1

Executive Summary

Woolworths has identified a possible mutual value creation opportunity by converting Direct Store Deliveries (DSD) of beers from Fosters and Lion Nathan to instead be delivered to WOW distribution centers which could result in converse supply chain cost savings for the two brewers Woolworths will benefit from such an initiative if the purchase price rebate it receives from the brewers e!ceeds the incremental costs to Woolworths from handling the additional beer volume Our analysis show that Woolworths will benefit from such an initiative if it can get a per carton rebate of "# $%$& which meets the re'uired hurdle rate of () *+ ,he report also analyses a energy efficiency initiative that could result in substantial benefits to Woolworths transport operations ,he proposed initiative re'uires replacement of dual tires on long haul semi-trailer truc.s with single wide-base tires that could result in increased fuel efficiency and subse'uent cost savings with reduction in overall greenhouse gas emissions Financial modeling based on available data has been provided to inform the benefits of such an initiative /part from the apparent 'uantitative benefits0 the report also identifies intangible benefits derived from adoption of the proposed initiative

,able of 1ontents
Introduction 3

Part A National Beer and Distribution 1. Ca ex !."#" DCs 3. Into%Stores &rans ort $. Store Costs '. (ebates ). Sensitivity Analysis *. Conclusion 3 $ $ $ ' ' '

Part B Ener+y E,,iciency Initiative 1. "ool-ort.s Sustainability Strate+y !. (e lacin+ dual tires -it. sin+le -ide base tires 3. Assum tions and Parameters $. &an+ible bene,its '. Intan+ible bene,its ). Conclusion ' ) / 0 11 11

Introduction
Woolworths has identified a possible mutual value creation opportunity by converting Direct Store Deliveries (DSD) of beers from Fosters and Lion Nathan to instead be delivered to WOW distribution centers which could result in converse supply chain cost savings for the two brewers Woolworths will benefit from such an initiative if the purchase price rebate it receives from the brewers e!ceeds the incremental costs to Woolworths from handling the additional beer volume ,he purpose of this report is to analyse costs and benefits resulting from DSD beer S23 into D1 deliveries 4art / of this report attempts to analy5e the feasibility of such an initiative0 and provides a cost benefit analysis for the DSD beer conversion scenario to assist management in their first round of negotiations with the brewers 4art 6 of the report e!plores an energy efficiency opportunity in line with Woolworth7s sustainability plans of )*+ reduction in greenhouse gas (898) emissions from its transport operations

4art /
National Beer Distribution and Transport
:n F;)#((0 li'uor stores sales made-up <#+ of /ustralian 8roup Li'uor Sales amounting to 2$.13 billion0 with 21.$ billion coming from beer sales alone and e!pected to increase annually by )+ ,he conversion of DSD beer S237s to D1 deliveries will benefit Woolworths only if the rebates it receives per carton e!ceeds the incremental cost incurred from handling the additional beer volume from the two brewers Our financial modeling is based on available data and where there is a lac. of concrete data certain assumptions have been made / brief description of assumptions0 data used and methods applied to derive at calculations are provided in the following sections

1. Ca ex
1apital e!penditure is the initial investment cost to Woolworths re'uired to process and handle the additional beer volume resulting from conversion of DSD beer into WOW D1s ,he capital e!penditure includes cost of <* new for.lifts totaling ") )*million0 :, systems upgradation cost of "# & million0 "# )* million in transition costs and && (% million in wor.ing capital investment to establish inventory e'ual to (# days of sales Due to annual volume growth of )+0 establishing

inventory at (#+ of sales will re'uire incremental wor.ing capital investment in each subse'uent year For.lifts have a useful life of (# years and will be depreciated over its useful life :, systems will be depreciated over its useful life of * years for accounting purposes ,ransition costs0 which include pro=ect team costs and legal costs0 are not capitali5ed and therefore will be e!pensed in the period incurred ,his results in ta! savings which will reduce total capital e!penditure by "# #<*million ,herefore total amount of capital e!penditure in F;() is ">( >million

