A Global Inbound Transportation A Global Inbound Transportation A Global Inbound Transportation A Global Inbound Transportation Strategy for Cordis Europe N.V.Strategy for Cordis Europe N.V.Strategy for Cordis Europe N.V.Strategy for Cordis Europe N.V.

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“Ground braking life changing”

A Global Inbound Transportation

Strategy for Cordis Europe N.V.

Peter Alexander Krol

Optimization

of

inbound

transportation

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Inbound transportation

A sourcing methodology

Rijks

universiteit

Groningen

July 2007

Thesis on behalf of graduating the studies of

Technology Management – Discrete Technology

Author:

Peter Alexander Krol

Student reference:

1302914

Email:

Peterkrollo@hotmail.com

University advisors:

Kamann, Prof dr D.J.K

Stek, Drs H.C.

Company:

Cordis Europe N.V.

Roden

Netherlands

Company advisors:

Stefan Spekreijse

Hans Schoonbeek

Roden, July 2007 © P.A. Krol

The author is responsible for the content of the thesis: all rights regarding this thesis are reserved for the author.

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Acknowledgements

I would like to thank all the people who have helped me during my thesis.

Especially I would thank Dirk-Jan Kamann who helped me after a hard time with the opportunity to finish my studies with an internship at Cordis in Roden. During my thesis I have learned a lot about a company in practice. Study from the books gave me a lot of knowledge but in practice using this knowledge is a way with unpredicted challenges. I have noticed that each person is different and act different in an

organization. Thereby it was very hopeful to see that even people with different

backgrounds and goals can cooperate to get the best results together.

From the purchasing perspective I was situated at the strategic sourcing department from Cordis Europe N.V. in Roden. During this period I have learned a lot about transportation, logistics and internal information processes which are all related together. These processes have been given special attention from a strategic perspective to build a sourcing methodology for inbound freight.

My company supervisors Stefan Spekreijse and Hans Schoonbeek have helped me to learn more about the organization and gave a lot of information about the inbound transportation. Thereby I would like to thank all the other members of the strategic sourcing department for the fine cooperation during my internship.

Thanks to all the employees situated at the Cordis N.V. Roden office who gave me advise despite their busy activities. Also to the employees in the warehouse for their time and interest towards me making acquainted with the warehousing process and providing me the data needed. I realize this

opportunity is really unique and has given me insights which will be of use to me and the rest of my career

Further I appreciate my colleague students and friends with which I have discussed several parts of this thesis.

Last but not least I would thank my parents, sister and girlfriend for the positive push effect to finish my study.

P.A. Krol

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Summary

Research and findings from the last decade has concluded that cost reductions can be gained at the bottom part of the supply chains. For organizations this resulted in new strategies about supply chain thinking and purchasing. In the past customers judged the value of a product or service on the basis of some combination of quality and price, Today’s customers, by contrast, have an expanded concept of value that includes convenience, after-sales service,

dependability, and so on (Christopher). It is not just the company that serves the end-customer; it is the network of companies that together serve the customer. Therefore the higher management of multinationals introduced new departments in

multinationals as purchasing, strategic sourcing and supply chain.

These departments are created to realize cost reductions for purchases and improving the customer service level. Du Pont has shown that, cost reductions at the supply side from 2 %, creates with most

organizations a profit increase of 25%. Customer service can be improved by optimizing the logistical system.

This thesis is about inbound transportation for Cordis Europe N.V.. Transportation is part of the logistical system of an

organization. Effective logistics management can provide major source of competitive advantage, in other words a position of enduring superiority over competitors in terms of customer preference may be achieved through logistics. The underlying philosophy behind the logistics concept is that of planning and co-ordinating the materials flow from source to user as an integrated system rather than managing the goods flow as a series of independent

activities. Thus under a logistics

management regime the goal is to link the marketplace, the distribution network, the manufacturing process and the procurement activity in such a way that the customers are served at higher levels and yet at lower cost. In other words: to achieve competitive advantage through both cost reduction and service management.

Now, several years after the introduction of these departments we take a look inside the organization Cordis Europe N.V. and try to find the basics for successful logistics and

supply chain management: responsiveness, reliability and relationships.

Are the common aspects as TCO, KPIs, Relationships, Cross-functional teams, Trust and Mutual openness really part of the organization to realize a strategy for inbound transportation?

Describing and discussing these aspects gave us enough information to:

Create an inbound freight chart for Cordis Europe N.V. Roden and give

recommendations to the strategic sourcing department of Cordis Europa N.V. Roden, in which manner they could gain cost savings for the transportation of inbound freight.

Thereby market orientation is a very

important aspect. Core competencies and the idea that a strategy is dependent on

organizational learning processes, that are in their turn dependant on the current organizational skills are for many companies a possibility to create competitive

advantages. The marketing concept

illustrates that customer needs is the aspect why companies exist. They should build their company in a way these customer needs are given a lot of attention. The goal is to fulfill the customer needs in the best way perceived by the customer and the

organization. To create this perceived value, the behavior in the organization should have the following aspects:

1. Search for market information throughout the whole company. Information about current and future customers and their current and future needs.

2. Integration and spreading of this market information to the different departments within the organization. 3. The coordinated reaction from the

organization using the known market information.

