Maersk Cyberattack

Maersk Says June Cyberattack Will Cost It up to $300 Million
Maersk ship Emma Maersk Line

A.P. Moller-Maersk A/S said a cyberattack that hit the owner of the world’s biggest container shipping company at the end of June will wipe as much as $300 million off profits in the third quarter.

The announcement was made in connection with second-quarter earnings, which showed Maersk missed analyst estimates after taking a writedown at the tankers unit that’s part of the energy business management has said it wants to get rid of.

In an interview with Bloomberg Television, CEO Soren Skou said the industry outlook was bright, despite the disruptions of cyberattacks and writedowns. Management at the Danish company sees “very healthy fundamentals” for container shipping, Skou told Bloomberg’s Matt Miller and Guy Johnson.

Frode Morkedal, the managing director of Clarksons Platou Securities, said the report was “slightly on the negative side, but we find solace in their positive market comments,” in a note to clients. Of the 31 Maersk analysts tracked by Bloomberg, 15 are telling investors to buy the stock, 12 suggest holding on to it, and four say clients are better off selling.

David Kerstens, an equity analyst at Jefferies, said the fact that Maersk Line reported its first profit in five quarters shows that “fundamentals in container shipping continue to improve,” according to a note. Kerstens is among analysts advising clients to buy. Clarksons has a neutral rating on the share.

• Earnings before interest and taxes was $302 million in the second quarter, missing the average estimate of $896 million in a Bloomberg survey of 10 analysts.

• Maersk had a net loss of $269 million, when analysts had expected a profit.

• Revenue was $9.60 billion, in line with estimates.

• The June cyberattack will cut about $200-300 million off Maersk’s results, it said.

• The company kept its outlook for the full year.

Profit was hurt by a $732 million impairment due to lower asset valuations in Maersk Tankers and “a few commercially challenged” terminals in the APM unit, it said

Maersk was among a number of multinational companies that in June was hit by a cyberattack. Its IT systems were disabled, preventing the shipping line from taking new orders for several days. Maersk said on Aug. 16 it kept its outlook despite the costs of the cyberattack, as the container shipping market improves.

“These system shutdowns resulted in significant business interruption during the shutdown period,” Maersk said in the report. The financial impact in the second quarter was “limited,” but “the impact in the third quarter is larger, due to temporary lost revenue in July,” it said. “While the businesses were significantly affected by this cyberattack, no data breach or data loss to third-parties has occurred.”

Aside from the cyberattack, Maersk said the industry outlook was healthy. After a decade dominated by overcapacity, the container industry is now benefiting from higher freight rates as some of the biggest companies swallow up smaller rivals.

Skou also said stronger global economic growth means container transport is now “doing quite well.”

Maersk said “the improvement in market fundamentals in past quarters has started to reflect in the freight rate,” which it said was up 22% from a year earlier. Freight rates increased by 36% on East-West trades and 17% on North-South trades, it said.

The company has given itself until the end of 2018 to come up with a plan to separate its energy business, which includes Maersk Oil and Maersk Drilling. The conglomerate wants to focus on its transport division, which, besides Maersk Line, includes port operator APM Terminals.

Digital and delivery – which ‘D’ matters most to the fast food industry? Two contrasting views.

SUMMARY:

Digitally-enabled delivery is a big thing in the fast food industry, but is it a long-term competitive differentiator for everyone?

The fast-food industry has been one the more recent sectors to talk up its digital channels, fuelled in part by the rise of specialist disruptor brands, such as Deliveroo, Just Eat and now, the big threat, Uber Eats.

Recent months have seen the likes of McDonald’s, Domino’s Pizza and Papa John’s drill down not only on their digital platforms, but also on how to tap into a consumer trend toward digitally-enabled delivery models. It’s the ‘other D’ – delivery – that’s emerging as the biggest priority, with McDonald’s, for example, pairing up with Uber Eats to provide a ‘to the home’ service.

So it’s interesting to see the views of Lenny Comma, CEO of Jack in the Box, which appear much more skeptikal about the long-term importance to the competitive landscape of being able to offer such functionality. Comma argues:

I think what we are really going to see happen with delivery over the long-term – and I will just compare it short-term to long-term – I think in the short-term, we are all going to drive some additional purchase occasions through delivery. We are all going to get more incrementally out of it than not.

