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Standardize, Optimize, Expand

By Trent Jefferies | January/February 2011 | 21 | 1

A three-step approach to more effective transportation practices

Transportation typically sits far down on the priority list—particularly when considered as a percentage of the cost of goods sold. At the higher organizational level, transportation often is ignored completely. Local sites are left to deal with it, but rarely are they equipped to yield the best solution. The following three steps offer an effective technique for achieving significant transportation savings.

It’s necessary to first determine the transportation model that best fits the organization, and then implement it. There are three areas of decision making, which include centralization, neutrality, and control.

Centralization: Most organizations take the path of least resistance—allowing each lower level organization to manage transportation independently. There is some logic for this, as many carriers have local or regional biases that make sense for a plant alignment. Additionally, transportation is relatively dynamic, so local involvement enables quick adjustments.

However, to save money, there has to be some means to improve, and that can only be done effectively if done 
centrally. There also is a productivity gain associated with combining like tasks; streamlining process; and having a workforce that is focused, cross-trained, and professionally developed. 

Centralization also provides the ability to combine volumes across sites in order to leverage the most advantageous contracts. By centralizing, execution control can be established to ensure use of the best-value carriers.

Neutrality: Neutrality indicates an organization maintaining its own contractual relationships and not skewing or biasing the decision making in advance. This enables decisions to be in the business’s best interest, with no predetermined bias. If it is decided to use third-party relationships, neutrality is risked, as carrier decisions made by third parties generally are biased toward their own networks. There is no clear answer on what works best. Much depends on the nature of an organization’s transportation needs, its size and buying power, and the region in which it operates.

If a company is shipping through many different modes, it may be difficult to manage the variety. Freight forwarders often act as third-party organizations and leverage their networks and relationships. Or they may use their own assets. Nonasset transportation organizations also can command very good rates with their volumes and offer competitive prices. The logic here is that the combined volumes of many customers exceed the volume to negotiate effectively, even with added margins. There is a breaking point at which this no longer holds true, which varies by company. It is approximated at $15 million to $20 million in annual transportation spend.

Other considerations include whether the company has sufficient human assets and expertise in a particular global region to manage contracts and whether the third party has sufficient presence in those regions and expertise in certain modes.

All freight forwarders will guarantee neutrality. But keep in mind that the only reason forwarders and like organizations exist and offer management services is to “feed” the network. They make money by moving items through their network, not by coordinating. Be careful of an offer for a neutral solution managed by a freight forwarder or nonasset transportation organization, as there may be an inherent conflict 
of interest.

Control: If a business uses a centralized model, the net effect at the plant level is outsourcing, regardless of who manages it. If a decentralized model is in use, the company must decide whether labor plus margin of an outsourced entity is cheaper or more efficient than its own personnel. If centralization is desired, there always should be a local, company-employed liaison who ensures communication is focused and simple. Unlike a full-time transportation coordinator, this role would coordinate with the control tower or centralized entity on an exception basis. For planning purposes, approximately 25 percent use 
is recommended.

The value of an outsourced organization lies in its ability to manage the educational and experiential caliber of people, provide a career path with growth in the logistics and transportation industry, and enable professional development and specialization where needed. For most nontransportation-related companies, this is impossible. Additionally, the outsourced entity quickly can adapt to transportation process and industry changes. In or out, it’s necessary to make a decision that is best for the long-term benefit of the company.

Once a model has been chosen, the next step is to optimize. There are tools available to help implement and optimize the model. Transportation management systems (TMSs) should be considered. If a business uses a network offered by a freight forwarder or nontransportation-related company, a management solution will be inherent.

Optimization can be categorized into two types—static and dynamic. Static optimization can be achieved by taking past transportation data and plugging them into an optimization routine. Free or no-obligation services are offered by many of the larger companies. Other providers may offer a contingency fee on future business. Alternatively, a consultant can be hired. Purchasing software solely for optimization is not recommended. There are different levels of optimization solutions, and the results can highlight potential or provide an improvement roadmap. 

In general, the optimizations all follow a similar logic: They evaluate mode use, alternate routing and loading, and opportunities for standardized routing. To accomplish this, shipment-level data—with origin and destination addresses, weight, cost, and mode—are required at minimum. Other information, such as dimensions, type of product, load classification, or industry segment, would provide further insight. If the business system does not capture all of this information, it must be obtained from major carriers. In addition, some costs can be cut when a business compiles and “sanitizes” its own data. In these instances, it’s important to coordinate the data format in advance.

