January 2002 | Commentary | Carriers Corner

Creating New Avenues for Cost Reductions

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To significantly reduce logistics costs, look beyond network optimization and rate reductions from your carriers.

Transportation providers have limited opportunity left to cut costs, yet significant savings opportunities—in managing inbound inventory, reducing static inventory, and increasing supply chain velocity—often go untapped. The challenge in achieving these benefits is to replace traditional thinking with a new energy for collaboration across critical enterprise planning functions.

Truckload transportation costs, as a percentage of the U.S. GDP, have decreased almost 20 percent during the past 20 years. Yet, operating costs—fuel, labor, repair parts—continue to rise for carriers.

Transport buyers use four traditional methods to counter these inevitable increases in costs:

  • Competitive bidding to reduce carrier rates
  • Optimization of existing networks
  • "Clean sheet" redesign of networks
  • Repeating Steps 1, 2, and 3

While useful, each of these steps yields only modest cost savings (five to 10 percent) and seldom rises to the level of true strategic change.

Leveraging Lane Economics

The goal in competitive bidding is to leverage the carrier's lane economics. Advanced processing techniques, such as automated bid optimization tools, are useful and will remain in the cost management toolkit.

But frequent re-bidding tends to raise uncertainty within the carrier network that is counter-productive to optimizing lane economics. Re-bidding of lanes often results in carrier changes that increase the risk for disruptions in the transportation buyer's network performance.

The Importance of Data Availability

Repetitive optimization will achieve only marginal savings unless the network has undergone significant change. The process requires making data—volume by lane, required service levels, freight characteristics, and regional or market-based anomalies—available. The calculated solution is only valid until significant changes occur once again, in these parameters.

Clean sheet redesign of the network is appropriate when major change has occurred, such as the addition of new distribution centers or customers. This new design will produce maximum network value as long as the underlying parameters remain unchanged.

Implementing a redesigned network requires capital investment, time, and effective carrier management. The reason most shippers fail to achieve strategic savings is they are locked into maintaining safety inventory as a hedge against variability in the supply chain.

While these safety stocks do provide emotional comfort, the U.S. Department of Commerce estimates inventory carrying costs at $332 billion per year—or about 36 percent of total logistics costs. The solution to reducing static inventory combines critical logistics planning functions, including inbound and outbound transportation, inventory management, production planning, warehousing, distribution, and purchasing.

Though all these functions have a significant effect on inventory, integration remains a difficult task within many large companies. The trend is becoming clear—seamless inventory management from supplier to consumption. When plant managers can "see" inventory on the floor, in the yard, and in-transit to the plant or distribution center, they are empowered with information to make better decisions about production, referrals, freight diversions, expedited transportation, and safety stock management.

Inbound Visibility Tools

Additional benefits of this visibility are flow control into and within the yard, and the ability to balance labor requirements on the receiving dock. Using the data collected in a visibility tool, supplier management and score- carding of both suppliers and carriers is possible.

Inbound visibility tools must facilitate integration of all traditional planning functions. The best tools will also integrate with corporate financial systems to capture the increase in available working capital. Rate reductions and network optimization can save thousands of dollars.

Using visibility tools to reduce static inventory will free up millions of dollars in working capital without sacrificing service to customers.

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