Our Understanding. Our Understanding. Ferrellgas is seeking a business partner to help develop and implement a New Business Model for Customer Operations. Propane Retailing Industry
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Our Understanding Ferrellgas is seeking a business partner to help develop and implement a New Business Model for Customer Operations Propane Retailing Industry • Highly fragmented industry that accounts for 3-4% of total energy usage in the US; Top 10 companies account for 45% of market share; Ferrellgas is largest participant, with 11% of retail sales • Predominant business model in the industry is a local commodity distribution business, with unsophisticated marketing and customer service Ferrellgas • Ferrellgas has grown to almost $1 billion sales in over 600 locations serving more than 1 million customers in 45 states, by acquisitions and industry consolidation • Existing processes, organization and systems are highly decentralized, reflect local patterns, and lack centralized real-time access to local data or central support for key functions • Current initiatives (Routing & Scheduling and Owner’s Pride) lack measurement system to assess their impact on operations, customer satisfaction and management effectiveness Project Goals • Become a world class distribution company • Maximize operational efficiency • Enhance customer satisfaction • Establish platform to increase long-term market share Transform Ferrellgas’ Business Model
Our Understanding The New Business Model needs to be “customer-centric”, consistent with the company’s core strategies and use process change and technology to cut costs wherever possible ... Fundamental Business Strategy • What operating cost reductions must be achieved to sustain and enhance Ferrellgas competitive position? • What new geographic markets will Ferrellgas tackle? • How many more locations will Ferrellgas enter? • Which existing markets are critical to Ferrellgas success? • What customer operations infrastructure will be needed to support further acquisitions? • How can management exercise centralized control? Customers Drivers of Market Presence • How do customers want to communicate with Ferrellgas: • In selling situations? • In emergencies? • On important customer issues? • On routine issues? • How do customers want Ferrellgas to respond? • What technologies should Ferrellgas use? • How else can Ferrellgas reduce the cost of its Customer functions? • How do we make each customer a profitable customer? • Which customer segments are priority targets? • Which new products / services will be available? • How do customers want to buy from Ferrellgas? • What “Win Back” programs will re-attract customers? • How can Ferrellgas reduce the cost of its Sales functions? Customers Distribution and Logistics Service • What service issues are most important for the most critical customer segments? • How do customers in each segment want Ferrellgas to handle these service issues? • Should the service approach vary from geographic market to market? • How should Ferrellgas deploy available technologies to effectively measure service quality and efficiency? • How else can Ferrellgas reduce the total cost of servicing its customers? • How and when do customers in each segment want delivery to occur? • How can Ferrellgas simplify and accelerate its delivery processes? • How should Ferrellgas deploy available technologies to optimize routes and dispatching? • How else can Ferrellgas reduce the total cost of delivering to its customers?
Our Understanding … And Ferrellgas’ focus on operational excellence will drive improved performance throughout the company Focus Areas Build effective Sales & Marketing Organization Customer Retention • Distribution & Logistics: Reduce costs by 1.5 to 2 cents • Customer Service / Customer Retention: Reduce customer churn from 15% to 5-7% • Sales & Marketing / Customer Relationship Management: Capture additional market share with improved marketing & sales infrastructure • Technology and Change Management: Proper use of technology, people, and best in class change management techniques to ensure training and change efforts are successfully applied across Ferrellgas Operational Excellence (Distribution & Logistics) Customer Service Cost Reduction
EvaluateCurrentState DevelopModel andRollout Plan DetailedDesign Implement Mobilize The Approach: ILLUSTRATIVE Domicile Cost Breakdown KPI Analysis and Determination Degree Day Forecasting Fixed Admin & Overhead 18 $0.830 16 $0.825 VariableMileage-basedCosts 14 $0.820 Driver Burden/Benefits 12 $0.815 10 $0.810 Driver Pay - Mileage 8 Domicile Admin $0.805 6 $0.800 4 $0.795 2 0 $0.790 01-Jan 08-Jan 15-Jan 22-Jan 29-Jan 05-Feb 12-Feb 19-Feb Variable Mx Degree Day Error Fleet Depreciation FixedAsset-basedCosts Cost/Pallet Shipped Route Miles Total Route Miles vs Demand Shipped Pounds Shipped 1400 2500 Fuel & Fuel Tax 1200 2400 1000 2300 800 2200 Fixed Maintenance 600 2100 400 2000 200 1900 Driver Pay - Stop Cost Domicile Facility Lease 0 1800 01-Jan 08-Jan 15-Jan 22-Jan 29-Jan 05-Feb 12-Feb 19-Feb LayoverCosts VariableStop-basedCosts THE GOAL THE GOAL Understand drivers of success to define a balanced scorecard that will help management discern the difference between volume-based gain and losses versus operations-driven impacts Understand the cost drivers to focus efforts Project Approach Sample Analysis: Distribution and Logistics We approach the diagnostic by first understanding the drivers of cost and service, then analyze the key performance indicators
