Getting a Handle on Transportation Costs
Plumbing fixture manufacturer TOTO Global Group taps a third-party logistics provider to benchmark freight spend.
For nearly all of its 94-year history, plumbing fixture manufacturer TOTO Global Group relied on steady, organic growth and sound management to build a supply chain that reliably supported $5.1 billion in annual sales and the movement of more than 60 million plumbing fixtures worldwide.
The onset of the global recession in 2008, however, drove TOTO Global Group to begin considering logistics operations improvements.
"A crisis mode prevailed at the time," recalls Sean Pope, senior manager for transportation logistics at TOTO USA, the North American division of the Kitakyushu, Japan-based firm. "Market pressures included capacity constraints, new carrier safety regulations, and fuel costs, which rose dramatically just as the economy was slowing down.
"With these factors in mind, we wanted to concentrate our energies, particularly when we put out bids for transportation and logistics services," he adds.
TOTO USA had never issued a traditional annual logistics network bid before, but by 2010, the company realized it had an opportunity to cut transport costs.
"Our goal was to contain costs while maintaining great service," Pope says. "However, we weren't sure how actively we should pursue transportation bids for 2011. We didn't usually put the entire network out to bid every 12 months; we'd typically focus on small subsets of the business throughout the year.
"There was also great uncertainty about supply and demand," he continues. "After considering all the factors, we decided the best way to make sure we were on solid ground was to do some benchmarking of our transport costs."
"Our goal for the benchmarking project was to contain transportation costs while maintaining great service."— Sean Pope, senior manager for transportation logistics, TOTO USA
TOTO USA operates two distribution centers in North America—one in Georgia, the other in California—from which it serves a customer base of 2,500 shipping points in the United States and Canada. It relies primarily on truckload shipments to reach these customers, but also uses intermodal and less-than-truckload (LTL) services.
"We began to analyze transportation services that encompassed the three modes," Pope explains. "We wanted to implement a benchmarking system to understand where we fit into the market, in terms of our transportation spend.
"Benchmarking also helped us validate what we were doing well, and identify areas we could improve," he adds.
Pope and his staff decided to outsource the benchmarking project and began to consider different options in the second quarter of 2010. Selecting a provider took about six months.
While many providers had strong truckload analysis offerings, TOTO USA chose Frisco, Texas-based third-party logistics provider Transplace's market-driven benchmarking services because it believed the company's technology would be particularly helpful in looking at LTL data.
TOTO USA also wanted to work with a company that valued collaboration.
"In today's environment, it's important to find a partner that's a cultural fit," Pope explains. "We felt Transplace would take the time to understand our business."
TOTO USA provided Transplace with data such as freight spend over a period of months, by mode, with line-level details and bill of lading data for all commodities.
"A lot of the work took place on the front end," explains Pope. "We discussed our business needs and what we were trying to do. Given those parameters, Transplace helped us understand what data we needed to provide to develop our goals."
In order to validate the benchmarking system, TOTO USA asked Transplace to provide preliminary results, which it then matched against data it knew to be true.
"Not only were we able to validate our spend in each transportation mode, but we were also able to validate the freight we had for each of our commodities," Pope says.
An Interpretive Component
The benchmarking services TOTO USA contracted for comprised four main elements:
- Analyze current market data, gathered through the Transplace TMS, Transplace-managed procurement events, and other alliance information sources.
- Compare similar carrier selection styles.
- Compare current supply chain costs to industry standards.
- Compare TOTO USA's supply chain networks to other companies in the same industry.
Transplace presented the benchmark data with a breakout of carrier rates ranging from high to low, based on TOTO USA's needs and industry comparisons. The report included categories describing aggressive market rates and realistic rates that would meet TOTO USA's goals.
"Before we started our analysis, TOTO USA told us how they would use the data, how much volume they had, and how concentrated their procurement efforts were," says Ben Cubitt, senior vice president, consulting and strategic services, Transplace.
"Those elements determine whether a company is closer to the aggressive rate or the general market rate," he continues. "Context is important."
In addition to measuring the effectiveness of sourcing and procurement, the data also supports network optimization, modeling hypothetical distribution centers in areas where TOTO USA doesn't currently have operations. The data provides an estimate of transportation rates in that city or region.
Transplace also analyzes the data to help TOTO USA make transportation decisions. "We provide input on factors that could affect TOTO USA's freight rates," says Brent Hudspeth, senior director of consulting and strategic services, Transplace.
One such factor is TOTO USA's drive to incorporate sustainability efforts not only into its products, but also into everything from its manufacturing and waste management practices to its supply chain. In 2010, for example, the manufacturer added expedited carrier UPS's carbon-neutral shipping program to its energy-efficient supply chain.
A primary factor in TOTO USA's decision to adopt UPS's initiative is that the program is verified and certified by independent third-party testing companies, a process that TOTO USA employs to validate its own high-efficiency products and environmental sustainability programs.
"TOTO USA wants to ensure its products are handled by a carrier that shares its conservation and green supply chain philosophy," says Cubitt.
The Data Delivers
Armed with the benchmarking provided by Transplace, TOTO USA issued a bid for transportation services in 2011. "The outcome of that bid process was exactly in line with what the benchmark data told us," Pope says.
"That was exciting, but we've gotten something else out of the project, as well," he continues. "By creating the data set, we were able to develop a new internal standard for how we maintain our information and how we will handle future data mining. We made process improvements in addition to achieving a higher confidence level in our transportation spend and strategy."
Thanks to its benchmarking data, TOTO USA now enjoys achievement overflow.