Accurate data are essential to understanding the current state, approximating savings, and identifying opportunities for improvement. The static optimization will provide a roadmap based on history of how a company can alter its own transportation network. It also will show lane-level data with weights and frequency of shipments to effectively bid lanes and establish better contracts.

Successful dynamic optimization requires a TMS that offers a real-time, short-term look at immediate shipping demand, whether incoming or outgoing, and how best to manage it. This is a computer-assisted effort, with the human input deriving the parameters of the “engine,” the methodology to implement, and the determination of effectiveness over time. The output of a dynamic optimization should be a daily best case for transportation needs and could include multistop pickups or dropoffs, combined loads, backhauls, and the like.

If there is some flexibility in pickup and delivery windows, the number of combinations to consider rises significantly—and so do the savings. The optimization activity is very complicated; there is considerable training, industry knowledge, and experience required to deliver effective results. This is not a “plug and chug” exercise.

This phase of the strategy takes the longest, and it involves expanding control of the shipping process to make the best business decisions for all phases of movement. In general, there are three buckets to consider: incoming, intracompany, and outgoing. Additional considerations are invoice consolidation and auditing.

Incoming: With some suppliers, a company pays direct carrier invoices. With others, it prepays for transportation. Buyers generally don’t coordinate transportation as effectively as others; hence, the path of least resistance is to build into the cost of the product some form of the delivery portion. In this way, the terms are free on board the company’s own dock, delivered duty unpaid, or delivered duty paid. The supplier generally uses its contract rates and prices (or builds into the cost of the product) based on a handling or manmanagement fee, a percentage of the sales price, a flat rate, or a generic rate based on distance.

This rarely is shown as a transportation cost on any ledger; although sometimes it will be a separate invoice line item and may get appropriately allocated. In any case, prepaid or transportation included are not in the best interest of the company. A case-by-case evaluation enables the users to determine whether the business should take over the transportation cost or leave it with a supplier. There are some cases in which the expense should remain—such as isolated suppliers with a cost-effective carrier. But, in general, it will be to the organization’s advantage to control the incoming transportation. This requires an active effort to enable the change. Policy alone will not make it happen. Here, again, a TMS can be valuable to ensure that purchase orders have transportation coordinated. Other benefits include the use of the incoming volume as part of the transportation network for negotiation and optimization efforts, as well as proper allocation of costs. The transportation budget will rise, but raw material costs should lessen.

Intracompany: These shipments are paid for by the company. On shipments from the United States to the European Union, for example, the value-added tax should never be paid by the shipper, as there is no way to recoup this expense. Also, it’s smart to confirm that the shipment considers customer needs and the best value. This is where centralization is advantageous.

Outgoing: There are three reasons to maintain control of outgoing activities:
  • The company can either offset coordination costs or add a slight margin.
  • The volume provides leverage to transportation efforts.
  • It offers greater control of the carrier.

  • In such a scenario, the business coordinates with the carrier regardless of whether the company pays the transportation invoice. By paying it, however, the company has more control over the carrier than the customer. The question is how to get control. This is difficult because it requires crossing organization and functional boundaries. It’s necessary to work with customer service, sales, and product management people in order to interface with the customer and identify solutions that offer value to the customer. Again, a TMS solution offers inherent system data that will have the source, destination, and current rates. Providing access via a portal to sales brings about accurate, real-time data. This offers the business more control and gives customers a simplified operation.

    By standardizing based on a model that fits each particular organization, users can optimize yield savings and expand control to increase those savings even more. Most benchmarking studies generically suggest the savings to be between 5 and 15 percent of total transportation spend. Tangible results include contract negotiation savings from larger volumes and rationalization of carriers; optimization, which alters the network and maximizes real-time shipment savings; and gaining more control on incoming and outgoing 

    shipments. There also are a myriad of soft benefits—particularly when implementing the strategy in conjunction with a TMS. They include increased data and reporting visibility, better control and visibility of product delivery, the ability to perform advanced shipping notices with suppliers and customers, automation, and data storage of transportation documentation.

    It is rare to find an initiative that delivers such significant results with such minimal risk. A cohesive transportation strategy must be top priority for all organizations.

    Trent Jefferies is a global logistics manager for Hexcel Corporation. He may be contacted at trent.jefferies@hexcel.com.