But essentially once the entire industry across all segments is delivery-enabled and what’s enabled is also digitally enabled through their apps and other means, I don’t think this is going to be a competitive advantage. I think it’s just going to be another means to an end for all consumers across any segment.

At that point [the differentiator] will go right back to what your brand is known for. Is it cheaper food, is it higher quality food, is it incredible flavors, is it late-night, munchie meals, what is it? Essentially this trend towards delivery to meet the consumer demand I think is somewhat of a temporary phenomenon as far as incrementality is concerned. We don’t bank on this as a long-term driver for us as compared to our competitors. I don’t think that you are going to have any specific restaurant brand including Jack in the Box that will have a competitive advantage over the long-term based on delivery.

What matters is how your brand is perceived in the market and how the service you provide to customers matches up to that. Jack in the Box is more accessible in the physical retail environment than many rivals, states Comma, and this will have an impact on the desire/need for home delivery:

Brands are known for what they are known for. The consumer believes that Jack in the Box is a late-night destination and that’s why I think we are going to be in their primary considerations that when they are looking to use delivery during late-night.

In contrast, rival brands are likely to have a greater need to offer delivery channels to expand their reach, he adds:

Most of the competitors do not have as many locations open 24/7 as we do. So the availability may not be there from all those competitors, even if the consumer wants to consider them.

There’s also a cautionary note struck around adding new items to the menu rather than sticking to the secret sauce that defines your business. Comma suggests:

Driving that type of [new] equity for the brand to make sense [of] opening those additional hours is really difficult to do, just like you have seen as other competitors have tried to get into the breakfast business. It’s a long-slow process to get the consumers to change those habits and to understand that you now have sort of new equities associated with your business.

This isn’t to say that Jack in the Box doesn’t have its own digital plans in place, adds Comma:

For the Jack in the Box brand first and foremost the digital platform is being tested now in the form of mobile app. [This] provides a lot of functionality, it really helps to expand the convenience factor of the brand. We expect that with a single platform Point of Sale, we will be able to move relatively quickly, once that test is [over], to get it into the hands of our consumers and throughout the entire system. So digital is a big piece of what should be launched in 2018.

Mention of the mobile app does bring delivery back into the picture though:

The consumer is demanding it. That also relates to the mobile app and the digital platform because that will make it easier to use delivery.

Catching-up

Delivery is also on the mind of Denny Marie Post, CEO at Red Robin Gourmet Burgers, who states that not being “a player in carry-out or a delivery” has had a negative impact on the company’s fortunes:

We have been cautious about expansion of third-party delivery services based on their high cost and uneven guest experience. That said, guests are clearly interested in more delivery options.

Meeting this interest has become a strategic priority, with the off-premise business now 7% of total revenues, compared to 5.2% a year ago, with a 70% increase in the past three months as resource has been put behind this. Post says:

This growth was driven by the launch and adoption of online ordering nationally, which now represents approximately 20% of off-premise sales. Third-party delivery also represents a significant amount of sales, almost 10% of total off-premise traffic despite being in only 118 of our locations. We are continuing to roll out curbside to locations where it is possible and to add call center support. By early in Q4, all corporate restaurants will be on the call center and have designated in-store pickup areas. Roughly two-thirds of all of our units will have curbside delivery.

Part of Red Robin’s reticence to get into off-premise delivery was a basic fear of not getting the orders right! But this also represents a growth prospect, says Post:

To understand what we could do, what we could control to improve the delivery experience, we conducted research with third-party users and found that our biggest opportunity was in accuracy of order…Immediately the off-premise team partnered with operations to develop and train in new procedures for double checking orders at pickup. This check, double check and handoff benefits both guests who carry out and those who choose to order through third-party delivery. If it gets home and it’s missing something, it’s hard to recover.

