TIFFANY & CO.
Transportation Analysis
Presented by:
Ping-Chun Chang
Hsi-Chuan Chen
Satish Mallya
Chris Offensend
Antonio Rodriguez
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Overview
• Background and Current Operations
• Transportation Cost Model
• Proposed Framework
• Analysis of Results
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Objective
Reduce total transportation cost considering
the tradeoff between cheap, but risky
transport, and an expensive, but secure
alternative
Targeting a 20% reduction in annual
transportation cost
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Deliverable
A decision logic for determining optimal carrier and
insurance coverage (if any), as well as ensuring
shipments meet carrier restrictions
5
Background and Current
Operations
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Tiffany & Co.
• Products
• Not just jewelry…
• Leather goods, fine china, crystal and watches
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Tiffany & Co.1
• Annual Sales
• 2010: $3.1 billion
• 2011: $3.6 billion
• Gross profit is 59% of net sales
• About $1.6 billion in inventory
• 87 locations within the U.S.
• 160 locations abroad
• Shipments originate from
production facility in
Parsippany, NJ
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Transportation Options
• We are only considering
shipments to stores
• UPS
• Cheap and easy, but comes with
risk of loss
• Loss rate: < 0.5%
• Brink’s
• More expensive, but effectively
100% reliable
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Insurance Coverage
• UPS
• An convenient, but expensive option
• AIB
• Lower rates
• 3rd party insurance company
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Current Operations (Domestic)
• Brink’s
• Shipments usually delivered within one to two business days
• Rates depend on weight and value of the shipment
• Rates are independent of distance
• UPS
• Rates depend on shipment weight and destination zone
• Three shipment methods
• Ground
• Next Day Air Saver
• 2nd Day Air Saver
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Current Operations (Domestic)
UPS
Ground
Next Day Air Saver
2nd Day Air Saver
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Current Operations (International)
• Brink's
• Primary carrier for shipments to international stores
• It can be assumed that all goods are shipped to one store within a
country and then distributed locally
• UPS
• Only used to ship to countries that Brink's International does not
cover
• Customs Clearance
• Shipments by both carriers are subject to holding periods upon
entry into a country
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Transportation Cost Model
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Transportation Options Considered
• Applicable to domestic and international
shipments
• Brink’s
• UPS
• Types of insurance coverage
• Tiffany & Co. self insured (no insurance)
• UPS insurance
• AIB insurance
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Costs Associated with Lost Packages
• Lost goods
• Administrative handling
• Cost per unit: $3.56
• Opportunity cost of delayed insurance payout
• Premium
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Premium
• A variable that describes the overall averseness
to risk
• Incorporates the intangible costs (Brand name,
operational delays, etc.) associated with lost
shipments into the total cost to Tiffany & Co. for
shipping product
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Expected Loss
Self Insured Shipments
E Loss   UPSLossRateShipmentValue * 1  P   $3.56  $100 
Fully Insured Shipments
E Loss   UPSLossRateShipmentValue * P   $3.56   HoldingCost ( PayoutTime, ShipmentValue)
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Pipeline Costs
• Due to differences in transit time, holding costs
vary by carrier
• Cost of capital: 15%PA
• For higher value shipments, the increase in speed
can offset the increase in transport cost
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Insurance Limits
• Maximum declarable value
• AIB insurance: $100,000
• UPS insurance: $50,000
• No shipments through UPS may be insured for more than
these amounts
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UPS Insurance Convenience
• We consider a variable “convenience” parameter
that can represent the reduced complexity (nonmonetary) of choosing UPS insurance over AIB
insurance
• “Convenience” may be expressed as a
percentage above the AIB rates that Tiffany & Co.
is willing to pay to avoid involving a third party
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Splitting Shipments
• Some large Brink’s shipments can be split into
smaller ones in order to take advantage of the
lower UPS rates
• Split shipments must meet certain criteria:
• Maximum declarable value (if insured)
• Maximum handling weight
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Proposed Framework
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Framework Overview
• Considering the various parameters of a shipment, find
the optimal carrier, insurance coverage and number of
sub-shipments
• Weight
• Destination
• Value
• Carton count (splitting)
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Decision Making
• Each shipment is analyzed individually
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Analysis of Results
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Domestic Costs and Savings
• Shipment allocation by carrier
• Domestic data only available for a period of 10 months
Initial Shipments
Optimized Shipments
UPS Self Insured
UPS with AIB Insurance
Brink's
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Domestic Costs and Savings
• Total domestic transportation spend
• Domestic data only available for a period of 10 months
$1,600,000
$1,400,000
$1,200,000
$1,000,000
UPS Self Insured
$800,000
Brink's
UPS with AIB Insurance
$600,000
$400,000
$200,000
$0
Initial Spend
Optimized Spend
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Domestic Premium
• Optimal domestic cost at various levels of premium
$1,400,000
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Brink’s Transportation Cost
$1,200,000
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3.5
3
2.5
$1,000,000
2
1.5
$800,000
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Optimal Costs at Premium = X
$600,000
.5
.1
$400,000
0
$200,000
$0
$0
$300,000
$600,000
UPS Transportation Cost
$900,000
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Assessment of Financial Risk
• Currently, Tiffany & Co. can expect to cover domestic
losses in excess of $160,000 a year from lost packages
since they self-insure packages.
