Inbound Traffic Control
Tracking inbound transportation used to fly under shippers' radar screens. Today, however, companies as large as Pepsico and as small as Pamida know the position of every shipment headed their way.
The concept of managing inbound transportation began to garner acceptance in the early 1980s, when leading companies sought to gain better control over their transport spend.
The problem was, control was decentralized in functional silos and shared by companies and their vendors. Controlling inbound required a strategic view.
Complicating the challenge, "shippers' transportation activities were balkanized. A company might use inbound rail, inbound truck, inbound ocean, outbound truck, outbound rail, and outbound ocean," recalls Brooks Bentz, a partner with consulting firm Accenture.
Often these functions were not centralized, so inbound might have been managed by the headquarters logistics group, and outbound managed at the distribution center level. "That was illogical," he adds.
"No matter what business you're in, freight comes in and freight goes out," Bentz continues. "Managing it holistically makes more sense.
"When you put all your transportation business out to bid simultaneously, carriers can see the complete picture and offer better rates. You can develop your carrier base as a network of capacity that delivers the best price and service, at the best cost for carriers."
Taking a holistic view of managing freight also opens new opportunities for competition. With the ability to evaluate multiple price tiers and service options, you might discover rail lanes that you hadn't thought of using, and shift truck to rail.
"And, when capacity is tight, you can still drive improvements by moving the right freight with the right carriers," Bentz says.
As part of this trend toward treating freight holistically, companies began to take inbound transportation management away from their vendors. But it's still a patchwork quilt of control.
"Today," reports Bentz, "some companies control 98 percent of their inbound. They pay the freight, do the routing, pick the carriers. Other companies—even large ones—only control a small portion of their inbound transportation."
A Tale of Two Companies
PepsiCo and Pamida couldn't be more different. PepsiCo is a world leader in convenience foods and beverages, with 2006 revenues of more than $35 billion and 168,000 employees. Pamida is a small-format regional retailer that operates 207 stores throughout the U.S. Midwest.
But both companies share something in common—they actively manage their inbound motor freight transportation.
Barry Mulkay, director of procurement/carrier operations for PepsiCo, procures all inbound and outbound transportation for the company's U.S. domestic movements.
PepsiCo spends approximately $1.6 billion annually on domestic transportation. "Transportation procurement is centralized, but not managed in a vacuum," Mulkay says. "We work closely with every business unit—Quaker Oats, Tropicana, Gatorade, Pepsi Cola, and FritoLay—to develop the best capacity, service, and cost solutions."
In the past, the company's transportation costs were often built into the price of the raw materials. Today, however, the majority of PepsiCo's inbound transportation costs are "unbundled."
"We worked with the material procurement teams to unbundle freight costs so we could fully understand and differentiate the cost of transportation," Mulkay explains. "For purchases where the costs are not unbundled, we still know the price of the transportation."
As part of the unbundling process, PepsiCo uses an inbound routing guide to dictate to vendors which carriers they will use. The carriers bill PepsiCo directly for their services.
"Unbundling transportation costs has been an evolutionary process," Mulkay notes. "We are still working to get some products unbundled. In some cases, we have to wait until a contract expires.
Leave it to the Experts
"PepsiCo people are experts in buying all our needed raw materials," he adds. "Quaker Oats, for example, has experts who buy plastic bottles for Gatorade. While they're geniuses at buying the bottles, they are not as knowledgeable about transportation—what it costs to ship bottles and caps from origin to the manufacturing facilities.
"The buyers would negotiate on the bottle price, pressuring vendors to reduce their prices, arguing that the cost of plastic had declined so the delivered price should be lower. The vendors would respond that transportation costs had increased, so they had to boost the bottles' overall delivered price," Mulkay says.
The PepsiCo and Business Unit transportation teams offered to help on the transportation side of this equation. They compared the vendors' quoted transportation costs against PepsiCo's benchmarked rates and current market conditions.
"We found some vendors were playing material costs against transportation costs, and vice versa," Mulkay says.
That's when PepsiCo decided to let the transportation experts manage freight costs, and the materials experts manage product procurement. "Most major U.S. companies are moving in this direction," Mulkay adds.
Managing the Whole
When it comes to managing transportation, PepsiCo does not differentiate between inbound and outbound.
