Freight Transportation: Four for the Road
Four strategies to help you get the most out of your carrier relationships.
Supply chain executives have their hands full. Every day, they are expected to increase inventory turns, improve delivery times and accuracy, and reduce operating costs.
Meanwhile, distribution networks have become more complicated. Today's supply chains stretch thousands of miles, span oceans, cross multiple borders, involve numerous handoffs, and utilize a variety of transport modes. The potential risk for glitches is high—and growing.
Logisticians spend more and more of their time handling freight transportation missteps and crises. To better understand how they manage the challenges of the new transportation climate, ProLogis recently interviewed 12 senior executives in charge of global distribution networks.
Managing the 'New Normal'
These executives' freight transportation concerns transcend cost. True, many of them have endured unforeseen transportation budgets hikes—as much as 20 percent—within the past year.
Yet they are more concerned about ensuring their products are on the shelf when customers want to buy them. When lead times lengthen or become erratic, inventory stock-outs become more frequent, resulting in lost sales and, worse still, lost customers.
Rates still matter, but so do other concerns.
"Years ago, our overriding goal was to beat down freight rates. Today, we're successful if we can hold rates flat," reports the vice president of logistics at a large sporting goods retailer. "We seek capacity, reliability, and rate stability."
These three qualities are exactly what all companies want today from carriers. Shippers, in turn, have devised strategies to achieve these goals, including:
1. Reconfigure distribution networks. Companies are reorganizing distribution networks to ensure that freight is transported as full containerloads and full truckloads, from origin to final destination, and with the fewest possible handoffs (see sidebar, below).
2. Centralize command and control. By taking responsibility for their freight bills, shippers can create efficient transportation lanes, leverage their aggregated transportation spend during rate and capacity negotiations, and ensure daily execution that yields the best negotiated rates.
3. Collaborate with carriers. Companies are striving to forge close collaborative ties with carriers and want to become preferred customers.
4. Create incremental capacity. Shippers are devising ways to extract greater capacity from their existing fleets and facilities—improving cube utilization, eliminating empty miles, and extending hours of operation, for example.
How do these strategies help shippers contain rising transportation costs, find offsetting savings, and ensure on-time deliveries? Here is a closer look at each strategy in action.
Reconfiguring Distribution Networks
Just as the shortest distance between two points is a straight line, the least- expensive method of freight transport is to move product at full container or truckload rates.
Cost disparities between full and partial loads are substantial. The rate for partial containerloads can be as much as three times greater than the rate for full containers, and the less-than-truckload rate can be as much as four times greater than the truckload rate.
With freight rates climbing, transportation managers have gone back to the drawing board to analyze product flows from every origin to every destination. They are searching for ways to aggregate product so it can be shipped in full containers or full truckloads; and examining both purchasing and demand patterns.
In many cases, companies find that the best way to build full containerloads and truckloads is to add a new "link" of distribution facilities to their supply chains.
Adding these links, however, appears to be antithetical to the industry's long-standing quest for simpler, less costly, and more efficient supply chains. For years, companies have streamlined their supply chains—removing redundant, extraneous links, consolidating DC networks, and increasing inventory turns.
The new links added to supply chains are not DCs, but rather freight-pooling hubs. Two kinds of freight-pooling hubs exist: consolidation centers and deconsolidation centers, sometimes called mixing centers.
Companies may add one or more of these freight-pooling hubs to the supply chain if the cost savings resulting from shipping full containers or truckloads created in these facilities exceed the incremental operating costs.
One study respondent, a national distribution company, provides a good example of how these networks operate. The company maintains a network of 39 DCs to provide next-day delivery to customers scattered across the United States. Its suppliers are located throughout North and South America and Asia.
The company carefully scrutinized its distribution network to determine how it could aggregate its DCs' orders into full containerload or truckload shipments on a regional basis.
It decided to establish five new regional mixing centers—in central New Jersey, Atlanta, Chicago, Dallas, and Los Angeles—to receive full containers or truckloads directly from suppliers. These containers and truckloads are unloaded, and the products are then mixed and re-shipped as full truckloads to each DC every 24 to 48 hours.
At the same time, the distribution company established consolidation centers at several Asian ports to aggregate shipments from its Asian suppliers into full containerloads destined for the mixing centers. It experienced significant cost savings.
Neither the consolidation centers nor the mixing centers maintain any inventory. Their mission is solely to ensure full container and truckload shipments between all points in the supply chain.