This new process has resulted in a boost in confidence about digitally-enabled third party delivery with Post confirming:

As a result of strong guest demand and higher confidence in our ability to deliver an accurate order, we have decided to expand to a total of 198 unique locations with the three services we already use, Amazon, DoorDash and Grubhub. To qualify all of the 80 new locations we have added had to have high guest experience scores. These operators have demonstrated that they are ready to capture more sales.

Beyond that, Red Robin is looking to technology investment to create “entirely new approaches for the future. Much of that innovation will require a new level of technology”, says Post. To that end, the firm has hired Dean Cookson, formerly the CTO at Virgin America Airlines, as its new CIO, charged with finding “new ways of being and interacting with the guest”.

One immediate challenge is likely to be gathering more customer data around digtally-empowered delivery options, as Post admits that the firm can’t accurately assess the incremental value of the model as yet:

It’s hard for us to say, because we don’t have access to guest data and we do not offer our Red Robin Royalty program to third-party delivery, because we don’t have the integrations we would need to do that. So we don’t have as much visibility, which is why we went out and did our own research to try to get at it…But the guest is demanding [delivery options] And if we’re not there, a lot of folks [do] show up there, a lot in the burger market in particular. So, I think [third party delivery is] a good way for us to hold our own in delivery while we explore other options.

My take

Fast food businesses haven’t been the fastest to takeaway the disruptor lessons around digital that we’ve seen in other parts of the retail landscape. The activity seen in recent months suggests that this is changing now. What will be interesting is to see how the digital focus plays out at different points of the market – from the cheap and cheerful burger, fries and a soda for under $5 through to the higher price point, restaurant-centric gourmet burger space.

I have some sympathy for Jack in the Box CEO Comma’s view that the digital delivery trend isn’t likely to be a significant long-term opportunity for his business. Personally I can’t imagine the desire to get online and order a cheap burger and fries from a fast food outlet. You’d need to be a Jack in the Box junkie (or McDonalds, KFC etc etc). On the other hand, Red Robin’s higher-end burgers cry out for a delivery option, a need that hasn’t been met to its optimal potential to date.

Megatrends

4 mega-trends that could change the world by 2030

In 2012, the US government put on its futurist hat and published a report entitled “Global Trends 2030: Alternative Worlds.”

It’s full of both grim predictions and hopeful insights about the world that humans will inhabit within the next two decades.

One section outlines four mega-trends that are poised to create the greatest impact in the years to come in society, healthcare, government, and resources.

Here’s what we can expect.


Individual empowerment

Individual empowerment

GiveDirectly

Over the next 15 to 20 years, continued giving from groups like the World Health Organization and the Bill and Melinda Gates Foundation will lift millions of people out of poverty, the report found, to the extent that the majority of the world’s population will no longer be impoverished.

This new wealth will produce millions more empowered individuals that will have the means to add to local and national economies.

The report hedged slightly, however, because more empowered people will also have greater access to lethal weapons and networks, which is “a capability formerly the monopoly of states.”

Diffusion of power

Diffusion of power

Reuters

Developing countries in Asia will become more prominent world powers compared to North American and European nations.

“China alone will probably have the largest economy, surpassing that of the United States a few years before 2030,” the report explained. “In a tectonic shift, the health of the global economy increasingly will be linked to how well the developing world does — more so than the traditional West.”

In other words, having the most money or people won’t necessarily keep a country powerful if others are more adept at staying connected to data and resources.

Demographic patterns

A combination of widespread aging, falling fertility, and urbanization will lead to a dramatically different world in 2030.

With an expected 8.3 billion people, human civilization will be both older and much more focused on city life. Our infrastructure may improve, but our level of innovation and output will slow down without younger workers.

“Aging countries will face an uphill battle in maintaining their living standards,” the report stated.

It’s entirely possible, however, that within the next several decades, humanity will generate more urban construction than it has in the rest of its history.

Growing demand for food, water, and energy

Growing demand for food, water, and energy

AP Photo/Patrick Reevell

A growing middle class and gains in empowerment will lead the demand for food to rise by 35%, water by 40%, and energy by 50%, government research suggested.

Regions with extreme weather patterns — like rain-soaked Singapore or muggy Mumbai — will get more extreme due to the effects of climate change. Dry areas such as northern Africa and the US Southwest will feel the effects of diminished precipitation especially hard.