That is why savings can be divided in hard savings and soft savings. Hard savings are cost reductions which can be gained by cutting prices changing from carriers or just reduce waste. Soft savings are savings gained through: information sharing, job satisfaction, trust, mutual openness and other harder definable aspects. This results in a better information flow, higher

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motivation and for the longer time horizon competitive advantages.

The first part of the thesis is the operational part. Research from the existing and future data will result in hard savings on the short term. Therefore all the costs involving transportation are made transparent. Thereafter the costs are more controllable. Controllable data give a lot of information about spend, carrier, weight, number of deliveries and invoices of the inbound transportation lanes. With these characteristics using the hard saving strategy savings on the following opportunities can be gained:

1. Diminish courier weight: structural 2. Diminish courier weight: once-only 3. Clustering of deliveries: structural 4. Compare prices carriers on specific

lanes

5. Compare prices for the same amount of goods transported by the same suppliers

Making all the costs controllable have resulted in cost savings for Cordis. Using the existing relationships with the suppliers and third party logisticians should make it possible to gain the forecasted savings. The second part is about optimizing the internal logistical system, relationships with their suppliers and the existing contracts. The internal logistical system is dependant on the cooperation of different departments and the related activities to increase the customer service. All the activities involved are clear. Having information sharing and mutual openness in the organization result in higher dependability internally which results in competitive advantages externally. The whole supply chain is getting advantage from the higher value; each part of the chain can create, to satisfy the end customer. With the existing strategic and bottleneck suppliers relationships exists. These relationships could be deeper; using TCO in the presented way will lead to cost reduction for both the supplier and buyer. Finally we have concluded that the importance of the supplier has influence on the transportation characteristics.

If a team for inbound transportation is set up, the first phase is to overcome the lack-of- trust barrier between members. Starting up has to be done with openness to each other. First speak out why there is lack of trust. Then working together, realizing the goals and objectives and finally making the project to be a success will also increase trust between members from the team.

The use of cross-functional teams in the way it is presented here will lead to more trust. And this result in better information flow, more openness and job satisfaction. Finally over years Cordis will take advantages of it. This can be subscribed to soft savings. Using KPIs in the relationship between transporter and Cordis will lead to a better transportation flow and thus to a better customer service for the whole supply chain. For these reasons Cordis should use KPIs in the contracts with the third party logistics suppliers. The contract with the third party logistics suppliers makes re-negotiating about transportation with the existing suppliers preferable.

In the contract the incoterms has to be negotiated as well. If a relationship exists both parties, the supplier and buyer must be able to optimize transportation and reduce waste.

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The final conclusion is:

Cordis could achieve a significant reduction Cordis could achieve a significant reduction Cordis could achieve a significant reduction Cordis could achieve a significant reduction in transportation costs by working together in transportation costs by working together in transportation costs by working together in transportation costs by working together on the basis of

on the basis ofon the basis of

on the basis of shared knowledge and cross shared knowledge and cross shared knowledge and cross shared knowledge and cross----functional team work.

functional team work. functional team work. functional team work.

This has resulted in the following proposals and recommendations.

Proposals and recommendations Proposals and recommendationsProposals and recommendations Proposals and recommendations

Review existing strategy of shipping terms

Set down incoterms: FCA (EXW)

or DDU/DDP

Negotiate transportation: compare

cost of insourcing-outsourcing per supplier

Standardize/cluster the

transportation of inbound goods from the biggest suppliers

Reduce transportation costs: More

negotiation power for better prices

Reduce warehouse costs: Steady

number of deliveries and volumes

Decrease of failure and damage

costs

Reduce administration costs: new

agreements on invoices with suppliers with large turnovers

TCO: -Improves relationship with strategic/preferred suppliers -Transparency in transportation costs -Cost reduction -Clarity on other TCO supply chain costs

VOC

-Misalignment

between

departments

-Departments

strive to reach

departmental goals

-Lack of trust

between

departments

Profit team

-Hard savings

opportunities

-Sustainable

supply

chain savings

-Efficiency

improvement

-Feeling of

involvement

-More cooperation between departments -More contact about transportation: create a participation feeling -Listen to and share solutions or

opportunities of different departments

-Clarity about decision making and information sharing

TCO

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Content

Acknowledgements………

3

3 Summary………

Summary………

Summary……….

……….

4

4 Company profile……….

Company profile……….

8

8 Introduction

Introduction

………..

8

8 Company History

Company History

………

……….... 8

8

8 Cordis and Johnson & Johnson………

Cordis and Johnson & Johnson………

.... 9

9

9 Strategic Sourcing Department………

Strategic Sourcing Department………

10

10 Strategic Sourcing a

Strategic Sourcing and t

Strategic Sourcing a

nd t

nd the Purchasing Function

he Purchasing Function

………..

……….. 10

10

10 General Problem Definition………

General Problem Definition………

11

11 Introduction………..

Introduction………..

11

11 Problem Identification………

Problem Identification………

11

11 Problem Context………..

Problem Context………..

11

11 P

Problem Definition……….

P

roblem Definition……….

11

11 Relevance………

Relevance………

12

12 Sub Questions………..

Sub Questions………..

12

12 Trends……….

Trends……….

13

13 Supply Chain……….

Supply Chain……….

13

13 Conceptual Model………

Conceptual Model……….

Conceptual Model………

…….

13

13 Explanation………

Explanation………

14

14 Literature

Literature

Literature………

………

17

17 Value Chain………..

Value Chain………..

