Case in Point
A high-precision solution enables DHL Express to be strategic about costing and profitability.
DHL Express is the leading international express courier with those ubiquitous yellow vans, one of which probably just passed your office window. Established in 1969 as a document courier with three founding employees, a briefcase and a single route from San Francisco to Hawaii, DHL today boasts a worldwide network. Key network components include approximately 4,500 facilities, 60,000 vehicles, 250 daily flights and three state-of-the-art quality-control centers that track global shipments 24x7.
Like that of its rivals, DHL’s business is a reliable barometer of the larger world economy. In early 2009, unfortunately, that barometer looked more like the altimeter of an airplane in a tailspin. With the economy in freefall, markets contracted dramatically, creating severe pressure to hold market share and win new business.
In an industry that is competitive in the best of times, holding market share means sharpening one’s pencil to set prices strategically and aggressively. To that end, DHL Express looked to a new costing and pricing solution to maximize margins built on its existing data warehouse platform from Teradata. To learn more, Teradata Magazine spoke with Graeme Aitken, Vice President, Business Controlling at DHL Express.
Describe the challenges your organization faces in terms of determining margins.
We’re very much a fixed-cost business. Ultimately, we’re an airline, and our planes are going to fly whether there’s one shipment on board or a full load. To fill the planes we have to manage our margins.
It might make sense to sign a very large customer at a lower margin to help cover fixed costs. Conversely, with a smaller-volume customer, we might expect to make a higher-percentage margin, but we can’t make those decisions without knowing what our margin (i.e., cost) really is. The country managers who set our prices are constantly trying to determine our real margins—for customers, for products or for trade lanes—but they’ve been handicapped by legacy costing and profitability tools that are no longer fit for that purpose.
What did that legacy approach involve?
For more than a decade DHL Express had used a Microsoft Access costing tool deployed locally in 200 countries. As an early attempt to implement activity-based costing, the tool used employee interviews to localize cost allocations. We basically asked people how they spend their time: How much time does a courier spend picking up shipments, and how much does he or she spend making deliveries?
How were your efforts limited by this system?
It was very subjective, and the answers tended to change every year, which gave us a different cost model. The update process was also very time-consuming. We would start building new models in June and use them the following January. So the costing information in a brand-new model was already 6 months old.
Another shortcoming was that the tool derived information from our billing system. So we would work out profitability based on what we were billing our customers—not on what we actually did for them operationally. That’s because when this system was built we didn’t have detailed operational information available that we do now. At the same time, it didn’t provide cost measures that reconciled to the general ledger and financial statements.
DHL already had a data warehouse from Teradata. Can you describe its primary role?
We operate a sophisticated global tracking system that lets customers trace their shipments as they pass through our network. Every parcel is scanned at pickup, on arrival and departure from a hub or facility, when it’s loaded on a plane, when it passes through customs, and finally upon delivery. Each scan record goes into the data warehouse where it’s available for reporting and analysis in near real time. But what we needed was a costing solution that would make this operational data available for costing.
Did you have other requirements as well?
We needed a single, centralized system that would be efficient and easier to update. When we built our legacy system, we sent it out to 200 countries on CD. That’s not very efficient. We wanted one global BI [business intelligence] application that we could run once for the whole world and close at one time in the month. It had to be rule-based, to eliminate subjectivity, and it had to have one global database for updating, distributing and clearing information.
It was also important that the solution be flexible. It had to integrate easily with the applications we already had, particularly the operational data warehouse. We wanted one vendor for both the system and the consulting services needed to deploy it, because we’d bought off-the-shelf applications before and found them to be anything but.
What solution did DHL eventually reach?
Ultimately, we chose to expand upon the existing Teradata solution, adding Teradata Value Analyzer as a costing and profitability engine, and the data warehouse as a repository and reporting platform for the output data. The new application is called INSIGHT.
How does INSIGHT work?
Teradata Value Analyzer runs monthly batch processes in which select data from DHL’s tracking, billing and general ledger systems, together with country-specific reference data, is processed in a complex costing algorithm. Initial pre-processing and validation extracts specific event stamps from the operational data, reducing billions of records to millions. Then the analyzer calculates two sets of costs—actual unit costs that typically reflect significant month-to-month variability, and standard costs based on periods of actual costs to average those variations.
“INSIGHT is going to be a game-changer for DHL because it will end our internal debates about margins. … It won’t be about whether specific customers are profitable, but how we can ensure that they are.”
After validation to check that every shipment has been costed and matched against billing records, the computed costs flow into two virtual data marts within the data warehouse. One supports profitability reporting, the other cost management. A Web-based user interface provides global access to a comprehensive library of pre-designed IBM Cognos reports.
What does the DHL user get from those reports?
We’ve built standard reports that should answer most cost and margin questions. You define the parameters, e.g., product, trade lane, period, etc., then push the button and out comes your data. You can see the profitability of any trade lane, any customer or any product. You have access to all the cost and revenue detail on every shipment, and it will be available to every pricing manager in every country.
Of course, the question I get now is: “Can I have an extract of the data for our local application?” And the answer is: “No, you can’t, because this is a global application.” INSIGHT will become the sole data warehouse for all cost and profitability questions. All the data anyone should need will be in INSIGHT.
How and when is INSIGHT being rolled out?
Two versions are being deployed to the field. A plug-and-play regular version with a base set of costing rules is being deployed to all countries currently. Later, a customizable version will be made available to larger countries, with interfaces to local general ledger systems for service-center-level financial detail and with more detailed costing rules. Following user training, INSIGHT went into production in February 2011.
How do you expect this solution to impact the company?
INSIGHT is going to be a game-changer for DHL because it will end our internal debates about margins. Whenever someone cites a margin today, we have a long debate about why that number is wrong—“It doesn’t take into account the delivery density,” “It doesn’t include the clearance price for this customer,” “We haven’t factored in an on-site courier,” or “The costs are 2 years old.” Everything becomes an (often valid) argument about the accuracy of the numbers we’re using.
With INSIGHT, the data is going to be vastly more accurate and there’s going to be much more of it. We’ll have route density information and fee compliance information, and all of us will be looking at the same data. The debate is going to shift from whether our data is accurate to what actions we can take. It won’t be about whether specific customers are profitable, but how we can ensure that they are.
What will INSIGHT’s impact be on DHL’s bottom line?
The only ROI we included in our business case was for operational cost reductions from the legacy systems we’ll switch off versus running INSIGHT. However, pricing and commercial uses such as revenue and EBIT [earnings before interest and taxes] improvements gained through more strategic pricing will be our biggest returns on this investment. It’s important to add, though, that INSIGHT supports pricing—we are not a cost-plus pricing organization. So we switch off all the old cost models, all the profitability tools, all the pricing tools as well as stop all the development for those old systems. INSIGHT is really a first step in cleaning up our BI landscape so that we have one view of costs and one view of profitability. The next step is one view of revenue. Then we’ll really have—how do you put it?—one version of the truth.