T IFFANY & C O. Transportation Analysis Presented 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 2

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 3

Deliverable A decision logic for determining optimal carrier and insurance coverage (if any), as well as ensuring shipments meet carrier restrictions 4

Background and Current Operations 5

1 Tiffany & Co. Products Not just jewelry… Leather goods, fine china, crystal and watches

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 7 5

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 8 6 7

Insurance Coverage UPS An convenient, but expensive option AIB Lower rates 3 rd party insurance company 9

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 2 nd Day Air Saver 10

Current Operations (Domestic) 11 2 nd Day Air Saver Ground Next Day Air Saver UPS

Current Operations (Domestic) 12 Ground Next Day Air Saver UPS 2 nd 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 13

Transportation Cost Model 14

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 15

Costs Associated with Lost Packages Lost goods Administrative handling Cost per unit: $3.56 Opportunity cost of delayed insurance payout Premium 16

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 17

Expected Loss 18 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 19

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 20

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 21

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 22

Proposed Framework 23

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) 24

Decision Making Each shipment is analyzed individually 25

Analysis of Results 26

Domestic Costs and Savings 27 Shipment allocation by carrier Domestic data only available for a period of 10 months

Domestic Costs and Savings 28 Total domestic transportation spend Domestic data only available for a period of 10 months

Domestic Premium Optimal domestic cost at various levels of premium 29

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. 30

International Costs and Savings 31 Shipment allocation by carrier International data only available for a period of 8 months

International Costs and Savings 32 Total international transportation spend International data only available for a period of 8 months

International Premium Optimal international cost at various levels of premium 33

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. 34

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. 35

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 36

Questions? 37 8

Appendix 38

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

References Information Annual Report, Tiffany & Co. Accessed online 4/10/ Images 1. Engagement_Rings_Diamonds_Dealer/tiffany_combination_novo_ring.jpg ab0hkl_XPG0/TacugZPhr0I/AAAAAAAAAHE/XWM8aykOz_U/s1600/rolex_image jpg Company_logo.svg/500px-The_Brink%E2%80%99s_Company_logo.svg.png 8. M/s1600/d ba47c088823bb43c4fc56d.jpg 44