We will still have enough resources to avoid energy scarcity by 2030; however, whether those resources include fracking or renewable forms like solar and wind is yet to be seen.

Fruit Snack Segment

Fruit Drives Growing Produce Snack Segment

Fruit Drives Growing Produce Snack Segment

The snackable fruit and vegetable category is growing, with sales of $16.3 billion in the year ending on May 27, 2017. Nielsen defined the category as packaged items sold in the produce department for the purpose of snacking. The “on-the-go” snack category posted a compound annu

al growth rate of 10 percent per year from 2012 to 2016. Nine hundred new snack items have been launched in that time.

Six hundred of those items were individual servings of fresh fruit, sometimes sold with additional items. Retailers sold $117 million in mixed fruit last year and almost as much in mixed fruit paired with another type of product, such as dip, cheese, veggies, or nuts. Nielsen found that 32 percent of U.S. homes purchase on-the-go produce snacks, with multicultural houses, families, and younger consumers buying more than others.

Monolithic Grocers

Monolithic Grocers Sell Monolithic Labels

August 11th, 2017

Cornucopia’s Take: Cornucopia strongly supports co-ops and other independent grocers who stock truly local and organic food, pay their staff a fair wage, and grow communities. Many consumers have a choice when it comes to food shopping, and choosing to support a member-owned co-op rewards family-scale farmers and gives you access to the healthiest food. Journalist and creator of the Deconstructing Dinner podcast, Jon Steinman, hopes you’ll consider the impact that grocery stores have on our food landscape.


Who Owns Your Grocery Store?
The Tyee
by Jon Steinman who is currently running a crowdfunding campaign to support the development of the book, Grocery Story – The Promise of Food Co-ops in the Age of Grocery Giants. Jon is also the writer and host of the Deconstructing Dinner television and radio series.

In the age of monolithic grocery giants, food co-ops offer a promising alternative.

People’s Food Co-op
Source: Robyn Kingsley

Who owns the grocery store you shop at?

I love this question. It’s a bloody important one, a solid entry-point into a much deeper inner dialogue about the type of food system we choose to invest in each time we pass through the grocery checkout. If you’re like most Canadians, your investment is probably not so much a choice but an exercise in necessity, habit or convenience. Most of us, after all, are sorely limited in choosing which among the country’s grocery giants our food dollars will support.

The national market share of Canadians’ grocery dollars is telling, with 30 per cent of us investing our food dollars in Loblaw Companies Ltd., 26 per cent in Sobeys (Empire Company Ltd.), and 25 per cent in Metro, Walmart or Costco combined. That’s right, over 80 per cent of Canada’s grocery dollars end up in the pockets of only five companies.

In Western Canada, Jim Pattison and his Overwaitea Food Group is high on that list too. In Vancouver, if you shopped at the once locally owned Capers Markets, your food dollars in the past 10 years have been an investment in Whole Foods. If the recent $13.7-billion acquisition of Whole Foods is approved, you’ll soon become an investor in the Amazon empire.

This eroding of competition among the grocery giants also mimics the (un)competitive landscape of the foods found on their shelves. In their “Grocery Goliaths” report, U.S. NGO Food & Water Watch refers to the companies supplying the stores as the “Monolithic Food Manufacturers.” Indeed they are. Today, two companies hold 99 per cent of the sports drink market, 80 per cent of the mayo market, and 85 per cent of dry mac and cheese. Three companies retain 96 per cent of the market for baby formula, 80 per cent for granola bars and 77 per cent for ketchup. In a third of the categories researched, the report found four or fewer companies controlled at least 75 per cent of sales. The figures are almost Orwellian.

How have these monolithic manufacturers amassed such concentration? Simple. They pay for it.

Food manufacturers across the globe are shelling out $50 billion a year in trade fees and discounts — requirements established by the grocery giants. In the U.S. alone, these “trade fees” have been estimated at $18 billion. The deeper the pockets of the manufacturer, the better the chance that the grocery gatekeepers will grant the manufacturer access to the eating public. Perhaps the most dubious of the fees are the slotting fees, where a manufacturer pays the retailer to place their product on their shelves. Once there, the retailers provides little guarantee that the product will remain. To assure long-term placement, manufacturers shell out a “pay-to-stay” fee.

