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UPS Executive Shares Insights on Total Cost of Ownership in the Electronics Supply Chain

Ken Torok came to my class on Monday evening, and provided a delightful discussion on total cost of ownership.  The class was focused on building and developing cost models, both for should-cost modeling, as well as total cost modeling.  After providing an introduction to the concept of TCO, I introduced Ken to the class.  This distinguished gentleman happened to have just retired as President of Global Freight Forwarding, and prior to that, as President of UPS Asia Pacific.  A native New Yorker, Ken turned down a career in finance and banking for an action-packed and exciting career in the world of global logistics.  He has over 30 years of experience working at UPS, and is now spending his time working with students and other activities in retirement.  He also happens to be a Wolfpack business school alum, having graduated in 1975, and went straight to UPS after graduating.  In fact, he started his career early during school loading trucks at a dock!

Ken asked my class a simple question:  What are the factors that go into a total cost of ownership model?  In this case, the context was an annual bid and quote negotiation they had to do with electronic manufacturers who wanted to ship products from the factories in Asia to the US.  We happened to use the example of a high end consumer electronics manufacturer, but in truth, any one of the manufacturers operated the same way.

“One of the first decisions Involves understanding the forecast and demand which will impact the type of equipment.  Fuel costs are an important part of the cost, and it may be indexed or  bundled into the cost.  The tonnage also determines how often will you use the shipment. What lane mix is also an extremely important cost factor that we have to know.  How much of the tonnage will move from factories in China to Europe, to the US, and to intra-Asia.  And the type of equipment used is something the Apple execs will want to know.  The 747-400 is an older plane that sucks fuels vs. a more efficient plane that uses less fuel.  The lane mix also folds into how much volume we already have on those channels  going to Europe and the US already – and can we do marginal pricing to win the business year round?  For instance, UPS may be carrying a baseload into Europe already, there may be space on the plane for extra product.  Maybe the pricing is different!  What are the metrics used to measure performance is part of the contract terms, especially around on-time service commitments.  And there has to be damage and mishandling issues – any costs associated with those events are important.”

“Security is one of the tightest with electronics.  Particularly on new product introductions, we needed to be very careful on being able to deploy a product roll-out simultaneously across the entire country, in California, New York Chicago, etc.  Some companies emphasizesthe same “experience” for all of their products, and this was one of the toughest parts of meeting their logistics requirements on new products.  This can be challenging as customs clearance becomes critical.  One of the benefits of UPS is that we have our own people on customs, and they can get the material through much easier than a third party.”

“One of the biggest differentiators of UPS is that for demanding customers, every transfer point has to be electronic and real-time – and there is a cost with the demands for the tracking and tracing of the shipment.  Real-time commitment is critical.  If you can’t provide real-time tracking, you won’t even be invited to bid.   This is all done by real-time scanning with agreed on scan points, including the transfer from their dock at the plant, transport to the airport, turnover to the carrier, loading onto the plane, another transmission on wheels up (showing if the plane is behind), and the technology wrapped around all of these scans and systems has a cost to be wrapped around that.  Liability insurance is another issue will it be for each container, product in the container, or the entire aircraft.  If entire aircraft goes down – there is a cost to providing that insurance.  If we don’t use our own airline – we have to buy insurance.”

Once the plane lands, we move the product from the airport to the factory, and in some countries, need to worry about security of drivers, and prevention of hijacking.  The route has to be approved and in some parts of the world, chase vehicles with the trucks so there is no hijacking.   This makes simultaneous product release at stores even more complicated!”

“The reason why people choose UPS is reliability, our safety record, and on-time delivery.  You could give a better price to use a local Chinese carrier – and get a much better rate from anyone trying to penetrate the local US market.  They are hungry to get into the market, but they will not be willing to take on the true cost of ownership associated with this business, they will marginally cost it – and that is a no-go.  It took UPS years to develop the China-global electronics market supply chain, and we were not very profitable during the early years.  Today, that is one of our largest market channels, and it is continuing to grow because of the investments and the reputation we have established for security, reliability, and delivering it right, every time, on time.”

Next time you think about total cost of ownership – just think about the number of parameters in this channel!