September 2004 | Commentary | 3PL Line

Optimize Your Transportation Program for Greater Efficiency

Tags: 3PL

Transportation is usually the largest cost in a company's logistics budget. In fact, two-thirds of the spend is often for the movement of raw materials and finished products. Managing these costs has become increasingly complex because of radical changes within the transportation industry.

Some variables that have a major impact on the cost of transportation today include rising fuel costs, a lack of truck capacity, the continuing driver shortage, volatile insurance rates, and industry regulation.

With these factors to consider, transportation outsourcing has become an increasingly attractive alternative for many shippers. Outsourcing shifts the headache of daily operations to providers who specialize in these services. It also shifts the burden of finding drivers and trucks, managing higher insurance costs, and dealing with complicated regulatory changes that affect the laws of supply and demand.

Within the management function, optimization is one of the key services that a solid, well-rounded third-party logistics provider will offer.

Optimizing transportation operations is more important than ever before. Modal conversion is more complex, and the reasons and circumstances for using truckload vs. LTL and intermodal have changed.

Prior to 2004, truckload stop-off charges were relatively small—$100 for the first stop, $75 for the second, $50 for the third, and so on, was commonplace. The incremental cost of having a truck loaded with five LTL shipments might have been only $325 more than if the truck had just one origin and one destination.

Since January and the advent (and subsequent repeal) of the Hours of Service regulatory changes, stop-off charges have increased, especially for multiple stops. The cost of making one stop may still be $100, but the second stop may be $150, the third $200, and so forth. That very same truck making five stops could accumulate $850 in accessorial charges.

Now combine this with the fact that many truckload carriers have published rate increases in the range of five to seven percent this year. So, that same move might cost you $1,000 more, assuming you can find an available truck. If you end up going to the spot market looking for a truck, the rates will be even higher.

In addition to comparing truckload vs. LTL costs, there is also the modal conversion scenario of using intermodal instead of truckload. Shippers have traditionally thought of intermodal as being less expensive, and were willing to build an extra day or two into the transit time as a trade-off for lower costs.

Not anymore. The current shortage of trucks has pushed shippers to the rails in greater numbers. They are finding that intermodal rail rates are often comparable with trucks, especially in the spot market. And stop-offs are not practical.

Truckload or intermodal may still be logical alternatives for your shipping needs, but you won't know that unless you optimize your transportation network and begin balancing cost vs. service across your entire population of shipments.

The Rules Have Changed

Don't view optimization of your common carrier freight as just a tactical part of your business. A properly optimized transportation function can create big cost savings and generate supply chain efficiencies, even in today's changing transportation landscape.

Optimizing your transportation network entails looking at a broad range of variables. These include size and weight of shipments, common origin and destination points, length of haul, co-mingling characteristics (you don't want to put tires with cereal), service standards, on-time requirements, and availability of alternative transportation modes.

Transportation decision support tools have become especially effective at helping to mix and route freight, especially when combined with warehousing technology to provide a true supply chain perspective to the analysis.

But just optimizing your freight alone won't fulfill the opportunity to reduce your overall transportation costs. For a shipper to realize maximum value in outsourcing the management of a common carrier network, a well-orchestrated, managed transportation solution is recommended.

That solution can provide benefits in the following areas:

  • Carrier management (such as rate improvement or a broader base of carriers).
  • Claims prevention, handling, and processing.
  • Regulations and compliance (such as DOT safety ratings and C-TPAT certification).
  • Shipment tracking and tracing (such as fewer expedites and exception notification).
  • Shipment planning (such as optimal mode choice or improved metrics).
  • Settlement (such as match pay, industry benchmarks, and freight audit).
  • Reporting (such as audit cost comparisons or performance feedback).
  • Re-engineering (supply chain design and optimization).
  • Business rule improvement (such as process control or change management).
  • Global integration (global footprint, established trading partners).
  • Customized technology (supplier management, ease of integration).

The heart of any good managed transportation solution is baselining historical data and implementing the solution with gainsharing that creates a partnership between the shipper and the third-party logistics provider. The better the data, the better the solution. The more "skin" there is in the game from both sides, the better the solution.

Transportation is the lifeline of the economy—and the largest cost in your logistics budget. Managing these costs well will enable you to keep the wheels moving on your transportation program.

Look for opportunities to improve your transportation program. You can start with optimization to ensure that you're taking advantage of alternative modes of transportation when it makes sense to do so. But don't overlook other areas where you can improve your transportation spend as well.