!. "#" DCs
With the conversion of DSD beer0 total carton volume processed through the five WOW D1s will increase by )+ in F;(& WOW Distribution centers currently have idle capacity to handle the yearly incremental volume for the ne!t ten years 6ased on this information we assume the life of the pro=ect to be ten years and therefore Our N4? and :@@ calculations are based on the cashflows over the (# year life of the pro=ect ,he investment in wor.ing capital to establish inventory is assumed to be recovered at the end of (# years / new managerial role will be created in each D1 to supervise the new supply chain operations /nnual Supply chain manager salary of "# (* million is considered a fi!ed D1 cost ,he incremental variable cost in D1s is from receiving0 storing0 sorting and loading beers and the total amount in F;(& is "(( $ million0 and this figure will be grow at &+ inflation rate in the subse'uent years :n F;(&0 the average fi!ed cost of D1 will decrease from "# >*## per carton to "# >>(&0 with no change in variable cost per carton

3. Into%stores trans ort

WOW D1s have truc. capacity to accommodate the incremental beer volume and therefore will not re'uire purchasing additional truc.s 9owever0 total variable costs from labour0 insurance0 maintenance and diesel fuel will increase because of the incremental beer volume :ncremental diesel cost for F;(& because of the additional volume will be "# & million Due to increased capacity truc.s will be better utili5ed0 resulting in average fi!ed costs per carton to be reduced from "# ((## to "# (#<$ ,he increased diesel consumption will result in increased average variable cost per carton from "# &A%) to "# &A%#

$. Stores costs

,he conversion of DSD beer into WOW D1 deliveries has no impact on stores fi! and variable costs ,he main change is pallet rent ,he average rent is "( per pallet in )#() prices and will increase by inflation rate &+ per annum :n F;(&0 the incremental pallet rent is "# *&<million 1onse'uently0 the full variable cost per carton is "# ###& in F;(&

'. (ebates
,he prediction of following (# years cash flow has calculated in spread sheet We assume that there will be no new li'uor store openings in the following years and all costs increase by &+ inflation rate ,o meet the () *+ hurdle rate of company0 the re'uired rebate per carton needs to be "# $%$& in F;(& :f the B6:, is e!pected to reach ")) million in F;(*0 then the re'uired rebate per carton should in F;(& will be "( )<(*

). Sensitivity Analysis
,he main factors influencing Woolworth7s B6:, and :@@ are total beer sales0 purchase price rebates0 diesel fuel costs in transport chain and energy usage in D1 and stores ,o consider about the sensitivity of these factors0 we can get that every change in beer volume0 rebate rate and diesel costs can lead to a fluctuation in :@@ 9owever0 the total amount of beer sales and the rebate price is not controlled by our company0 but0 diesel usage in truc.s is a manageable e!pense

*.Conclusion
From our analysis0 Woolworths re'uire a minimum of "# $%$& rebate per carton in F;(& to meet the WOW hurdle rate of () *+ ,he DSD beer conversion will result in reduced total fi!ed cost per carton 9owever total variable cost per carton will increase due to increased fuel consumption and incremental pallet rent ,he B6:, in F;(& from DSD conversion will be "> ()million For the B6:, to be ")) million in F;(* the rebate per beer carton re'uired in F;(& should be "( )<(*

4art 6
Energy Efficiency Initiative

1. "ool-ort.3s Sustainability Strate+y

Woolworth7s sustainability report )##< identifies si! issues most relevant to their business operations @eduction in green house gas emissions from energy usage and fuel consumption from distribution networ. operations is Woolworth7s number one priority as illustrated below Woolworth places high importance on the impact the sustainability pro=ects have on immediate and direct cost to business0 on brand reputation0 compliance0 and materiality significance Our proposed energy efficiency initiative will contribute significantly towards Woolworth7s commitment of )*+ reduction in carbon emissions per carton delivered by Woolworths-owned truc.s ( ,his report proposes an energy efficiency initiative with minimal impact on direct cost to business at the same time providing high returns in terms of annual fuel savings0 yearly savings on replacement cost of tires and reduced greenhouse gas emissions resulting in savings in carbon ta! payments ,he total annual savings achieved will be more significant if the initiative is implemented on all long haul truc.s currently owned and operated by Woolworths