17

17 Characteristics of a Market Oriented Organization………

Characteristics of a Market Oriented Organization………

18

18 Logistics……….

Logistics……….

20

20 Which Charac

Which Characteristics Influence the Logistical Performance

Which Charac

teristics Influence the Logistical Performance

of an Organization

of an Organization………

………

………..

20

20 Executing Sourcing Strategy………..

Executing Sourcing Strategy………..

22

22 Purpose………...

Purpose………...

22

22 Challenge of global logistics………..

Challenge of global logistics………..

25

Part 1

Part 1 Which Characteristics Influence the Costs for transportation

Which Characteristics Influence the Costs for transportation

………

……… 27

27

27 Organizational Information………..

Organizational Information………..

27

27 Information about Lanes………

Information about Lanes………

27

27 The Chart………..

The Chart………..

29

29 What Transportation Conditions are Negotia

What Transportation Conditions are Negotiated with the

What Transportation Conditions are Negotia

ted with the

Suppliers of the Biggest Lanes……….

30

30 Hard savings

Hard savings

………

……… 32

………

32

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Part 2

Part 2 Does the Importance of the Supplier Influence Transportation

Does the Importance of the Supplier Influence Transportation

Does the Importance of the Supplier Influence Transportation…………..

…………..

37

37 Logistics a matter of Services………

Logistics a matter of Services………

37

37 TCO

TCO (Total Cost of Ownership)………

TCO

(Total Cost of Ownership)………

39

39 Managerial Implications for TCO Adoption………..

Managerial Implications for TCO Adoption………..

40

40 Logistics………..

Logistics………..

41

41 Inter

Inter

Inter----Functional Cooperation……….

Functional Cooperation……….

4

43

4

3

3 Introduction………..

Introduction………..

43

43 Teams…

Teams………..

Teams…

………..

43

43 The Decision Making Unit……….

The Decision Making Unit……….

44

44 Trust………

Trust………

45

45 Contracting……….

Contracting……….

47

47 Introduction………..

Introduction………..

47

47 Contracts………

Contracts………

47

47 Why KPIs Belong in Supply Chain Contracts………..

Why KPIs Belong in Supply Chain Contracts………..

47

47 Incoterms………...

Incoterms………...

49

49 Conclusions and Recommendations………..

Conclusions and Recommendations………..

52

52 References………..

References………..

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Company Profile

Introduction

For more than 40 years, Cordis Corporation, a Johnson & Johnson company, has

pioneered less invasive medical devices for vascular disease. Technological innovation and a deep understanding of the medical marketplace and the needs of patients have made Cordis the world’s leading developer and manufacturer of products for

interventional medicine. Other important actors in this market are Boston Scientific and Guidant.

Besides the office in Roden, for which this research project is carried out, Cordis has offices in the USA (Miami, Fremont and Warren), in Mexico (Juarez) and in Puerto Rico. The corporate headquarters are established in Miami Lakes.

In this chapter the organization will be introduced. We will start with an overview of the company history, after which a

description of the core business and the company structure follows. In the last paragraph the Strategic Sourcing

department and the purchasing function will be scrutinized.

Company

history

In 1959 Dr. Wm. P. Murphy founded the Cordis Corporation in Miami, Florida as a medical device corporation and it rapidly gains recognition for being a pioneer in innovative devices and products for interventional vascular medicine and electro-physiology. Cordis means: “het hart betreffend”; “van het hart”. Dr. Wm. P. Murphy gave the corporation this name, because the activities of his company were related to the heart of the human body. The first product Cordis developed was an injector, a device with which contrast fluid could be injected under pressure in the vascular system. At the same time a pacemaker was developed, which was implanted in the human body for the first time in 1962. At this time, doctors still made their own catheters. The Cordis Corporation was the first organization to market pre-shaped and sterilized cardio logical catheters on the American and Canadian market.

In 1966 a small business enterprise in Veenendaal got permission to represent Cordis in Europe. They decided to establish the European plant in Roden, and in 1970 the first products were produced and launched on the market. The main products Cordis manufactured were pacemakers. The fundamental research was carried out in Miami, but in Roden the need for technical expertise grew. The strict legislation in the United States and the development of the European market made it necessary to start the research and development of new products in Roden.

The pacemaker production was sold in 1987. Cordis enters the interventional marketplace with a full line of PTCA (percutaneous transluminal coronary angioplasty) guiding catheters. The technology becomes the industry standard. The research and development department in Roden was granted the responsibility for the whole design and development of diagnostic

catheters. Cordis only made catheters for the heart (cardiology), but the growing need for catheters for other parts of the human vascular system (radiology) did Cordis decide to focus on radiology as well.

In 1990 Cordis introduces the first PTCA balloon utilizing nylon balloon technology. This material also becomes the industry standard. By inflating the balloon on the place of the stricture in a blood vessel, the stricture could be improved. The researchers in Miami developed a radiological balloon-dilitation-catheter. The production in Roden started in 1992. A year later Roden was the first with the production of cardio logical balloon-catheters. For both successful production lines Roden was given the responsibility for further development, and as a result the product-offer expanded enormously.