It matters little to the retailer if the product is unhealthy, lacks innovation, or carries a heavy environmental footprint — the foods on our grocery store shelves are reserved for the highest bidders. As one report on slotting fees writes, “Supermarkets today are as much about selling shelves to food companies as they are about selling food to customers.” An article in the Economist captures it best, “So lucrative have slotting fees become, that industry insiders joke that supermarket shelves are now the world’s most expensive property.”

So what’s wrong with this eroding of competition in the marketplace?

For me, it’s the impact the hollowing out of options has on my local economy and how it prevents the local food butchers, bakers and kombucha-makers from accessing the shelves of local and regional stores. These good-food innovators deserve access to the marketplace. They are the entrepreneurs who are transforming the food supply, but they are no match for the flexed muscle of a new flavour of Doritos.

In my hometown of Nelson, B.C., any investment in the three largest grocery stores results in my community lining the pockets of the second, fourth and 21st richest Canadians. Not surprisingly, none of these grocery tycoons live anywhere close to Nelson. Why do we allow our local economy to be controlled remotely by a handful of companies run by people who would likely struggle to even find Nelson on a map?

There are alternatives. We can plant a garden, raise some chickens, flock to the farmers’ markets or shop at one of many specialty food stores. I love all of these options. But are they alternatives spelling the end of the grocery store? Not at all. Despite the exciting growth of these more direct forms of food access, 94 per cent of our food dollars continue to end up in the hands of food retailers.

So what are we to do?

The history books are full of examples of efforts to combat the concentration of wealth and power within the grocery sector. At times, this exercise in resistance has spanned the spectrum of back-to-the-land homesteaders at one end, to the president of the United States at the other.

“Which do you want? Do you want to live in a town patronized by some great combination of capitalists who pick it out as a suitable place to plant their industry and draw you into their employment? Or do you want to see your sons and your brothers and your husbands build up business for themselves under the protection of laws which make it impossible for any giant, however big, to crush them and put them out of business.” That was then-to-be president Woodrow Wilson, speaking during his election campaign of 1912.

By 1934, the groundswell of resistance in the U.S. to the rise of chain stores had resulted in 17 states implementing chain store taxes. In the grocery sector, much of the resistance was in response to the spread of the largest of the grocery giants, A&P, who at the time had assumed 16.7 per cent of the American grocery market. Despite intense opposition to it, anti-trust legislation succeeded in holding back mergers and preventing the demise of many locally owned food-based businesses. By the early 1980s, these agencies and their requisite powers were severely eroded, their powers reserved for only the most egregious of anti-competitive activity. The great mergers of the 1980s and 90s ensued.

The resistance among consumers was not, however, extinguished.

One of the most under-appreciated responses to this concentration of wealth and power were the hundreds of communities that organized themselves to take back control of their local economies and food supply. They did this by forming food buying groups and retail food co-ops. The first wave of these consumer-owned stores emerged in the Depression era, but it wasn’t until the early 1970s and a new wave of community-owned grocery stores did the inspiring food co-op movement of today really take shape. These co-ops were primarily focused on sourcing organic foods and exercised their collective buying power to keep prices low for their member-owners.

Here in B.C., the most organized of these efforts was Fed-Up Co-operative Wholesale, formed in 1972 by the CRS Workers’ Co-op. By 1973, Fed-Up was providing wholesaling services to 50 pre-order food co-ops operating throughout the province. In the U.S., efforts were more widespread, with buying groups and formal co-ops mushrooming across the country. The Minneapolis-St. Paul area was a hotbed of co-op activity, and today has become home to about 13 food co-ops, many of which operate multiple locations. Back in B.C., two of those early co-ops in particular stood the test of time and today are known as the East End Food Co-op in Vancouver and the Kootenay Co-op in Nelson. Both co-ops are 42 years old.