Woolworths Limited: Doing the right thing Sustainability Strategy 20017 2015

!. (e lacin+ dual tires -it. sin+le -ide%base tires

,his energy efficiency initiative is proposed in line with Woolworth7s sustainability strategy and recommends changing dual tires on long haul truc.s with a single wide-base tire to achieve better fuel efficiency and reduced greenhouse gas emissions Our analysis show substantial yearly savings on fuel cost0 tire replacement cost0 carbon ta! and reduced greenhouse gas emissions per truc. Our analysis is based on data provided by ,ransport 1anada (govt of 1anada) which show highspeed trac. tests at BnergotestC demonstrated fuel savings of up to A <+ for a tractor-trailer e'uipped with wide-base tires ,he vehicle used for the test was a tractor-trailer with two drive a!les and two trailer a!les Drive and trailer tires account for over $*+ of a truc.7s tire drag forces @eplacing dual tires with single wide-base tires on the drive and trailer a!le improved fuel efficiency by A <+ Figure 2: Typical tractor-trailer with two drive and trailer axles 2.

Woolworths currently employs semi-trailer truc.s for regional and national distribution ,he test results mentioned above was obtained at constant high speed ($#.mDh and above) and therefore as a conservative approach it is assumed that the test results would apply only under similar conditions0 and would thus apply primarily to trips on roads with a posted ma!imum speed of $# .mDh or more We believe that to achieve similar efficiency results0 the most relevant fleet division that have applicability to the above tests would be Woolworth7s long-haul truc.s employed for regional and national distribution that travel long distances on open highway roads allowing them to travel at constant high speeds over longer distances 9owever there are a number of factors that contribute to fuel efficiency and tires is =ust one of many ,he contribution of tires to the total energy is dependent
2

"llustration #rom $oodyear %ommer&ial 'ire Systems (e)ort

upon the effects of many outside factors such as aerodynamics and speed0 load0 wheel alignment and inflation pressure0 driving style and environmental factors such as air temperature0 weather conditions0 road surfaces and terrain& ,herefore it is highly recommended that Woolworths perform a preliminary test to measure actual fuel efficiency under its operating conditions before progressing the analysis through the feasibility and approval re'uest stages

3. Assum tions and Parameters

i ii / long haul is defined as any haul over )## miles> For our analysis we assume tire replacements are made to Woolworths long haul truc.s that travel on average a total distance of )## miles or &)( .m (two-way) iii Due to the long distances traveled at relatively high constant speeds0 long haul truc.s generally achieve better average speeds For our calculation we ma.e a conservative estimate the average speed to be <#.mDh * iv 1onsidering other factors such as driver brea. time0 loading and unloading time0 and other variable factors0 it would ta.e on average ) day for a truc. to ma.e a complete trip (two-way) v We estimate that a long haul truc. will re'uire on average ) days of vehicle maintenance and servicing in a month resulting in )> non-operational days a year ,herefore the average operational truc. days in a year is &>( days vi 6ased on the above assumptions0 a long haul truc. is e!pected to ma.e (<( (&>(D)) trips a year traveling a total distance of *>0$A( .ilometers vii Eaintenance 1ostsF ,ire life for wide base tires is comparable to regular tires G ,herefore there is no incremental costs or savings in depreciation or maintenance for wide-base tires ,he useful life of a tire varies depending on several factors such as surface condition0 inflation pressure0 driving style etc viii @eplacement Scenario: ,he replacement scenario will re'uire purchasing new wide-base tires0 new rims to accommodate the wide-base tires0 and installation costs We propose
3 4 5 1