The development of new products has a high priority. In 1990 Johnson & Johnson

Interventional Systems Company receives

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FDA clearance to market the so-called stent, which is cited by physicians as a

“breakthrough in interventional medicine”. Stents are slotted steel tubes developed for strictures in the vessels, which are often the result of a disease of the vascular wall. When the stricture is pushed open by a balloon-catheter, a new stricture often appears on the same place. Stents are developed to prevent these vessels to slip again. A stent is crimped on the balloon-catheter and during the procedure it is permanently left behind in the blood vessel. Another important development was the CYPHER stent, a drug-eluting stent to evaluate the risk of in-stent restenosis. This stent significantly reduces late lumen loss and reduced the incidence of restenosis to zero after placement in patients with coronary artery disease.

In 2002 Cordis receives approval in Europe for the CYPHER Sirolimus-eluting stent, the first approved drug-eluting stent, offers an effective, safe treatment alternative to open-heart surgery for a broad range of coronary artery disease patients.

In 2003 Cordis received FDA approval to market its CYPHER stent in the United States, making it the first drug/device combination for the treatment of restenosis. The next few years Cordis will aim at continuous cooperation to attain the best results. The objective of Cordis is to become number one in the area of treatment and diagnosis of heart-and vascular diseases. In Roden the fast development of new products for heart- and vascular diseases at the lowest cost is the core business.

Cordis and Johnson & Johnson

On the 23rd_{of February 1996 Cordis}

Corporation merges with Johnson & Johnson Interventional Systems Co. to form Cordis Corporation, a Johnson & Johnson company with approximately 3,500 employee’s world wide. Johnson & Johnson is globally an active player in the healthcare industry. The Johnson & Johnson head office is situated in New Brunswick, New Jersey. In total they own 188 companies in more than 52 countries. The products are sold in more than 175 countries. Well over 100.000 employees work for Johnson & Johnson in the following three segments: Consumer, Pharmaceutical and medical Devices & Diagnostics.

Johnson &Johnson is very concerned about renewal and invests about 10% of its

turnover in Research and Development. The success of Johnson & Johnson is owed to the company philosophy, which has been

expressed in the company Credo. The Credo is the basic philosophy of Johnson &

Johnson and contains all norms and values that Johnson & Johnson employees have to respect. Clients occupy the first place, followed by employees, the community and finally the shareholders. The most important lines of policy are renewal, the delivery of quality as a motive, inspiring leadership, good support for employees, and customer orientation.

Core businesses of Cordis Europe N.V.

Roden

The core businesses of Cordis Europe N.V. Roden are:

1. Development of new products and processes. The department product development with the development of new products or improvements of existing products.

2. Manufacturing of new products. The products Cordis manufactures are produced under strict requirements. To meet these requirements the organization possesses 9000m² clean room. In these dust-reduced areas production can take place under controlled circumstances. Unique for Cordis Roden is the presence of an own 100% Ethylene Oxide sterilizer, by which the products can be

sterilized in-house.

3. The distribution of products. Supply Chain Management stores all Cordis-products that are produced elsewhere before further distribution in Europe. Roden ships the end-products to Johnson & Johnson and Cordis companies, who distribute the products to the hospitals.

4. Cordis Roden is occupied with legislation regarding to medical devices. The department of Quality Compliance Services makes sure that legislation in countries where Cordis-products are sold is met. 5. Quality assurance

6. Environmental, Health and Safety policy: Cordis Corporation is

committed to global Environmental, Health and Safety (EHS) leadership

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with respect to its associates, customers, suppliers, contractors, visitors, and its communities. To attain this commitment, Cordis Corporation conducts its business in accordance with the principle of beyond compliance and collaboration.

Strategic Sourcing department

From the 1st_{of November 2006 the}

organizational chart for the strategic sourcing department was illustrated as below....

COGS: Costs Of Goods Sold

ARD: Advanced Research Development NIC: Non-Inventory Capital

NPD: New product Development

The project started in September. From the 1st_{of September till November 1}st_more

people where working on the department. In this thesis I will use the chart as shown above.

I was placed on this department from the 1st

of September 2006 till 1st_{March 2007.}

Strategic sourcing and the purchasing

function.

The strategic sourcing department has risen two years ago. The trend within big

multinationals to search for cost savings at the purchase part of the company and the knowledge that each party involved from bottom down till the retailer have influence on the customer service and thus value perceived by the customer gave companies awareness of the necessity to have good relations with their suppliers to create together a better customer service by optimizing the logistical system. It is the function for the strategic sourcing

department to make Johnson & Johnsons’ core competences more powerful to outsource activities which take unnecessary attention. It is the strategy of Johnson & Johnson

which is the primary reason to use a strategic sourcing department.

The strategic sourcing has diminished the amount of suppliers. And realized cost savings the last three years. With the existing suppliers using the Kraljic portfolio the importance per supplier for Cordis is known.

I have noticed that the function of gaining cost savings is the most important topic for the department. If a sole supplier

and thus strategic supplier having a good relationship with the strategic sourcing department needs help by price cutting or other services, they have to help them to get in the future advantages of it. If you don’t: you can loose trust in the relationship or even loose your most important supplier. Do not always look at the short term, savings created for the long term will gain more sustainable advantages for the company. The broader look to create win-win

situations for both the supplier and Johnson & Johnson is hard to find at the strategic sourcing department. Strategic is strategic and not operational.

If another department needs products or goods, they have to ask strategic sourcing for authorization to buy a product. Regarding the importance, a new purchasing process with selection and quality restrictions will be started up.