ILLUSTRATIVE Network Optimization (Domicile Consolidation/Service Area Opt) Customer Density Demand Planning or Inventory Visibility Domicile/Service Area Network Route Planning: Optimization & Adherence Customer Order Patterns In-route Modifications (True Dynamic) Route Mileage-based Costs Demand Visibility Fuel Efficiency Management Routing Efficiency Fuel Pricing / Sourcing Fuel Cost Value-based Pricing / Customer Profitability Demand Visibility Demand Planning / Inventory Visibility Delivery Stop-basedCosts Delivery FrequencyManagement Delivery Equipment & Processes Cost of Delivery Delivery Process Eff. Customer Storage Capacity Network Rationalization (Domicile Consolidation/Service Area Opt) Network Config. Fleet Planning & Tracking Fleet Mgmt. Asset Costs Maintenance Programs and Management Inventory Planning Inventory Management & Planning Driver Management & Communication Admin Processing (Logs, Tax, Reporting) Operations Administration (Logs, Tax, Corp Reporting Indirect PersonnelCosts* Customer Management * Those personnel costs not related to direct operations (driver labor, domicile maintenance and management, etc) Benefits Cost Management Centralized Shared Services Some Potential Key Initiatives Management Objective Key Cost Components Key Cost Drivers Potential Technology-based Initiative Project Approach Sample Analysis: Distribution and Logistics The operations diagnostic will review all aspects of distribution and logistics imperatives to ensure that the leading practice technology and process initiatives pursued will drive maximum impact
EvaluateCurrentState DevelopModel andRollout Plan DetailedDesign Implement Mobilize The Approach: ILLUSTRATIVE System System System HQ Mgmt. System Update Update Update Update Equip. Equip. Recovery Terminal Recovery Planned Forecast Planned Enough Yes Forecast Enough Shipping Shipping Equip.? Require Equip.? Require ments Driver HQ driver ments No HQ Pick-up Deliver HQ Pick-up of Equip. Deliver Vehicles of Equip. Terminal and Bags Vehicles and Bags Equip. Deck & Equip. Deck & availabl Dispatch No availabl Driver Dispatch Terminal e at Trucks Terminal Dealer Yes e at Trucks Direct D/A pick-up other Direct D/A pick-up other Delivery w/ Ryder Term.? Sign Delivery w/ Ryder Term.? Sign ? one-way Receipt - ? one-way Receipt - rental Delivery rental Delivery Yes 3rd Party No Terminal Equipin Equipin Various Canada / Canada / Inter- NE US Inter- NE US Drop-off terminal D/A Driver Drop-off terminal In our sample review of routing effectiveness, alternative Route Design could have eliminated 9% of total miles Equip. to transfer Equip. to transfer Overnight Pick up Overnight Pick up 3rd Party Equip. Equip. using Company using Company Ryder pick-up in Terminal Ryder pick-up in one-way west US one-way west US Terminal Terminal B receives receives Terminal Equip. Equip. Postpone • POTENTIAL TECHNOLOGY ASSESSMENTS • Route Delivery • Dynamic Routing and Communication • Demand Forecasting • On-Board Computer • Asset Tracking • POTENTIAL PROCESS ASSESSMENTS • Route Development or Leverage of Routing Technology • Demand Forecasting or Leveraging of Routing Technology • Asset Planning • In Route Communication • Exception Process Management 3rd Party Postpone process LTL carrier process LTL carrier until System pick-up until System pick-up Equip. Equip. and Equip. Update Equip. and received Update bags received bags B During the early phases of the project, we hope to uncover rapid improvement areas that could potentially fund the longer-term transformation initiatives. Project Approach Sample Analysis: Distribution & Logistics During the assessment of process and technologies we intend to identify and prioritize opportunities to guide the business transformation initiative
EvaluateCurrentState DevelopModel andRollout Plan DetailedDesign Implement Mobilize The Approach: Residential – 80% x trips Ô $ Value x margin rate = $ Profitability Rural Customers 50% Cust.Segment Agriculture – 20% x trips Ô $ Value x margin rate = $ Profitability Metro Area Industrial/Comm. Customers - 30% Total Segment Profitability Other - 20% Inputs: • Segment profitability by period • Loyalty rate • Retention rate • Acquisition costs • Annual profits per customer segment • Annual costs per customer Cumulative Value Time Annual Profits per Customer Cumulative Value Time Project Approach Sample Analysis: Customer Lifetime Value Analysis The Customer Profitability Analysis willhelp evaluate key customer strategy options Step 1: Determine Transaction Profitability by Segment for one period. Step 2: Calculate the lifetime value for each customer segment. Note: Depending on the level of information available from Ferrellgas, market sales information across the industry will be used; or Ferrellgas sales information will be used. Several variables can be used to determine the time horizon to use, including loyalty rate and retention rate. Customer will shift between channels during this lifecycle.