$oodyear %ommer&ial 'ire Systems re)ort #a&tors a##e&ting tru&* #uel e&onomy +S ,n-ironmental .rote&tion /gen&y: 'ru&* &arrier #leet tool 'rans)ort %anada tire &al&ulator guide 0anuary 2012 /ssumed s)eed due to la&* o# Woolworths tru&* o)erations data

that the change to wide base tires be made to those truc.s that currently need tire replacement so that there is no need to factor cost of disposal of old dual tires i! Wide-base tiresGF / new single wide-base tire costs "&## % per wheel end Dual-tires cost appro! "(## more than wide-base tires ! @imsGF ,he cost of new rims is ">## per wheel end ("$## per a!le) ,he useful life of rims is variable and generally last until they rust 9owever considering that long haul truc.s travel long distances with heavy loads and under varying conditions we have assumed that to achieve comparable fuel efficiency results0 on average the rims will need to be replaced every (# years !i 1urrent Fuel 1onsumptionF We have assumed the fuel consumption for Woolworth7s semi-trailer truc.s is # * litersD.m as provided in /ppendi! : of this assignment !ii ,he life of a tire lasts anywhere between >#0### .m to ()#0### 2m depending on various factors< ,he annual mileage for Woolworth7s long haul truc.s as per our calculations is *>0$A( 2m ,herefore we feel it is reasonable to assume that tires will need replacing every year for best efficiency results !iii @eplacing a wide base tire costs less that replacing a dual tire by appro! "(## /nnual savings resulting from annual replacement of $ tires results in a total savings of "$##

$. &an+ible Bene,its
@eplacing dual tires with single wide base tires results in annual fuel savings of )()A << liters per truc. and reduction in annual green house gas emissions by * <* tonnes per truc. ,he annual savings in fuel cost per truc. is "&(%& and savings in carbon ta! is "(&) 1ost savings result from annual tire replacement since it costs less to replace a wide base tire than to replace a dual tire Since tires are replaced every once a year the annual total savings from replacing all eight tires is "<A$ ,herefore Woolworths can achieve a total cost savings of ">0#A& per truc. per annum ,he capital e!penditure per truc. includes cost of changing rims to accommodate the new tires0 cost of purchasing wide base tires and installation costs which amounts to ")&A& <% Our analysis assumes that rims re'uire replacing every (# years and therefore our N4? calculation is based on cashflows over a period of (# years ,he N4? for the investment is "(*0>#& and paybac. period is less than ( year ,here are other
! 7

/ll -alues in %anadian dollars Wisegee*

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benefits that could result from using wide bas tires / report by Eichelin $ shows that using wide base tires also results in increased aisle width at the rear end of the bus as demonstrated below therefore increasing potential for carrying capacity

,he report also suggests that lower assembly weight of wide base tires allows payload increases ,herefore Woolworths will need to consider these benefits that could potentially lead to further cost reduction

'. Intan+ible bene,its

/s a sustainable transport strategy0 this proposal not only benefits Woolworths by driving down costs0 but also creates several intangible benefits / previous 4ricewaterhouse1oopers7 research has indicated that over %# percent of a company7s value relates to intangible assets0 which is significantly a large proportion Our environmental-friendly program has potential to enhance Woolworths7 brand value and its reputation Furthermore0 Woolworths was named as Hone of the most environmentally aware companiesI by the World Bconomic Forum in )#((0 it ma.es Woolworths the only South /frican retailer on the list of (% worldwide companies ,his certainly is a strategic resource for Woolworths0 which strengthens a positive image of the company /nd this image is a significant factor for consumer attraction Similarly0 1ooremans ()#(() claimed that strategic resource is a founding factor of competitive advantage contributes 1onsumers nowadays prefer reliable suppliers with good reputations much more when they are ma.ing purchase decisions Furthermore0 this environmental-friendly program will improve customer and employee loyalty for Woolworths to a certain e!tent Data from a 9arvard 3niversity study showed that sustainable corporations had > times growth on sales and $ times growth on employment than that of Hshareholder firstI companies Eore than <#+ consumers say they are switching to socially and environmentally responsible companies and )#+ actually did in )##% ,hus0 our sustainable transport system program will certainly increase
2