Stefan Spekreijse HR +Freight + IM + EM Hans Schoonbeek Capital + Facilities + Tooling

NIC

Pieter van Bolhuis NPD support Cardio & ARD

Jan Winters NPD support Endo + COGS Lijuan van der Harst-Yi

Strategic Sourcing Manager confidential

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General problem definition

Introduction

In this part the problem identification, problem context and problem definition are represented. These three dimension result in the objective and main question. Using sub questions we will give later in the thesis stepwise answers and recommendations to the strategic sourcing department dealing with inbound freight. Thereafter the trends and supply chain are discussed. At the end the conceptual model is given and explained.

Problem identification

In the past Cordis Europa N.V. just looked at the cost containment and enlargement of the flexibility of in- and outsourcing

problems, because they just wanted to create the lowest cost price.

“If we can produce at the lowest price we will be the most competitive organization in our

market”.

Because of the dynamic character of markets nowadays, Cordis Europa N.V. introduced two years ago a strategic sourcing

department, with which Cordis has to differentiate themselves from their competitors in another way. In the past consumers would value a product or service on the basis of some combination of quality and price. Tomorrow’s consumers, by contrast, will use an expanded concept of value that includes convenience of purchase, after-sales service, dependability,

uniqueness and so on. (Treacy and Wiersma, 1993)

“In which way, using our core competences, we are getting things done by our suppliers

to satisfy the needs of our customers”.

That is why organizations give attention to their suppliers; they categorize, negotiate contracts and go into relationships with them. This is called strategic sourcing: a new way of strategic thinking and behavior in organizations.

The definition of sourcing means: in- or outsourcing of organizational activities. It is a hot topic for the top management of organizations. This is not surprising if we

see that sourcing decisions have a great influence at the current and future profile of organizations. The core business of a

strategic sourcing department is very simple: be alert, watchful and observing.

The strategic sourcing department is

searching for cost savings by scrutinizing the costs of the product related activities.

Therefore they noticed that transportation costs are huge looking at the total spend. That was the trigger for looking at freight and caused the strategic sourcing

department to start with this research. Here at Cordis Europa N.V. Roden freight is a grey area for the strategic sourcing

department. Right now they are not allowed to get insight information about the inbound and outbound freight. Even the budget for freight is unknown. For example: At finance and distribution they just can give some rough valuation for the total freight spends. -The strategic sourcing department wants to get more insight information about the freight related to Cordis Europa N.V. Roden and they think there must be some

opportunities to gain savings.

-The Strategic sourcing department needs more information about transportation to negotiate better terms for transportation. Because the purchasing functions were done per department, transportation was missed-out. With the creation of the strategic

sourcing department, more attention is given to the suppliers. That’s why transportation became a better negotiable aspect for Cordis Europa N.V.

Problem context

In this section, the environment is presented in which the research is conducted. For example, the set-up and objectives of other projects that will have an impact on the distribution structure are discussed

Problem definition

The objective and main question are defined in the following section. Out of the problem analysis a problem statement to be

formulated in order to clarify the main objective of this research. A main objective specifies what the customer (Cordis) can expect from his researcher (Verschuren, 1986). In the objective the customer and the

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expected end product need to be represented. From the main objective a main question can be derived. During this research answers need to be found to the main and underlying sub questions.

Objective ObjectiveObjective Objective

Create an inbound freight chart for Cordis Europe N.V. Roden and give

recommendations to the strategic sourcing department of Cordis Europa N.V. Roden, in which manner they could gain cost savings for the transportation of inbound freight. Main question

Main questionMain question Main question

“How is the inbound freight charted at Cordis Europa N.V. Roden and what are the characteristics of the inbound freight transportation and which recommendations can be made to the strategic sourcing department of Cordis Europa N.V. Roden to gain cost savings and so provide a

contribution to an improved ROI?”

Relevance

The turbulent business environment of the late 20th_{century has produced an ever}

greater awareness amongst managers of the financial dimension of decision making. An important financial dimension to decision making is resource utilization and

specifically the use of fixed working capital. The pressure in most organizations is to improve the productivity of capital. In this regard it is usual to utilize the concept of Return on Investment (ROI). Return on investment is the ratio between the net profit and the capital that was employed to produce that profit, thus:

This ratio can be further expanded:

To gain improvement on the ROI one or other, or both, of these ratios must increase. Typically many companies will focus their main attention on the margin in their attempt to drive up the ROI, yet it can often be more effective to use leverage of improved capital turnover to boost ROI. Very small net

margins can lead to excellent ROI if the productivity of capital is high.

Du Pont has shown that savings of 2% creates with most companies a profit increase of 25%. Therefore the ROI will increase with 25% also.

The ways in which logistics management can impact on ROI are many and varied.

Figure 1 highlights the major elements determining ROI and the potential for improvement through more effective logistics management. sales revenue profit costs ROI capital employed accounts receivable cash fixed assets inventory Customer service Logistics efficiency Asset deployment & utilization

figure 1: logistics impact on ROI (Christopher, 1998)

Across European and North American industry it has been estimated that distribution costs as a percentage of sales revenue typically are between 5 per cent and 10 per cent. A reduction in logistical costs will, if other thing being equal, will gain an improvement in profit.