Today, the retail food co-op model is a definitive movement, with over 300 stores operating across the U.S. and many national and regional organizations supporting their development. The natural food co-ops in Canada never took hold to the extent they did across the border, but a new wave of interest is forming, particularly in Ontario where the Ontario Natural Food Company (1975) has been helping usher in a flurry of new food co-ops. Some of these co-ops already have a few years under their belt like the West End Food Co-op in Toronto, the Mustard Seed in Hamilton and Eat Local Sudbury Co-op in Sudbury.

Here in Nelson, I’ve been a member-owner of the Kootenay Co-op since 2006. Like at any consumer co-op, once a year I gather with my fellow co-owners to elect from among our 14,000+ members, a group of us to lead the store on our behalf. When I have a question or concern about an existing product or a request for an item not yet on the store’s shelves, my grocery store listens with earnest and eager attention. I know the names of most of the people who work in the store and I recognize half of the shoppers each time I pass through the automatic sliding doors. The same energy and social engagement that attracts me to the busy farmers’ markets is the same incentive that draws me into my grocery store. My grocery store is my community.

Last year, the Kootenay Co-op purchased $3.5 million in products from local suppliers, and I’m not referring to the appropriated version of “local” used by the chain stores that now use it to describe any food produced in the province. The Kootenay Co-op’s “local” is specifically defined as being from within the West Kootenay region of the province. In an act of defiance and pride, the co-op appropriately labels these foods as “True Local.”

Not surprisingly, the hundreds of natural food co-ops in North America, which, for years had easily differentiated themselves from their conventional counterparts, are today facing new pressures from the national and multinational chains, not to mention the recent emergence of regional chains specializing in foods that were once characteristically “co-op.” The fear among co-ops of this new competition is palpable, but there are quite a few characteristics of food co-ops that conventional stores will never match.

Food co-ops are democratic: Any member of the co-op can run for the board of directors and all members are invited to vote for their board each year.

Local head-office: The entire management team running a food co-op is local. No one is calling the shots from Toronto, Nova Scotia or Arkansas. In turn, cooperative grocery stores employ more people than privately owned ones. With 160 employees, the Kootenay Co-op, as one example, has become Nelson’s largest non-governmental employer (population of Nelson: 10,250).

Profits remain with the co-op: Any profits generated by a food co-op are either re-invested back into the co-op and/or distributed equitably among member-owners. If you hear anyone alleging that a food co-op is gouging its members, it’s simply not possible. The financial success of the co-op benefits the entire membership and co-ops are in the business of providing the best prices to their members while ensuring their suppliers are fairly compensated and the products carry the least environmental impact.

More immune to takeovers: Amazon’s pending acquisition of Whole Foods is a reminder of the risk inherent when people rely too heavily on privately owned grocery stores. Indeed, Whole Foods is no mom-and-pop retailer, but as conscientious as any privately-owned, independent local grocer might be, any possible takeover of their store(s) by the hungry giants is a decision that is entirely their own; it’s not one that requires approval of the store’s shoppers as is the case with a food co-op.

In Canada, support for start-up food co-ops is lagging, but between a number of organizations in the U.S. and the many co-op development agencies across Canada, the resources are certainly there for those wishing to organize their own community-owned grocery store. There are also existing food co-ops to learn from and one of the core principles of cooperatives is to cooperate among each other. With hundreds of these stores in rural and urban communities alike, there is no shortage of co-ops to reach out to and lean on.

Before hitting the ground running, what might be a first critical step in becoming a participant in the food co-op movement is to support the shift within the collective conscience of eaters, of how we perceive the existing grocery stores operating in our neighbourhoods. Just like the buying groups of 1970s B.C., it’s likely necessary for each of us to first arrive at that place of being downright fed-up with the companies currently feeding us. Then the work can really begin toward democratizing our local economy and democratizing our grocery stores.

Activity Based Costing

The ABCs of Activity-Based Costing for Logistics

Only companies that have an accurate, ABC-based view of their delivery costs at the individual product and customer levels can successfully compete and win.