Additionally, with the pre-planning involved in building these shipments, the company can collaborate with carriers and ensure equipment availability and consistent delivery.
Centralize Control and Command
Decoupling freight costs from product costs is one clear-cut trend respondents report. Shippers are taking responsibility for their freight bills, where previously suppliers paid the freight costs and added this expense to the materials invoice.
This change helps shippers establish centralized command and control over freight movement. They can also use their firms' total shipping volumes as leverage in negotiating incentive-based contracts with carriers.
In the past, shippers often negotiated favorable carrier rates in specific freight lanes by committing to channel certain volumes through those lanes.
Too often, however, those commitments failed to translate into actual shipments because of snafus within the shippers' decentralized operations. Local traffic managers, for example, may have been unaware of the incentive contract and tendered loads to other carriers.
Whatever the cause, the result is always the same—increased shipping rates. The disparity between the best contract shipping rates and those with alternative carriers can be as much as seven percent.
Worse still, shippers' failure to follow through on commitments may sub-optimize their carriers' operations, weakening their future bargaining position with carriers.
As a general rule, centralizing transportation decisions also enables shippers to move transportation planning closer to the point of order so it ceases to be an end-of-the-line function.
If traffic managers find out about orders only when they are ready to ship, for example, they don't have enough time to arrange for the best carrier and rates or to combine shipments into full truckloads.
By contrast, when given centralized shipment visibility at the time of order, traffic managers have a wider window within which to consolidate shipments, and can then take advantage of truckload, continuous movement, and pooled distribution rates.
One senior supply chain executive at a household cleaning products manufacturer, for example, reports that early centralized visibility enabled the company to reduce off-contract carrier spending, and boost the volume of orders shipped at truckload rates from 35 percent to 65 percent. The reduced transportation spend translated to a one-percent increase in its bottom line.
Several respondents report integrating centralized freight transportation planning into their procurement strategies for seasonal buying and production planning.
One retailer, for example, routinely books ocean freight in March when it places orders for goods to be delivered and shipped in October. The company believes such advanced planning is critical to lining up carrier capacity during the busy holiday season.
Collaborate with Carriers
Many companies are attempting to forge close ties with their transportation providers and, in the process, become preferred customers. At the same time, many carriers track their operating ratios—expenses divided by revenues—by customer.
Carriers have raised freight rates recently by 5 percent to 17 percent. Shippers with difficult-to-move freight may experience rate increases near the high end of the range. In contrast, carrier-friendly shippers receive rate increases near the low end. No wonder many shippers go out of their way to become a preferred customer.
Shippers cite the following strategies for developing carrier-friendly policies:
Forecast expected freight movements. Many suppliers are taking a page from Wal-Mart's playbook. Wal-Mart routinely shares its point-of-sale information and forecasts with suppliers to ensure that the right product is available at the right time and in the right place.
Many suppliers now provide their carriers with detailed transportation forecasts. First, they compile forecasts of their sales and manufacturing schedules. Next, they convert those projected volumes into detailed shipment forecasts—by size, by week over the duration of the planning horizon, by mode, and by lane (origination and destination pairs).
Suppliers update their shipment forecasts weekly or monthly. Given these forecasts, carriers can commit capacity in advance, and, if needed, contract for outside capacity. Updated forecasts are critical because they enable carriers to position capacity for promotions, seasonal peaks, and new business.
Reduce dwell times. Carriers strive to keep their equipment moving as often as possible to fully utilize their assets and enhance driver productivity.
Long-haul drivers waste a lot of time—as much as 25 percent of their workweek—waiting for equipment and dock availability, and loading and unloading. Carriers may charge accessorial and detention fees and may even refuse to serve locations where they have been detained excessively.
Shippers are taking a close look at their shipping and receiving processes, searching for ways to reduce their carriers' costs. "We have adopted a pit-stop mentality to get drivers in and out of our facility as quickly as possible," says one senior executive.
These efforts have succeeded in reducing driver dwell times. So-called "drop-and-hook" programs allow carriers to do two things: drop an empty trailer to be loaded, then picked up later; and pick up a loaded trailer that has been dropped off earlier.
In one respondent's program, the driver is never at the DC for more than 20 minutes. Some shippers have also increased the size of their shipping and receiving areas to facilitate faster loading and unloading.
