Roadmap to Transportation Savings
Transportation is a large part of every supply chain. Here's a three-pronged approach to finding savings in your supply chain and some innovative ways to add to your company's bottom line.
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IF YOU WANT TO FIND supply chain savings, where should your company focus its attention to reap the largest savings for the effort? Are continuous moves and tours the place to start or are they the hardest things to do with the lowest potential benefit? Are there easier supply chain improvements that can achieve larger, faster rewards?
When seeking to optimize its supply chain, each firm has multiple options to save money, and each has its own priority for initiatives and corresponding savings. Which initiative to pursue first depends on what you ship (the commodities, volumes and frequencies), how you ship (the mode or modes) and whether your firm is growing by acquisition or not growing at all.
However, optimization may be applicable to any firm with a transportation budget of at least $1 million annually. There are certain approaches that might be made and a range of estimated savings that companies can receive by taking these steps. (Note that the cost savings used here are estimates, to be used for example purposes only. Actual cost savings vary and are dependent on many factors.)
The initiatives here are divided into "easy," "more work" and "difficult to implement," compared to the savings to be realized (see the effort/savings matrix, Figure 1). To achieve the highest efficiencies and the fastest ROI, most of these initiatives require reports from a transportation management system (TMS),whether managed in house or outsourced.
Easy
All of the "Easy" initiatives help establish a baseline that shows what has been saved, as well as a benchmark to see where money can be saved and how much.
Truckload Benchmarking
In many ways, this is the most important optimization initiative, particularly for firms with significant truckload expenditures. It involves capturing basic shipping data - origin, destination, mode and what was spent divided into line haul and accessorial fees - and comparing this data to industry standards to determine savings opportunities.
Constraint Based Truckload Bids
Firms that spend at least $5 million in truckload transportation annually and that want to become more strategic transportation buyers will benefit most from this initiative. Constraint based bid tools use mathematics to not only optimize price, but also constrain carriers in different ways and penalize them when their actions cost the firm money. Penalties can be imposed when carriers don't provide services such as EDI and drop trailers, don't accept loads or have a poor on time percentage.
Constraint based bids in conjunction with a TMS often reveal that the lowest cost carriers in the routing guide often do less and less over time; carrier substitutions result in an increased total cost of transportation. Strategic buyers can use trend analysis information collected during the truckload benchmarking process to determine when it might be appropriate to re-optimize the network by running a constraint based bid and potentially, lower costs. Over time, most companies conducting constraint based bids experience smaller rate increases, even in an up market.
Truckload Weight and Cube Benchmark
All firms shipping truckload can benefit from a weight and cube benchmark, which considers how much product can be loaded into a trailer before exceeding the legal weight limit or before the product cubes out. The objective is to utilize as much of the space and weight capacity of the trailer as possible each time. For example, a truck may be capable of carrying 44,000 pounds of freight, but your firm may average closer to 30,000 pounds per shipment. By increasing the weight or cube on a truck, you not only save money, but also reduce the number of trucks you need to hire - a real benefit during peak shipping seasons.
The analysis can be completed in about a week, as long as good shipment level mode, weight and cube data are available. Implementing change is much harder, because it requires coordination from warehousing or distribution center management regarding pallet configuration as well as from sales and customer service as changes are made to minimum order quantities. It is worth the effort to make these process changes. It is not uncommon to increase product on the truck by 10-40 percent with a corresponding reduction in cost. Generally speaking, that level of savings will not be achievable through any other initiatives presented here.
More Work
The second set of initiatives focus on routing guide enforcement and order optimization.
Routing Guide Enforcement
Using an open bidding process to develop a routing guide doesn't ensure savings. Unless you monitor carrier load acceptance compared to the routing guide and its corresponding impact on cost, you're likely to suffer "routing guide leakage, "or a shift toward carrier substitution and an increase in rates. There are good reasons for carrier substitution, such as when a carrier isn't doing a good job, but most of the time, leakage is caused simply because someone is not following the routing guide. The estimated savings you'll receive by enforcing the routing guide ranges from 0-10 percent of the entire transportation budget, depending on the amount of routing guide leakage.