"We manage them the same way," Mulkay says. "It's our job to ensure an uninterrupted flow to the entire supply chain. That means all shipments—finished goods and raw materials—required by our manufacturing facilities, co-packers, distribution centers, and customers arrive on time at the least landed cost."
PepsiCo services 450,000 customers domestically, and supports and supplies more than 200 manufacturing facilities and co-packers. The company delivers to approximately 1,600 distribution centers across the United States, and processes three million transactions annually while delivering about two million loads.
While PepsiCo uses every transportation mode, truckload (TL)—which includes private and dedicated fleets, and point-to-point core carriers—is king. All the business PepsiCo delivers travels almost one billion miles annually, "and that's just domestically," Mulkay notes.
PepsiCo's guiding principle is: "What the customer requires is delivered!" To live by this principle, Mulkay's team has its own goal: to "own" everything that moves.
"We want to help make the best transportation decisions for the company," Mulkay explains. "We act as consultants and execute for anyone in the organization who has any kind of transportation need."
PepsiCo's transportation management system (TMS) optimizes all inbound and outbound material flows to ensure Mulkay's team makes the right mode selection—whether private or dedicated truck fleets, point-to-point trucking, or intermodal service.
"The TMS runs multiple optimizations at the speed of light, and connects information to create a tour where we pick up a load from a supplier, deliver it to a plant, then pick up a load from the plant or nearby facility. It repeats the process of picking up and delivering loads," Mulkay explains.
PepsiCo's TMS contains all the rate and cost information to help Mulkay and his team compare private fleet, dedicated fleet, and point-to-point motor carrier options. It solves for the most cost-efficient options available, and won't connect a load to a tour unless it can meet the load's delivery time requirement.
"Some components of our inbound transportation might be different from outbound, but that's insignificant," insists Mulkay. "We manage transportation to our customers' needs. That boils down to when they need to ship the product and when they need to receive it."
Mulkay's group applies its expertise to providing customers with transportation options so they can choose the service and cost that best suits their needs.
"We consider all the options," Mulkay says. "Our first priority is to ensure that we maintain an uninterrupted flow to our supply chain. The second priority is to ensure that we do that at better-than-market competitive prices."
Twice each year, PepsiCo benchmarks its freight rates against other large U.S. retailers to determine what it is paying for certain origin-to-destination pairs, and to ensure it gains leverage for its transportation spend. It also uses the benchmark information to negotiate with carriers and service providers.
"Because of the size of our domestic transportation spend, we expect to get extremely competitive pricing," Mulkay notes.
PepsiCo has had a core carrier program in place for 10 years, and values the relationships it has established with those carriers.
"We enter partnerships for the long term, and prefer our carriers to share our mission," Mulkay says. "We do everything we can to maintain appropriate relationships with our partners. If they have a service issue, for example, it becomes our issue as well, and we try to help them solve the problem.
"It's more difficult to replace a carrier than it is to help them solve a service problem," he adds.
PepsiCo maintains a weekly service scorecard on all its carriers. At least once or twice a year, the transportation teams conduct face-to-face meetings with carriers to review past performance and future opportunities.
"Carriers may have seen us do things that are wasteful and can bring them to our attention so we can reduce or eliminate them," Mulkay says. "Or they may have ideas on how to join some pick-up and delivery pairs with other shippers to eliminate empty miles."
One of PepsiCo's core carriers is Werner Enterprises, Omaha, Neb. Werner has implemented PepsiCo's proprietary TMS application for the FritoLay division, and extended its Web-based TMS to FritoLay vendors, suppliers, and plant facilities.
These stakeholders are able to enter their inbound and outbound shipments into the system. The Werner TMS then analyzes the shipments' parameters—including pickup and delivery schedules and altitude routing—and assigns the mode, carrier, and cost.
The Werner TMS monitors these shipments for acceptance and compliance by the core carrier community. The Werner TMS also provides reports on shipment service levels and costing for trend analysis and provider scorecarding.
Pamida Gets a Makeover
In 1999, ShopKo Stores Inc., a Fortune 500 company headquartered in Green Bay, Wis., purchased Pamida and began operating the company as a separate division.
ShopKo is a big box retailer; Pamida is not (stores average 18,000 to 32,000 square feet). Thus, Pamida struggled with an inefficient inbound distribution network that was based on a big box model.