Dwell times are also lengthened when drivers have to wait for an available dock door or for an appointment. Many shippers require carriers to call ahead and reserve a delivery time, which puts the onus on drivers to make multiple phone calls or faxes—another possible source of delays. Drivers generally prefer to schedule appointments online.
To eliminate bottlenecks, some shippers have extended their hours of operation, doubling or tripling dock-door capacity.
Improve carriers' cash flow. Carriers operate on thin margins, so cash flow is a paramount concern. Shippers who pay their carriers quickly and reliably not only earn carriers' gratitude but also fare better during rate negotiations.
Billing cycles can be nightmares for carriers and shippers alike. The typical process is as follows: carriers issue invoices to shippers, based upon standard or contracted rates; in turn, shippers audit freight bills to verify the correct volumes and rates.
When discrepancies are found, they are either deducted from the invoice or charged back to the carrier. Final settlement can take weeks or months, imposing large clerical costs on both carriers and shippers and impairing carriers' cash flow.
To streamline the billing cycle, some shippers have turned to self-invoicing programs, where a carrier accepts both the load and the rate during the tendering process. Upon delivery of the shipment, the shipper pays the carrier directly without going through the older, unwieldy billing cycle.
One shipper, for example, pays carriers daily via EDI on a shipment-by-shipment basis. In turn, shippers are rewarded with lower negotiated rates.
Two-way scorecards. Shippers have long used scorecards to evaluate carrier performance. Many shippers now also use them to evaluate how well their operations mesh with their carriers'. These metrics include dwell times, count accuracy, documentation quality, disparities between forecast and actual loads moved, and changed orders.
Shippers meet with their carriers quarterly or even monthly to review these metrics, with both parties striving for collaborative collegiality. As with all collaborations, these reviews have become a two-way street.
One brand-name manufacturer formed a logistics council comprising its largest carriers and 3PLs along with its internal transportation, warehousing, and supply chain planning groups. Once each quarter, the council meets for two days to review the latest shipment forecasts and scorecard metrics.
The council's agenda also includes ideas and proposals for improving its operations for the good of its vendors. "We ask vendors two questions: What are the industry's best practices today from a shipper's point of view? What can we do to improve?" the company's transportation manager reports.
Shippers hope such collaborations will yield consistent carrier capacity along with minimal rate increases.
Analysts, policymakers, and government officials often talk about the dire need for more capacity in the nation's rail system, highway infrastructure, and ports. While they are surely right, their policy recommendations generally entail ambitious, costly projects that may or may not receive funding, and will take many years to complete.
Meanwhile, freight must move today. Many respondent companies strive to extract additional capacity from their existing plants and equipment. To achieve this goal, shippers and carriers must eliminate the following inefficiencies.
Inefficiency #1: Cube Utilization. Improving cube utilization sounds exotic, but simply involves packing more "stuff" into truckloads.
One sporting goods retailer reports enacting a plan to improve cube utilization in its truckload shipments from its DCs to its stores.
The retailer's broad product line includes bulky items such as canoes, as well as densely compact products such as dumbbells. The retailer hired additional DC workers to increase packing efficiency, and improved truckload cube utilization by 14 percent—for a net capacity gain without having to pay for additional truckloads.
Its campaign has been a success. The company's transportation budget savings are twice as large as the incremental cost of the added loading labor.
Inefficiency #2: Empty Miles. Trucking experts estimate that as many as one-third of all trucks on the road are empty. They have delivered their loads and are headed either back to home base, or to their next pickup.
Many shippers are focusing on ways to fill those empty miles, thereby reducing transportation costs while also bolstering capacity.
One supply chain executive outlines the problem—and a solution: "We use a dedicated fleet to deliver to our stores, but 80 percent of the time the trucks are empty on the return trip. We have to become smarter about sharing resources. By identifying synergies where another company's shipment will eliminate empty miles, we both gain capacity and reduce costs."
The question is: where and how to find other parties to share resources or create synergies? Answer: networking.
One shipper found the synergies it needed by talking to vendors. "We ship inbound to our DCs and outbound to our stores, and were looking to become the two legs of a carrier's triangle," the company's executive explains.
"We have a DC in Los Angeles that ships to our stores in California, Oregon, and Washington. We use a carrier out of Washington to handle this freight.
"The same carrier also ships paper products all over the country, but always ends up running empty trucks from Salt Lake City back to Los Angeles.
