February 2006 | Commentary | 3PL Line

Premium Freight Makes JIT Fit

Tags: 3PL

Just-in-time (JIT) manufacturing is a tremendous advantage—when everything works perfectly. But what happens when the supply chain falls out of sync—when an overseas supplier has equipment problems, environmental factors delay deliveries, or defective parts are discovered on the assembly line? How do suppliers avoid chaos and keep JIT production rolling?

One solution is premium freight—last-minute rush shipments to bring in materials or components. Manufacturers generally view premium freight as a costly, but unavoidable, nuisance. But they see these shipments only as a large number of one-time events.

Part of the Process

Because it's a given that premium freight will always be part of the manufacturing process, especially with the proliferation of JIT plants, companies should use the service strategically.

Companies should employ advanced planning that makes premium freight an integral part of the production process. This ensures maintenance of the customer's schedule and budget, and reduces the cost of expedited shipments.

The need for a strategic premium-freight plan stems from the fact that JIT's advantages are also its drawbacks. JIT plants operate very lean; as a result, safety stock has been reduced. No longer can a worker go to the warehouse and grab extra parts; they can only be accessed as needed.

But what happens if workers can't access the right parts at the right time?

Traditionally, someone at the JIT plant would work piecemeal each time a premium-freight shipment was required. They'd then call an expedited carrier, but not necessarily one that would provide the best price or service.

The entire process of ordering premium freight has been revolutionized, however, by the emergence of third-party logistics companies (3PLs). These companies are unbiased in their choice of carriers, using performance data to make their selections.

One 3PL, for example, utilizes a contracted group of pre-qualified carriers, each with a numerical performance rating to ensure quality service. With this type of logistics management, multiple transportation modes are ready and waiting. Rates are pre-negotiated, and carriers respond within very short time windows.

The big advantage of third-party logistics providers is that they use the web to notify a base of carriers quickly, receive immediate bids, and rapidly assign shipments. This gives carriers the ability to link electronically into the JIT process.

Suppliers call the 3PL when they need an expedited shipment and provide parameters such as the number of pieces, weight, destination, and deadline. Carriers bid online within 15 minutes, and the best carrier is selected for a specific job. The 3PL takes care of all the back-end billing issues.

Next-Door Neighbors?

Even with an increasing number of JIT operations located adjacent to or within a customer's plant, premium freight is still essential. Original equipment manufacturers (OEMs) are forcing the entire supply chain to source overseas to cut costs.

That means an individual supplier isn't really next door, because that company's own suppliers are strung out across the globe, with foreign-made components arriving at the JIT location for assembly. The same problems apply; they are just out of the OEM's sight.

And the supply base itself is turning to JIT, so the need for premium freight is undiminished, wherever the OEM's direct supplier resides.

The importance of premium freight will grow as suppliers take on more responsibility for assembly. Suppliers are newer on the logistics learning curve than assembly plants and typically are not as efficient. Moreover, handling transportation—with its strict regulations, customs rules, new players, and new modes—can be complex.

New-product launches also drive the use of premium freight. Manufacturers quickly work out the logistics kinks in mature products, but new products develop problems that often are not fixed as fast. Yet the plants need to continue running without any safety stock.

In addition, any time OEMs change over to a new model, the transportation network must be redesigned, which involves quality, capacity, and scheduling issues.

Making it Work

Manufacturers can use premium freight to their strategic advantage in a number of ways.

First, premium freight increases flexibility when companies need to make quick decisions, react rapidly to marketplace changes, and launch products speedily. Companies need a supply chain that is equally nimble, with backup logistics.

OEMs have given suppliers the flexibility to use premium freight so that, if the OEM changes its schedule and a supplier can't meet the contracted price, the OEM often will absorb the shipping costs—if it's in a controlled environment.

Second, pre-planned premium freight actually reduces costs. Visibility of delivery times, reporting techniques, and better negotiated rates all mean the plant does not have to maintain as much inventory and avoids the penalties associated with slowing the line or disrupting the supply chain.

Third, global companies find many locations pose barriers to transportation, so they need a good plan in place with a pre-constructed carrier network.

By planning ahead and working with a high-tech, dedicated logistics partner, companies can relieve pressure on the supply chain, increase flexibility, cut costs, and make JIT a better fit.