Tan Miller | Aug 15, 2017

Activity-based costing (ABC) has helped many companies for decades gain a true understanding of their costs to produce and distribute products to customers.  ABC provides a precise, accurate view of costs at very granular levels—namely, at the individual product, service and customer level. As we will discuss, this differs from traditional accounting systems that are best suited to generate cost analyses at the overall firm, function and facility level, but which distort costs at more granular levels such as the individual product or customer level.

ABC receives relatively little attention in the world of logistics today, where such forces as the rapid advance of technology, the growth of e-commerce and the rise of omni-channel dominate headlines and corporate resources. However, ABC remains a critical foundational tool that represents an absolute necessity to ensure a company can accurately understand its true costs to serve customers. In this article, we revisit this essential decision support capability.

What Is Activity-based Costing?

ABC first gained prominence in the corporate world during the 1980s as a new methodology that allowed manufacturers to accurately capture their true costs to produce individual products. Two of the original developers of this approach, Robert Cooper and Robert Kaplan, described this methodology in a 1988 seminal article titled, “Measure Costs Right: Make the Right Decisions.” These authors argued that because traditional accounting systems proportionately allocate a manufacturer’s overhead costs based upon gross measures such as the total dollar sales of each product produced, this results in distorted individual product cost calculations. (Indirect overhead costs are expenses such as heating, lighting and supervisory management. In manufacturing operations, note also that direct labor costs, direct labor hours and machine hours associated with producing individual products are other common “bases” or “drivers” for proportionately allocating overhead costs.) Further, when companies use aggregate measures to proportionately allocate costs such as marketing and distribution to individual products, the potential for major distortions in product costing dramatically increases.

Successes during the 1980s in applying ABC methods to manufacturing prompted an eventual expansion of this methodology to other key components of the supply chain (e.g., distribution). Manufacturers such as Proctor & Gamble and Warner-Lambert began using ABC models to determine their overall costs to serve individual customers (e.g., Walmart), and to evaluate the costs of offering different individual services to customers (e.g., services such as vendor-managed inventory and advanced shipment notices, or ASNs). To illustrate how ABC contributes to a company’s understanding of distribution and other related costs, let’s consider the following example where a company is evaluating the profitability of its three major distribution channels.

A Distribution Channel Profitability Example

Assume company XYZ is a manufacturer and distributor of pharmaceutical and consumer products, and it sells its products through three primary distribution channels: mass merchandisers, wholesalers and small retailers. Now let’s evaluate the overall profitability of each channel based upon: 1) a traditional accounting system, and 2) an ABC system.

Assume that XYZ’s traditional cost accounting system allocates its distribution center’s (DC) costs based upon either the total dollars or weight shipped to each customer and channel. Typically customers, channels and products do not consume DC resources (such as labor and machine time) proportionately to their dollar or weight volume, so a traditional cost accounting system will distort the true costs.

Now suppose the XYZ DC distributes a mix of low-valued to high-valued products with a wide range in the dollar value per pound, and it receives, stores and ships products in everything from individual eaches (e.g., pharmaceuticals) to pallet quantities (e.g., bulk consumer products). In addition, assume there are small pick lines (for eaches), automated conveyor lines (for cases) and forklifts (for bulk pallets) to move product from inventory storage to the shipping dock. Finally, there is a separate pick area to serve the special requirements of the three largest customers, and all modes of transport are used, from truckload to ground parcel to next-day air. An ABC view of costs at this facility would differ substantially from that of a traditional aggregate volume-based perspective.

Figure 1 shows the difference in the net profit generated by the three different distribution channels as calculated by traditional volume-based accounting and then by an ABC approach. In contrast to the volume-driver-based accounting system that uses only sales dollars to allocate costs, XYZ’s ABC system employs many more drivers. For example, the DC may use a case pick operation to serve small retailers and a bulk pick operation to serve wholesalers and mass merchandisers.

The ABC system would accurately calibrate the different costs of serving customers using the two different operations. It also would evaluate the costs of all other major components (such as order management, transportation and sales force activities) involved in serving customers.

In this fictitious case, one can observe that based on the ABC costing system, the small retailer channel provides the smallest profit margin (4%), while the mass merchandise (11%) and wholesale (9%) channels yield a higher return. Conversely, the traditional costing system incorrectly indicates that the small retail channel generates the highest profit margin (16%), followed by the mass merchandise (9%) and wholesale (7%) channels, respectively.

