total international transportation spend• International data only available for a period of 8 months
Initial Shipments Optimized Shipments$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
UPS Self InsuredBrink'sUPS with AIB Insurance
International Premium• Optimal international cost at various levels of premium
33
$300,000 $400,000 $500,000 $600,000 $700,000 $800,000$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
0.1
.5
11.5
22.5
33.5
4
5
Optimal Cost at Premium = X
UPS Transportation Cost
Bri
nk’
s T
ran
spo
rta
tion
Co
st
Assessment of Financial Risk• Tiffany & Co. do not self-insure international shipments. • However, it is important to note that including the option of
sending Internationally via UPS with or without insurance does not significantly increase the expected value of lost packages.
34
Observations & Conclusions• The current policy of a flat value cut-off is extremely
inefficient.• Since Brink’s does not charge by distance domestically,
the optimal threshold changes by UPS zone. • However, the optimal Brink’s threshold also varies by
carton weight. This makes it nearly impossible to find a simple policy to determine carrier and approach optimal costs.
• There is a universal domestic threshold to determine if a package sent by UPS should be insured or not. This threshold is very low and can be expected to be <$500 at current insurance rates and current loss rates.
35
Observations & Conclusions
• The higher rate charged by Brink’s to ensure delivery of a shipment is often much greater than the cost of risk associated with the expected loss of a UPS shipment
• Assigning carrier on a per-shipment basis is the easiest way to reach the optimal overall cost
36
Questions?
37
8
Appendix
38
Decision Flowchart
Wi: Weight of an eachVi: Value of an eachCQT: Carton Quantity (eaches in a carton)TT: Transaction TypeCWT: Carton weightCb: Cost of Brink’sCu: Cost of UPS
Decision Flowchart
SI: Self insuranceUPS: UPS insuranceAIB: AIB insurance
Decision Flowchart
N: VariableLim/Vi: Value limit / ViLim/Wi: Weight limit / Wi
Decision FlowchartCQT: Carton quantitySS: Shipment size in eachesFS: Number of full shipmentsPS: Number of eaches in a partial shipment
N
Decision Flowchart
References• Information
1. 2011 Annual Report, Tiffany & Co. Accessed online 4/10/2012. http://investor.tiffany.com/annuals.cfm
• Images1. http://i683.photobucket.com/albums/vv193/TheRuler496/Diamonds/
Tiffany_Diamond_Engagement_Rings_Diamonds_Dealer/tiffany_combination_novo_ring.jpg
2. http://www.tiffany.com/shared/media/products/15279095_D_1.jpg
3. http://blogs.glam.com/glamchic/files/2011/06/tote.jpg
4. http://www.tiffanyandcousajewelry.com/1761-3553-thickbox/tiffany-elsa-man-watch.jpg
5. http://4.bp.blogspot.com/-ab0hkl_XPG0/TacugZPhr0I/AAAAAAAAAHE/XWM8aykOz_U/s1600/rolex_image.902271.jpg
6. http://www.hdicon.com/wp-content/uploads/2010/08/ups_2003.png
7. http://upload.wikimedia.org/wikipedia/commons/thumb/9/97/The_Brink%E2%80%99s_Company_logo.svg/500px-The_Brink%E2%80%99s_Company_logo.svg.png
8. http://2.bp.blogspot.com/_CvAeOGiQet4/TNmYSyCfgRI/AAAAAAAAATs/Asl83nYHMuM/s1600/d951433759ba47c088823bb43c4fc56d.jpg
44