• By including the option for insuring packages via AIB or
UPS, Tiffany & Co. can reduce the expected self-insured
losses to <$5,000.
• We calculated a 97% reduction in expected losses that
Tiffany & Co. would have to cover.
• Note that this is in addition to lowering the overall actual
transportation cost.
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International Costs and Savings
• Shipment allocation by carrier
• International data only available for a period of 8 months
Initial Shipments
Optimized Shipments
UPS Self Insured
UPS with AIB Insurance
Brink's
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International Costs and Savings
• Total international transportation spend
• International data only available for a period of 8 months
$3,000,000
$2,500,000
$2,000,000
UPS Self Insured
$1,500,000
Brink's
UPS with AIB Insurance
$1,000,000
$500,000
$0
Initial Shipments
Optimized Shipments
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International Premium
• Optimal international cost at various levels of premium
$3,000,000
Brink’s Transportation Cost
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$2,500,000
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3.5
$2,000,000
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2.5
2
$1,500,000
1.5
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Optimal Cost at Premium = X
.5
$1,000,000
.1
0
$500,000
$0
$300,000
$400,000
$500,000
$600,000
$700,000
UPS Transportation Cost
$800,000
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Assessment of Financial Risk
• Tiffany & Co. do not self-insure international shipments.
• However, it is important to note that including the option of
sending Internationally via UPS with or without insurance
does not significantly increase the expected value of lost
packages.
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Observations & Conclusions
• The current policy of a flat value cut-off is extremely
inefficient.
• Since Brink’s does not charge by distance domestically,
the optimal threshold changes by UPS zone.
• However, the optimal Brink’s threshold also varies by
carton weight. This makes it nearly impossible to find a
simple policy to determine carrier and approach optimal
costs.
• There is a universal domestic threshold to determine if a
package sent by UPS should be insured or not. This
threshold is very low and can be expected to be <$500 at
current insurance rates and current loss rates.
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Observations & Conclusions
• The higher rate charged by Brink’s to ensure delivery of a
shipment is often much greater than the cost of risk
associated with the expected loss of a UPS shipment
• Assigning carrier on a per-shipment basis is the easiest
way to reach the optimal overall cost
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Questions?
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Appendix
Decision Flowchart
Wi: Weight of an each
Vi: Value of an each
CQT: Carton Quantity (eaches in a carton)
TT: Transaction Type
CWT: Carton weight
Cb: Cost of Brink’s
Cu: Cost of UPS
Decision Flowchart
SI: Self insurance
UPS: UPS insurance
AIB: AIB insurance
Decision Flowchart
N: Variable
Lim/Vi: Value limit / Vi
Lim/Wi: Weight limit / Wi
Decision Flowchart
CQT: Carton quantity
SS: Shipment size in eaches
FS: Number of full shipments
PS: Number of eaches in a partial shipment
N
Decision Flowchart
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References
• Information
1.
2011 Annual Report, Tiffany & Co. Accessed online 4/10/2012.
http://investor.tiffany.com/annuals.cfm
• Images
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http://i683.photobucket.com/albums/vv193/TheRuler496/Diamonds/Tiffany_Diamond_
Engagement_Rings_Diamonds_Dealer/tiffany_combination_novo_ring.jpg
http://www.tiffany.com/shared/media/products/15279095_D_1.jpg
http://blogs.glam.com/glamchic/files/2011/06/tote.jpg
http://www.tiffanyandcousajewelry.com/1761-3553-thickbox/tiffany-elsa-man-watch.jpg
http://4.bp.blogspot.com/ab0hkl_XPG0/TacugZPhr0I/AAAAAAAAAHE/XWM8aykOz_U/s1600/rolex_image.902
271.jpg
http://www.hdicon.com/wp-content/uploads/2010/08/ups_2003.png
http://upload.wikimedia.org/wikipedia/commons/thumb/9/97/The_Brink%E2%80%99s_
Company_logo.svg/500px-The_Brink%E2%80%99s_Company_logo.svg.png
http://2.bp.blogspot.com/_CvAeOGiQet4/TNmYSyCfgRI/AAAAAAAAATs/Asl83nYHMu
M/s1600/d951433759ba47c088823bb43c4fc56d.jpg