Note that in the traditional system, XYZ’s $84 million total annual operating expenses are allocated to each channel based upon that channel’s proportion of total gross revenue (e.g., the small retail channel’s operating expense equals 100/700 x $84 million). This gross allocation of operating expenses distorts XYZ’s cost to serve each channel.

This example illustrates the alternative, more accurate cost and profitability insights that a good ABC system can generate, and the dangers of making decisions without an ABC system.

The ABC Models behind ABC Systems

To develop an accurate ABC system, a company must first develop a good process model of the activity or operation of interest. XYZ requires that its ABC system capture how its costs to deliver products to each customer differ. At the minimum, therefore, XYZ must create ABC models of its DC operations and transportation delivery processes.

Further, as Figure 1 illustrates, XYZ is evaluating its costs by customer (and distribution channel) in terms of sales force activities and customer service. In practice, this would necessitate that XYZ construct and maintain process models of each of these major components of the order-to-delivery process. For illustrative purposes, we briefly consider DC operations which represent one of the key activities of this overall process.

Figure 2 illustrates the process and cost model that XYZ would maintain of this operation. A team of DC operations and accounting/finance personnel would develop the process flows and cost analyses necessary to generate this model.

A review of Figure 2 shows that the cost per unit (i.e., per pallet, case or each) of every activity is calibrated. XYZ can combine this DC ABC model with its databases that provide data on how many cases, pallets and eaches its DC picks and ships to each customer, in order to assess the costs XYZ incurs in serving each of its customers from the DC. XYZ would need similar models of the other major activities (e.g., transportation) utilized in serving its customers.

Collectively, these ABC process models would facilitate XYZ’s evaluation of the true cost to serve each customer.

ABC Is More Critical than Ever in Logistics

Omni-channel and the business to consumer delivery process represent one of the most dynamic, rapidly evolving areas of logistics operations. Further, the escalating competition that B2C suppliers face to provide same-day or near-same-day deliveries to consumers (often with no delivery fee) places many suppliers under severe cost pressures. Business-to-business suppliers similarly face ever-increasing service demands and cost pressures, and many suppliers now compete in both the B2B and B2C worlds.

To compete today, and to design efficient, profitable delivery strategies for tomorrow, demands that suppliers accurately know their costs to deliver every product to every customer. Suppliers managing without this essential information have little hope of designing and executing efficient and effective delivery network strategies and operations. Only suppliers armed with an accurate, ABC-based view of their delivery costs at the individual product and customer levels can successfully compete in the long run.

Final Takeaways

It is beyond the scope of this article to review in detail development and implementation strategies for ABC systems. However, there are several key takeaways we will address in closing, and we offer additional references for the interested reader.

• First, it is important to note that ABC costing systems are intended to complement traditional accounting and financial systems, and should not be viewed as replacements or threats to a company’s existing systems. Rather, ABC systems facilitate detailed insights on a company’s true cost to serve individual products, to offer specific customized customer services, and so on.

• It is imperative that an ABC system utilize the same underlying data and database sources as the other accounting systems of a company. ABC systems will employ the data differently and may have additional input sources than do the traditional accounting systems; however, the “total costs” of the two systems must be identical. In other words, any cost analysis generated by an ABC system must align with a company’s financial reporting system at an “aggregate level.” As illustrated in Figure 1, individual cost analyses (such as the cost to serve different distribution channels) will differ between the ABC and traditional accounting systems. However, at the aggregate total operating cost level, the systems must agree.

• To develop ABC models of its operations, a company should utilize operational colleagues working with accounting/finance colleagues in a team-based approach. For example, to construct an ABC model of a distribution center, the project team should include several DC managers, as well as other logistics and accounting personnel.

• Commercial software is available to facilitate the development and deployment of ABC systems, or alternatively a company can develop its own ABC models to complement its existing accounting systems.

To conclude, in the rapidly evolving world of 21st century logistics, it is more critical than ever for companies to invest sufficient resources in the well-established, foundational decision support capability that an ABC system provides.

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