Sub questions

With answering the following sub questions, we can give an answer to the main question. For all the aspects used in the questions literature will be attached and later on projected on the situation at Cordis Europe N.V.. The answering part of this thesis is split up in two parts. The first part will

Profit

ROI = Capital employed

Profit Sales

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result in an inbound transportation chart and the hard savings which can be gained at the short term. Part two will show how freight must be managed and organized in the logistical system of the organization.

1. Which methods and possibilities to gain cost savings for freight

transportation do exist and must be used in a strategy for inbound transportation?

Part 1: Part 1:Part 1: Part 1:

2. Which characteristics influence the costs for transportation of goods? 3. What are the characteristics of the

actual inbound commodities flow for Cordis Europa N.V. Roden?

Part 2: Part 2:Part 2: Part 2:

4. Does the importance of suppliers influence transportation from these suppliers to Roden?

5. Which opportunities do exist to improve the internal logistical performance of an organization? 6. What should be set down in the

contracts to optimize transportation?

Trends

During the project some trends are taken into account. These trends have an impact on the inbound transportation of Cordis Europa N.V. Roden. The notice will occur higher validation of the project.

The trends are:

-EDO = implementation central hub in Belgium. In juli 2007 all the outbound freight from Cordis Europa N.V. Roden will be transported to a central hub in Courchel (Belgium)

-AP2PLE = European Purchasing Project. This is an project which regulates the overall (global) procurement for all Johnson & Johnson related companies in Europe. There must be an alignment with the freight

strategies that are designed for all Johnson & Johnson related companies by AP2PLE.

-GAP = Global airfreight project. In this project: supplier selection criteria, biggest J&J lanes and other information is created which is usable for our strategy.

-Manufacturing decrease (<): The production of finished goods will decrease. The inbound and outbound freight will be diminished in the future.

Supply chain

Illustrated below is the supply chain for Cordis. In Roden are two warehouses: FGI inventory building 04 and other

inventory building 02. In the FGI Inventory finished goods from manufacturing and other finished goods from inter-company transportation will be stocked.

In the Other inventory all the

manufacturing and organizational related products are stocked.

Because of EDO the FGI inventory building will vanish in the future. All inbound inter-company transportation for building 04 will disappear.

This means that the first part of the supply chain which is marked in red, is the only important part if we look at inbound freight.

Conceptual Model

An abstract model or conceptual model is a theoretical construct that represents something, with a set of variables and a set of logical and quantitative relationships between them. Models in this sense are constructed to enable reasoning within an idealized logical framework about these

OEM supplier Manufacturing Other Cordis manufacturing Sterili- zation Packa- ging & Label- ling FGI (Finished Goods Invento-ry) European end-users (hospitals) European Country FGI Other regional FGI warehouses

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processes and are an important component of scientific theories.

In this case is tried to visualize the total

inbound and outbound freight for Cordis Europe N.V. Roden. First we need a conceptual model, which represents an ontology (In philosophy, ontology is the study of being or existence. It seeks to describe or posit the basic categories and relationships of being or existence to define entities and types of entities within its framework. Ontology can be said to study conceptions of reality.), that is the set of expressions in the model which are intended to denote some aspect of the freight problem. As we see (figure 3) the conceptual

freightmodel shows idealized logical

relationships. Idealized here means that the model may make explicit assumptions that are known to be false in some detail. Such assumptions may be justified on the grounds that they simplify the model while, at the same time, allowing the production of acceptably accurate solutions, as is illustrated below

The conceptual freight model is a conceptual representation of the freight situation at Cordis Europa N.V. discussed above. The assumptions and relations between the different objects are chosen by the writer trying to give in his sight the most realistic representation of the situation at Cordis Europa N.V.. Therefore all the objects and

the relations between these objects will be singled out below, trying to reach

understanding by the reader. During the project, when unknown trends appear, there

is the possibility of chanching the existing relations.

Explanation

We can distinguish three operational fields: The environment, J&J and Cordis Europa N.V. Roden. We will examine the inbound freight and outbound freight for Cordis Europa N.V. Roden. On that account the inbound freight and outbound freight are two separated objects in the Cordis Europa N.V. Roden field.

J&J means all other J&J related companies except Cordis Europe N.V. Roden.

Intercompany is the most regular to use during this thesis.

- The Cordis Europa N.V. Roden field is just the plant in Roden. Actually we just look at the distribution center, where all the inbound finished goods and outbound goods are stalled. And building 02 where product for manufacturing and organizational use will be stalled. Every product which is delivered to Cordis Europa N.V. Roden goes to the FGI inventory 04 or Other inventory 02. After internal

Figure 3

Environment

J&J

Cordis

Europe N.V.

Roden

Inbound

Freight

Outbound

Freight

Carriers

customers

suppliers

customers

Selected carriers J&J Manufactu ring < AP2PLE EDO

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distribution for manufacturing, sterilization etc., the goods will return to the FGI inventory distribution center and will be stalled.

- The J&J field represents all the J&J

and J&J related companies worldwide (also other Cordis plants)who deliver products to Cordis Europa N.V., and these who will receive products from the Roden plant. Because the carrier selection for Cordis Europa N.V. Roden is done by J&J, there has been given special attention to this subject in the conceptual modal.

- The environment represents all other companies who deliver products to Cordis Europa N.V.or receive products from the Roden plant.