EvaluateCurrentState DevelopModel andRollout Plan DetailedDesign Implement Mobilize The Approach: Project Approach Sample Analysis: Sales & Marketing / Customer Relationship Management Home Use Agriculture Industrial Lost Customers Define Customer Needs Determine Customer Perception Service Requirements and Frequency Price Level Quality of Service Service Expectations Supply Stability Potential for technology Integration On Time Delivery Ferrellgas Leading Practices Safety Marketing & Sales Structure Service Flexibility Potential for Technology Integration Payment and Billing GAPS
Sample Analysis: Major Opportunities - Gains Chart for Client The following chart describes the results of the analysis. This chart ranks customers based on their propensity to consume products from the Client. These 20% of customers account for 81% sales Top performing deciles These deciles perform no better than a random selection of customers These are the incremental sales $ that would be recognized as a result of using the model to select 136 high value customers as opposed to selecting 136 customers some other way. Multiply this number by the number of markets and again by the number of sweet spots and the numbers start to get large. Customers in the top decile are 4 times more likely to buy Heinz Frozen Soups than the overall population
Sample Analysis: Customer Retention The least expensive, and often quickest, way to help drive growth is to find ways to retain your existing customers. Data Mining can play a significant and strategic role in this activity. While looking for opportunities to proactively manage retention, the team identified a significant trend indicating a dramatic slowdown in growth. This slowdown is largely due to flat customer acquisition and increasing customer attrition.
New Customers Leaving Customers Increase in Active Customers Net Growth Churn Rate Calendar Month Active Customers 1,046 210 1,031 209 60% 12% 48% March 1,062 1,074 258 38% 27% 11% April 1,698 919 318 40% 30% 10% May 2,342 987 380 9% -2% 11% June 3,279 1,096 568 21% 13% 8% July 3,568 794 810 20% 4% 16% August 4,300 September 5,169 Sample Analysis: Customer Retention The following table shows the effect that Churn is having on Growth. At the present average churn rate of 13% monthly, NGM will have to replace its entire customer base every eight to ten months. • Active Customers: Customers who ordered at least once in a given month • New Customers: Customers who ordered for the first time in a given month • Leaving Customers: Customers who ordered for the last time in a given month • Churn Rate: Customers Leaving as a percentage of Active Customers in a given month
Departing Customers In & Out Customers 32 178 Calendar Month Active Customers Leaving Customers % Attrition % Trial and Abandon Churn Rate 53 156 March 1,062 210 82 176 April 1,698 209 3% 9% 12% 136 182 May 2,342 258 7% 4% 11% 189 191 June 3,279 318 4% 6% 10% 300 268 July 3,568 380 5% 6% 11% 535 275 August 4,300 568 6% 7% 13% September 5,169 810 5% 11% 16% Sample Analysis: Customer Retention To help understand who was leaving, the team identified two types of departing customers. The first group try the site one or two times and then never return. These are described below as “In & Out” customers. The second group are customers who used the site for while and then abandoned the channel. These a referred to below as Departing Customers. Please note, attrition appears to be increasing significantly and less people appear to be trying the site. • % Trial and Abandon: In & Out Customers as a percentage of Active Customers in a given month • % Attrition: Departing Customers as a percentage of Active Customers in a given month
EvaluateCurrentState DevelopModel andRollout Plan DetailedDesign Implement Mobilize The Approach: Project Approach Sample Analysis: Sales & Marketing / Customer Relationship Management Change Drivers Innovation Levers Scan For Company Sources To Satisfy Customer Needs Ferrellgas Past Changes Improve Value (Refining Supply Chain Efficiencies) Existing or Partially Met Customer Needs Confirming Understanding of Ferrellgas Business Objectives to Examine Value Opportunities Culture & the Need for Change Perform Value System Analysis of Process Value Drivers Create Value (New Offerings/ Linkages) Market Insight Unmet Needs Define Value Enhancement Opportunities Customer Needs Migrate Value By Expanding Value Chain Migrating of Customers to New Values Strategy & Value Conclusion