Hey! Your Numbers are Trying to Talk to You!
I run across many companies in my travels. For a while, I've been centering a bit on different companies' methodologies for the continuous quest of supply chain network optimization, amongst other things. Some do quite a bit of planning and research, even hiring consultants, while others, it appears, do not. Particularly, the methodology for the planned placement and closures of distribution centers have been a little unsettling. Companies for the most part have been focusing on the things they are supposed to, i.e. location of key customers, proximity to key resources, economic development incentives, etc. However, the glaring error I am seeing again and again is the general lack of regard for one of the most important aspects of these projects—the transportation costs.
As a logistics major in college, many of my core transportation courses focused on how to determine optimal locations for warehouses, DCs, production centers, etc. To put it simply, a company's net return is the price of the goods sold less the cost of production, warehousing, and the cost of transport. When asked to speak to logistics students at a few different universities this year, I always asked to see the text books utilized in order to formulate a timely and appropriate hour of "logistics pontification." The textbooks I've been seeing are essentially the same books I utilized circa 1980's, back when gas was cheap, there was no Internet, and I was sporting a mullet. I assumed that these books would have been gone by now (just like the mullet), replaced with fresh information and new, exciting ideas regarding transportation aspects in the new millennium. Not the case. Information was dated as far back as pre-deregulation—some as far back as the 1940's in the footer. Some of the information I found was just plain inaccurate and dated. It is no wonder that the actual cost of transport is the one aspect that is still being neglected in these decisions. Formal training in this area has been lacking.
As a result of this, what other mistakes are these companies making? Some are glaring. Why would a company bring ocean containers from China to the East Coast just to turn around and ship them to the West Coast? Goods from the Northeast shipped to a midwestern distribution center, only to be shipped back to the Northeast. Some companies do a nice job with proper analysis and pick what they think is the perfect spot for a DC—or, perhaps, choose the best DC to actually close down, but they miss something that can be avoided. Take, for instance, their LTL. They may have thought that they optimized their transportation costs, but the basic flaw occurs by merely having their less-than-truckload carriers utilize a discounted rate base named after Russian dictators dated from the Milli Vanilli era, and by doing this they are not helping to optimize their carrier mix. As a result, they are paying higher LTL prices than they should because they have failed to help their carriers optimize their network—and are being punished for it by upwards of 20—30%. Thus, their transportation costs, and one of the key pieces of their net return, is negatively impacted.