- The carriers are placed in the environment. In the conceptual model there is an alignment with the carrier selection J&J. Probably the environmental suppliers have selected their own carriers which means there are other alignments. Because this is not in the reach of my research it will not be mentioned. The discontinuous lines represent

information sharing between the different objects. The continue lines represents the transportation of a product by the chosen transporter. The bilaterally discontinuous line between carrier and J&J selected carriers represent long term relationships with four global transporters chosen by supplier selection J&J. Lets discuss the different chains in the conceptual model Inbound Freight

Inbound FreightInbound Freight

Inbound Freight: The suppliers deliver different kind of products to Cordis Europa N.V.. They choose their own transporters who will bring their products to Cordis Europa N.V. (inbound freight). For the Intercompany suppliers the carriers are already chosen as you can see in the conceptual model.

- We can divide suppliers in: suppliers and J&J suppliers from the Cordis perspective. That is why there are two supplier objects placed in different fields, the Environment field and J&J field.

- If the suppliers are J&J related

companies the carrier selection will be done by J&J.

- Environmental suppliers will satisfy

the needs of Cordis Europa N.V. Roden. Cordis Europa N.V. Roden demand supplier to satisfy his needs (discontinues line). They contact a carrier for delivery to the Roden plant (discontinues line). The carrier will confirm the demand for

transportation of products from the supplier to the Roden plant.

(discontinues line). The delivery is done (continues line).

- J&J suppliers will satisfy the needs of Cordis Europa N.V. Roden. Cordis Europa N.V. Roden demand J&J to satisfy his needs (discontinues line). They contact a selected carrier for delivery to the Roden plant (discontinues line). Long term relationships with four global carriers chosen by supplier selection J&J (bilaterally discontinues line). The carier takes the delivery on his account. (Discontinuous line). The delivery is done by the selected carrier, from the J&J supplier to the inbound freight (continues line).

Outbound Freight: Outbound Freight: Outbound Freight:

Outbound Freight: The outbound freight is not in the scope of the project. In the conceptual model this part is highlighted with a square discontinuous brown line. It is still mentioned to give a better view of all aspects involved with freight.

In contrast with the inbound, the outbound freight selection will be done by J&J for all the transportation to customers related to Cordis Europa N.V. Roden. Therefore the carrier selection object is situated in the J&J field.

- We can divide customers in:

customers and J&J customers from the Cordis perspective. That is why the object customers is placed in the Environment field and J&J field. - Cordis Europa N.V. Roden will

satisfy the needs of their customers. J&J customers and environmental customers demand Cordis Europa N.V. Roden to satisfy their needs (discontinuous line). Cordis Europa N.V. Roden gets a carrier by J&J selected carriers for delivery and the

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carrier accepts the delivery. (Bilaterally discontinues line). Thereby long term relationships with four global carriers chosen by

supplier selection J&J are shown (bilaterally discontinues line). The delivery is done by the selected carrier, from the outbound freight to the J&J customers or environmental customers (continuous line).

It is shown how inbound transportation is regulated at Cordis. Here the internal information process is shown, from order to delivery at Roden.

Strategic Sourcing has contact with suppliers and buys products from them. There are long-term relationships in with a lot of information can be shared. All other departments who need products ask strategic sourcing for authorization. Then transportation becomes part of negotiation. Mostly the suppliers arrange and pay transportation to Roden. The

biggest part of transportation is a commodity flow from Cordis Mexico to Roden.

Distribution has negotiated fixed

transportation prices with several carriers. Some suppliers deliver more than once a day. In the next chapter research from articles and books about the most important topics around inbound transportation are

represented. Information about supply-chain management and purchasing management resulting in a strategic sourcing department and the opportunities to gain cost savings and a higher customer level improving the logistical system are set down.

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Literature

In the past, customers judged the value of a product or service on the basis of some combination of quality and price. Today’s customers, by contrast, have an expanded concept of value that includes convenience of purchase, after-sale service, dependability, and so on.

Companies that have taken leadership positions in their industries in the last decade typically have done so by narrowing their business focus, not broadening it. In today’s highly competitive, global marketplace the pressure on organizations to find new ways to create and deliver value to customers grows even stronger. Gradually, in emerging economies as well as mature markets, the power of the buyer has overtaken that of the customer. The rules are different in a buyers’ market. In particular customer service becomes a key differentiator as the sophistication and demands of customers continually increase. There has been a growing recognition that it is through logistics and supply chain

management that the twin goals of cost reduction and service enhancement can be achieved. Better management of the ‘pipeline’ means that customers are served more effectively and yet the costs of providing that service are reduced. Logistics is the process of strategically managing the procurement, movement and storage of materials, parts and finished inventory (and the related information flows) through the organization and its marketing channels in such a way that current and future profitability are maximized through the cost-effective fulfilment of orders. (Christopher)

Effective logistics management can provide major source of competitive advantage, in other words a position of enduring

superiority over competitors in terms of customer preference may be achieved through logistics.

To get a better view about the importance of inbound transportation of a company it can be looked at in two ways. First inbound transportation can be seen as part of the organization, according to the value chain of Porter. Secondly to show the importance of

inbound transportation is to specify the whole supply chain from producer to consumer from a particular organization.

Value chain

Michael Porter in 1985 introduced in his book ‘The competitive advantage’ the concept of the Value Chain. He told:

‘Competitive advantage cannot be

understood by looking at a firm as a whole. It stems from the many discrete activities a firm performs in designing, producing, marketing, delivering and supporting its product. Each of these activities can contribute to a firm’s relative cost position and create a basis for differentiation…The value chain disaggregates a firm into its strategically relevant activities in order to understand the behaviour of costs and the existing and potential sources of

differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors.’

