TIFFANY & CO. Transportation AnalysisPresented by:

Ping-Chun Chang

Hsi-Chuan Chen

Satish Mallya

Chris Offensend

Antonio Rodriguez

Overview

• Background and Current Operations• Transportation Cost Model• Proposed Framework• Analysis of Results

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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

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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)

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Ground

Next Day Air Saver

UPS

2nd Day Air Saver

Current Operations (International)• Brink's

• Primary carrier for shipments to international stores• It can be assumed that all goods are shipped to one store within a

country and then distributed locally

• UPS• Only used to ship to countries that Brink's International does not

cover

• Customs Clearance• Shipments by both carriers are subject to holding periods upon

entry into a country

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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

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),(56.3$* lueShipmentVaPayoutTimetHoldingCosPlueShipmentVaeUPSLossRatLossE

100$56.3$1* PlueShipmentVaeUPSLossRatLossE

Self Insured Shipments

Fully Insured Shipments

Pipeline Costs

• Due to differences in transit time, holding costs vary by carrier

• Cost of capital: 15%PA• For higher value shipments, the increase in speed can offset the increase in transport cost

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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 (non-monetary) of choosing UPS insurance over AIB insurance

• “Convenience” may be expressed as a percentage above the AIB rates that Tiffany & Co. is willing to pay to avoid involving a third party

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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

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• Shipment allocation by carrier• Domestic data only available for a period of 10 months

Optimized Shipments

UPS Self Insured

UPS with AIB Insurance

Brink's

Initial Shipments

Domestic Costs and Savings

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Initial Spend Optimized Spend$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

UPS Self InsuredBrink'sUPS with AIB Insurance

• Total domestic transportation spend• Domestic data only available for a period of 10 months

Domestic Premium• Optimal domestic cost at various levels of premium

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$0 $300,000 $600,000 $900,000$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

0

.5

11.5

22.5

33.54

5

.1

Optimal Costs at Premium = X

UPS Transportation Cost

Bri

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spo

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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

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• Shipment allocation by carrier• International data only available for a period of 8 months

Optimized Shipments

UPS Self Insured

UPS with AIB Insurance

Brink's

Initial Shipments

International Costs and Savings

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• Total international transportation spend• International data only available for a period of 8 months

Initial Shipments Optimized Shipments$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

UPS Self InsuredBrink'sUPS with AIB Insurance

International Premium• Optimal international cost at various levels of premium

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$300,000 $400,000 $500,000 $600,000 $700,000 $800,000$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

0.1

.5

11.5

22.5

33.5

4

5

Optimal Cost at Premium = X

UPS Transportation Cost

Bri

nk’

s T

ran

spo

rta

tion

Co

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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

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Decision Flowchart

Wi: Weight of an eachVi: Value of an eachCQT: Carton Quantity (eaches in a carton)TT: Transaction TypeCWT: Carton weightCb: Cost of Brink’sCu: Cost of UPS

Decision Flowchart

SI: Self insuranceUPS: UPS insuranceAIB: AIB insurance

Decision Flowchart

N: VariableLim/Vi: Value limit / ViLim/Wi: Weight limit / Wi

Decision FlowchartCQT: Carton quantitySS: Shipment size in eachesFS: Number of full shipmentsPS: Number of eaches in a partial shipment

N

Decision Flowchart

References• Information

1. 2011 Annual Report, Tiffany & Co. Accessed online 4/10/2012. http://investor.tiffany.com/annuals.cfm

• Images1. http://i683.photobucket.com/albums/vv193/TheRuler496/Diamonds/

Tiffany_Diamond_Engagement_Rings_Diamonds_Dealer/tiffany_combination_novo_ring.jpg

2. http://www.tiffany.com/shared/media/products/15279095_D_1.jpg

3. http://blogs.glam.com/glamchic/files/2011/06/tote.jpg

4. http://www.tiffanyandcousajewelry.com/1761-3553-thickbox/tiffany-elsa-man-watch.jpg

5. http://4.bp.blogspot.com/-ab0hkl_XPG0/TacugZPhr0I/AAAAAAAAAHE/XWM8aykOz_U/s1600/rolex_image.902271.jpg

6. http://www.hdicon.com/wp-content/uploads/2010/08/ups_2003.png

7. http://upload.wikimedia.org/wikipedia/commons/thumb/9/97/The_Brink%E2%80%99s_Company_logo.svg/500px-The_Brink%E2%80%99s_Company_logo.svg.png

8. http://2.bp.blogspot.com/_CvAeOGiQet4/TNmYSyCfgRI/AAAAAAAAATs/Asl83nYHMuM/s1600/d951433759ba47c088823bb43c4fc56d.jpg

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