4i&helin 5iew)oint on wide base singles and other #uture tru&* tire ty)es

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Woolworths7 intangible assets in the ways of enhancing brand value0 company7s reputation0 as well as improving consumers and employees7 loyalty

). Conclusion ,he results from our analysis are based on available data and certain assumptions ,he results could vary based on accuracy of data used and assumptions made 9owever we believe adoption of wide base tires on Woolworth7s truc.s will have both tangible and intangible benefits Long haul truc.s operated by Woolworths could achieve similar fuel efficiency as indicated by tests performed on truc.s under similar operating conditions Our analysis shows substantial annual cost savings and reduction in 898 emissions per truc. 3sing wide base tires instead of dual tires could have other benefits such as potential for increasing aisle width resulting in increased carrying capacity 9owever further analysis is re'uired to assess the feasibility of such benefits /part from the tangible benefits demonstrated by this report0 Woolworths should also ta.e into consideration other intangible benefits such as enhancing brand value and company reputation

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(e,erences

/ustralian 6ureau of Statistics )#((0 Survey of Eotor ?ehicle 3se0 /ustralia0 () months ended &( October )#(#0 /ustralian 6ureau of Statistics0 1anberra0 viewed (( Eay )#()0 J httpFDDwww abs gov auDausstatsDabsK nsfDmfDA)#$ #DL 6i5community com )#((0 Woolworths7 sustainability programmes recogni5ed internationally0 viewed (# Eay )#()0 JhttpFDDwww bi5community comD/rticleD(A%D>*<D%>&%$ htmlL 1ooremans0 1 0 )#((0 Ea.e it StrategicM Financial investment logic is not enough Bnergy Bfficiency0 vol >0 no >0 pp ><&-A) 8oodyear 1ommercial ,ire Systems n d 0 Factors /ffecting ,ruc. Fuel Bconomy 3 S / 0 viewed (# Eay )#()0 JhttpFDDwww goodyear comDtruc.DsupportDfuelNecon htmlL 8overnment of 1anada )#((0 Wide-6ase and Low @olling @esistance ,ires 1alculator 3ser 8uide0 Ottawa 1anada0 viewed A Eay )#()0 JhttpFDDwww tc gc caDengDprogramsDenvironmentecofreight-road-menu-)%*( htmL Strandberg )##A0 ,he 6usiness 1ase for Sustainability0 viewed (# Eay )#()0 JhttpFDDwww corostrandberg comDpdfsD6usinessN1aseNforNSustainabilityN)( pdfL ,ire @ac.0 )#()0 ,ire ,ech :nformationD8eneral ,ire :nformation0 viewed (# Eay )#()0 JhttpFDDwww tirerac. comDtiresDtiretechDtechpage =spOtechidP(&$L 3nited States Bnvironmental 4rotection /gency0 )#()0 ,ruc. 1arrier FLBB, ,ool0 3nited States Bnvironmental 4rotection /gency0 viewed (( Eay )#()0 J httpFDDwww google comDurlO saPtQrctP=Q'PQesrcPsQfrmP(QsourcePwebQcdP(QvedP#1::6B6;w//QurlPhttp+&/+)F +)Fwww epa gov+)Fsmartway+)Fdocuments+)Fpartnership+)Ftruc.s+)Fpartnership +)F>)#b()##< pdfQeiPDRi5,>=eF2L/iSe)mETa1/QusgP/FS=1N9%$ftESSWbD1;l:D? 6!D'OSgs8rwQsig)PlUS&t3%w1=TA>cp2>',e5gL Wise 8BB2 n d 0 9ow Long Do ,ires LastO0 viewed (# Eay )#()0 JhttpFDDwww wisegee. comDhowlong-do-tires-last htmL Woolworths )##<0 VDoing the right thingF Sustainability Strategy )##<- )#(*70 Woolworths0 /ustralia0 viewed (( Eay )#()0 p(( Woolworths )#((0 VWoolworth Limited /nnual @eport )#((-1loser Bvery day 70 Woolworths0 /ustralia0 viewed * Eay )#()0 pp )<-$

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