He suggested that activities within the organisation add value to the service and products that the organisation produces, and all these activities should be run at optimum level if the organisation is to gain any real competitive advantage. If they are run efficiently the value obtained should exceed the costs of running them i.e. customers should return to the organisation and transact freely and willingly. Michael Porter suggested that the organisation is split into ‘primary activities’ and ‘support activities’. These support activities are integrating functions that cut across the various primary activities within the firm. Competitive advantage is derived from the way in which firms organize and perform these discrete activities within the value chain. To gain competitive advantage over its rivals, a firm must deliver value to its customers through performing these activities more efficiently than its competitors or by performing the

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activities in a unique way that creates greater differentiation.

Two activities from the value chain have a great impact on the freight problem mentioned here: Inbound logistics and procurement. If Cordis is able to optimize inbound transportation, competitive advantage can be gained. This research is done for purchasing and supply chain management. Purchasing management refers to all activities required to manage supplier relationships. Purchasing management is part of supply-chain management. Supply-chain

management differs from purchasing in that it encompasses also all logistics activities (Volmann et al 1984).

Inbound logistics These activities are related to receiving, storing and disseminating inputs to the product, such as materials handling, warehousing, inventory control, vehicle scheduling and returns to suppliers. Procurement In short, the purchasing

function should obtain the proper equipment, material, supplies and service of the right quality, in the right quantity, at the right price and from the right source (Aljian, 1984) Characteristics of a market oriented

Characteristics of a market oriented Characteristics of a market oriented Characteristics of a market oriented organization

organizationorganization organization

Closely related to this vision on strategy Prahalad en Hamel (1990) introduced the concept “core competencies” and the idea that a strategy is dependent on

organizational learning processes that are in their turn dependant on the current

organizational skills.

So this paradigm resulted in a focus on organizations creating competitive advantages by applying resources and competencies, whereby the competencies can be interpreted as the glue that connect the resources together. Competencies, as innovative capability and efficient

purchasing processes, are characteristics of an organization. Particularly the core competencies are complex combinations of skills and knowledge which are hard to copy and therefore generate an appropriate foundation for a defensible competitive advantage.

A market oriented organization is a connected combination of three characteristics:

1. An external focused culture,

Creating superior value for customers to manage each customer in a different way, and give employees wide authorization to improve customer orientation. This external focus is used by each person within the organization and there is mutual openness and information sharing.

2. A configuration for rewarding, structures and standards which strive for development in customer relations and other relevant parties throughout the organization. Market oriented organizations are managed that customers uncomplicated can communicate with all the different organizational parts. The organization is based on value creating processes. 3. Information about customers and other parties. The gathering, capture and evaluation of information can be supported by information technology, but the technology has just a supportive character. A central database or intranet is very appropriate as organizational storage and makes information easy, quick and cheap available for all parties involved. The fundamentals for the value creating process are built by three sub-processes: Define value, the value perceived by the supplier is the base for all the executed primary activities. Thereafter develop value, when the value is defined in the format of a value proposition, the value can be realized by introducing supporting activities. Developing a suitable distribution system, determine the right price and set down contracts for the buying process. Finally deliver value, by processes as production, order transactions, purchasing,

communication, customer service, complain settlement and logistics. These processes exist mostly of interaction with customers. Focus on the market is for many companies a possibility to create competitive

advantages. The marketing concept

illustrates that customer needs is the aspect why companies exist. They should build their company in a way these customer needs are given a lot of attention. The goal is to fulfil the customer needs in the best way

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perceived by the customer and the

organization. To create this perceived value, the behaviour in the organization should have the following aspects:

1. Search for market information throughout the whole company. Information about current and future customers and their current and future needs.

2. Integration and spreading of this market information to the different departments within the organization. 3. The coordinated reaction from the

organization using the known market information.

By using these concrete activities the vague market concept, normally hard to quantify, is tried to make more concrete.

Narver and Slater concluded that culture is the basic for a better organizational focus on the market. They suggest that focus on the market can be divided in three parts:

1. Focus on the customer 2. Focus on concurrent’s

3. Focus on the inter- functional coordination

From different studies about the effect on market orientation the following conclusions arose (Narver & Slater, 1990; Jaworski & Kohli, 1993).

-In the level of market orientation can be huge differences between departments and business units

-A higher focus on the market, results in better organizational accomplishments: positive cause between level of market focus and profitability, customer satisfaction, turnover expansion and the success of new products.

-Increasing the level of market focus obligates the organization to give attention to complementary organizational processes as: hiring new employees, training and motivating of current employees and reward systems.

A successful market orientated organization has to deal with a lot of internal and

external information. It needs a good

information infrastructure to be competitive: 1. Each part of the organization

gathers information

2. Information from different sources will be combined to one

understandable focus

3. Hard transaction data are combined with soft personal information 4. Information is spread fast internally 5. Decisions are made by persons with

access to the best information 6. Information overload is avoided by a

strong focus and effective processes and other sources.

A well understood information infrastructure is the basic to optimize the logistical performance of an organization. Information about customers Information about concurrents Information about suppliers Information about other markets Superior value for the customer Gathering information Internal spreading of information