Order Optimization
For most firms, mode optimization, simple consolidation and multi-stop truckload optimization deliver the majority of order optimization opportunities. Pool points and crossdocking play a significant role for others.
Difficult to Implement
The third set of initiatives focus on continuous moves, tours, and network modeling.
Continuous Moves
When full truckload orders can be combined into a string to leverage rates from a low cost area into longer moves, you've created a continuous move. But unless you can pick up the second load right after you deliver the first, the economics don't work. Even when both pickup and delivery happen at the same facility, inbound and outbound docks are typically controlled and scheduled by different individuals and departments; usually, each of these individuals tries to minimize the labor cost in his or her department, not reduce transportation cost. Due to the difficulty of managing continuous moves and the low estimated savings (typically, less than 1 percent of the transportation budget), this method works best for those who have implemented all other methods of optimization first.Tours
Tours, the hot trend in the industry, require a modeling tool that looks for highly repeatable movements to string together. Tours work best for short haul freight, with estimated savings between 1 and 30 percent at the load level and a typical total savings potential of less than 1 percent of the total transportation budget.
Tours are based on the assumption that removing the deadhead from a carrier's network will result in savings that the carrier will share with you. In a seller's market, where there is equipment shortage and plenty of freight, there's very little incentive for the carrier to share the savings. In a buyer's market, where there is more equipment than freight, another phenomenon occurs: Carriers that are not well capitalized are quick to lower their rates below market level to keep cash flowing so they don't go out of business. Since these carriers are already willing to give you below market rates, it becomes difficult to create a tour that is below market. Finally, even if the carrier shares some of the savings with you, you have to figure out how to keep as much of it as possible after taking into account what you paid to administer the tour (see Figure 2).
Network Modeling
This is the most difficult initiative to implement, requiring more work, and time (three to six months to gather the data required to build and baseline a network model) and more money (costs easily run $100,000 or more). Still, it is the key tool for strategic savings, since it makes a comprehensive assessment of current transportation, inventory and manufacturing costs and develops strategic models for optimizing the entire supply chain. Larger companies with multiple distribution points that are looking for the next level of growth or those that have acquired companies recently and haven't looked at how the distribution networks overlap will benefit most.
It is not an insignificant effort to collect shipment history and rates and to understand the capacity of various distribution centers. It becomes very complex if an organization has acquired two or three other firms, each with its own challenges. When multiple entities are involved, different data sources and different methodologies for accounting for costs can be at play. Logistics consultants can usually find a way to get to the needed data, though, if they look long and hard enough.
Even if collecting all the required data has its difficulties, it is also one of the biggest advantages of doing network modeling. Without common data in a firm, there will be competing data and assumptions. Developing a network model creates a shared understanding of how the network works and a shared set of assumptions and data to be used by all teams considering changes.
For certain firms, network modeling can offer significant savings potential (20-30 percent is not uncommon) if the firm improves its in-stocks and if inventory can be eliminated with network changes. This is huge and meaningful, not just to transportation and distribution, but to the firm's bottom line.
The Speed of Change
Just as each firm has a hierarchy of initiatives that move toward optimization, each organization has its own tolerance level for change necessary to produce savings. When multiple divisions and business units must agree on and implement process changes, achieving the highest possible level of savings may take longer. Buy-in and support from the highest levels of management can help facilitate the change process. So can skilled logistics consultants, who regularly use all of the optimization tools and know how to get the most value out of them.
Using a particular method of optimization for one purpose can even become a catalyst for further change in another area. When a TMS is implemented, it forces discipline onto the order shipment process cycle. Quite often, the enforced discipline exposes irrationalities in the current process. For example, manufacturers without process controls will sometimes allow customers to change their orders right up until the shipment arrives; certain customers tend to get into the habit of making changes of this sort. As the TMS captures the data, the firm learns exactly how much it costs to make these last minute changes and how it negatively impacts the bottom line. The firm can use the information to make more changes that lead to savings and improve overall profits.
This article presents the highlights of C.H. Robinson's white paper on optimization," Supply Chains: Where to Find the Biggest, Fastest Transportation Savings."