In 2005, Sun Capital Partners Inc. acquired ShopKo and decided to run its two retail operations as separate entities.
"My job was to break Pamida away from ShopKo," recalls Ken Sutton, director of logistics for Pamida Stores. "When we did that, Pamida was left without a transportation management system. So we decided to outsource distribution to a third-party logistics provider, Werner Enterprises. We underwent an extreme makeover."
As part of its distribution overhaul, the retailer developed a vendor partnership manual, which includes detailed routing instructions for all FOB Collect shipments to Pamida facilities.
Pamida's traffic department must individually authorize all deviations from these standard routing instructions prior to shipment. Pamida buyers are not authorized to issue routing instructions.
Each evening, the retailer downloads its vendor purchase orders (POs) to Werner's Web-based transportation management system. Vendors then log on to the Werner TMS application to enter their purchase orders, which are validated against the PO file database. The orders are optimized and routed.
Werner's system coordinates inbound shipments coming from multiple vendors and routes them through a consolidation pool point, and consolidates shipments on multi-stop truckload, intermodal, or less-than-truckload, reducing Pamida's total delivered cost and increasing velocity.
"This system provides benefits," Sutton reports. "We reduced order turnaround time by two weeks. In the past, we weren't delivering to our stores weekly, now we are."
Pamida is also now more aware of how its merchants are buying, and tries to apply supply chain logic to their purchases.
"For example, our buyers were purchasing chairs from a vendor in Mississippi in lots of 160, but only 130 chairs fit on a trailer," Sutton says. "So they were ordering one truckload and one less-than-truckload shipment. We changed the purchase order quantity to 130, and unit costs dropped considerably. The LTL shipment was about half the cost of the TL move, but we were only picking up 30 more chairs."
Both PepsiCo and Pamida rely on a sophisticated TMS to manage their inbound transportation and carriers effectively.
"Today's highly sophisticated TMS make inbound freight management significantly easier," notes Pat Lemons, vice president operations, Yellow Freight Corp. "The TMS tools and new Web capabilities have provided new transparency to information and eased shipper dependence on carriers or reporting services to provide data."
This real-time availability of timely information for both shippers and consignees "has elevated everyone's game," Lemons asserts. "Partners are more honest with each other, and, because information is readily available, both inbound and outbound can see what's happening on the other end."
This information-intensive service presents a unique challenge to motor carriers trying to serve two customers—the shipper and the consignee.
"Their needs are so different, but we have to satisfy both," Lemons says.
On the inbound side, large shippers might operate their own TMS with sophisticated capabilities. These shippers typically trap large amounts of inbound freight, for the most part based on purchase orders they issue.
"That creates an unusual requirement for us as an LTL carrier because we use a PRO or shipment number to track freight," Lemons says. "The PRO number seldom matches up with the purchase order number. So we adapt our systems to trap that information and correlate the two types of data.
"Receivers typically unload those large freight volumes—full trailer-loads—by PO, so a reconciliation has to take place to get everything cleared," Lemons adds.
While companies have made great strides in managing inbound transportation services and carriers more effectively, "most would readily admit they have less control over inbound freight than they do over outbound," says Dan Cushman, chief marketing officer, Werner Enterprises.
Look out the Window
"To manage outbound freight, all they have to do is look out the window and they can see it leaving the dock," he says. "But with inbound, they are the recipient, and for a long time had no visibility into what was coming in or what it cost.
"But in the last five years," Cushman explains, "more companies are trying to wrap their arms around better managing their inbound. They are moving further upstream in their purchasing relationships to control a much larger percent of that freight."
Companies are trying to integrate their vendor communities to work with carriers to deliver inbound goods at the lowest overall cost and highest service solution, according to Jim Schelble, executive vice president sales and marketing for Werner.
"In the past few years, when capacity was very tight, customers were saying, 'vendors are using any number of carriers to ship their freight to us, without us ever capturing that information. If we got involved in the inbound routing, we could capture that capacity demand and optimize it across all our vendors. We could eliminate deadhead miles or half-filled trailers, and everyone wins.'
"That's where the industry is heading," Schelble concludes.
"Companies are driving out transportation inefficiency because they have visibility into what's moving. They are gaining inbound traffic control."