"We have a supplier in Salt Lake City, and we were able to use that supplier to fill the third leg of the triangle. The carrier now delivers shipments from our DC in Los Angeles to stores in the Northwest," the executive continues.
"From there, the carrier delivers paper products to its customer in Salt Lake City, and we schedule a shipment from our Salt Lake City vendor to our DC in Los Angeles. This third leg forms a complete triangle using dedicated equipment, avoids costly dead-head miles, and allows the driver to be home for the weekend."
Inefficiency #3: Hours of Operation. A DC that limits operations to one eight-hour shift for five days a week is operating at less than 25 percent of its full capacity. To combat this inefficiency, many companies have expanded their work weeks.
In some cases, suppliers have switched to a 24/7 schedule because their customers have done so and insist on the ability to ship to their DCs at night and on weekends.
After making the switch, many suppliers find 24/7 operations conducive to smoother freight flows to and from their DCs and their customers' DCs. In turn, more predictable volumes lead to reduced overtime, improved inventory turns, and faster deliveries.
Additionally, around-the-clock operations can add significantly to shipping capacity. One shipper wishes his company had made the switch sooner:
"We can move a trailer in and out of our facilities in less than half the time on a weekend than we can during the week," he explains. "Our carriers couldn't be happier; the new schedule took the 'bumps' out of their systems. We also found that equipment is more available on weekends than during the week.
"The 24/7 operation is also a good fit with our drop-and-hook program, giving drivers more flexibility on pickup times. And the rail and truck carriers tell us that smoothing the flow of our shipments helps them provide capacity for our hauls," he adds.
No Overnight Solutions
Ultimately, as one senior supply chain executive says, "These transport problems won't be fixed overnight. This is the new normal. Let's just get used to it and figure out what options are available for dealing with the problems."
He's right, and supply chain professionals worldwide have been busy doing exactly that—using resourceful thinking and ingenuity to deal with these problems and guarantee freight gets to its destination on time.
Distribution Network Know-how
Reconfiguring distribution networks is one strategy shippers can employ to help reduce transportation costs. Companies can create four different kinds of distribution networks; which one they choose depends on their shipping volumes.
1. Direct-to-DC network. (See #1 below.) This is the most efficient transportation network. A vendor or factory ships full containerloads directly to each shipper's DC, receiving full containerload pricing. The product is not handled at all between the plant and each DC.
2. Deconsolidation Network. (See #2 below.) A shipper will add a deconsolidation center to its network when each of its DCs handles a volume that is less than a full containerload, whereas the combined volumes of several DCs add up to a full containerload.
Various suppliers or factories will then ship full containers to the deconsolidation center, or mixing center, where they are split into separate shipments destined for a number of different DCs.
These partial containerloads are then aggregated into full truckloads destined for each of the shipper's DCs.
While a deconsolidation network adds a product-handling step, it also yields cost savings by moving product at full container and truckload rates.
3. Consolidation Network. (See #3 below.) A shipper will add a consolidation center to its network if it receives less-than-container volumes from suppliers or manufacturers.
In general, the shipper will locate the consolidation center abroad at the port of origin where less-than-containerloads from multiple vendors or factories can be aggregated into full containerloads destined for each of the shipper's U.S. DCs.
Although a consolidation network also adds a product-handling step, it too yields cost savings by moving product at full container and truckload rates, and the labor employed to handle the product is paid at lower Asian rates.
4. Consolidation-to-Deconsolidation Network. (See #4 below.) Once again, a shipper will add a consolidation center at the point of origin when it receives less-than-container volumes from suppliers and manufacturers.
This time, however, the shipper's DCs do not have large enough inbound volumes to support full containerloads from the consolidation center.
Instead, the consolidation center ships the full containerloads to the shipper's stateside deconsolidation center, where products from other inbound vendors or factories can be mixed and aggregated into full truckloads destined for the shipper's individual DCs.
While this network does add two product-handling steps, one of which involves higher U.S. labor rates, it also ensures full container and truckload pricing.
In all four cases, the justification for adding an extra step to the supply chain is the cost savings from full-container and truckload transportation rates. As the cost of freight transportation rises, those savings will escalate.
Reprinted with permission from Moving Freight Today: How Shippers Are Creating Greater Capacity, Reliability, and Rate Stability, a ProLogis whitepaper written by Paul Nuzum, and edited by Leonard Sahling. To download, visit: www.prologisresearch.com.