March 2003 | Commentary | 3PL Line

Shifting Gears from Inventory to Motor Freight Costs

Tags: 3PL

The nation's motor carrier freight bill for 2001 was $494 billion—more than 50 percent of total U.S. business logistics costs ($970 billion) and 82 percent of total U.S. business transportation costs ($605 billion), according to Robert Delaney's annual State of Logistics Report released in June 2002.

The implication for the nation's shippers and receivers is clear: 50 percent of the logistics cost equation cannot be ignored. It is time to shift the centerpiece of U.S. corporate logistics agendas from inventory to motor freight cost reductions.

Corporate transportation managers cannot look externally to carriers for motor freight cost containment or continued margin concessions. Driver, vehicle, fuel, and insurance costs are, at the micro-economic level, largely uncontrollable.

Neither can transportation managers look to internal trade-offs such as shipping less frequently or shifting to slower and cheaper transport as quick fixes. While minimizing transportation costs, these options increase inventories and/or reduce customer service levels.

Instead, corporate transportation managers must employ a portfolio of targeted optimization strategies, or best practices, with one goal in mind: maximize asset utilization within the motor freight costs they control.

Motor Freight Market Segmentation

Rail, ocean, barge, TOFC, and air freight are largely homogenous modes. Conversely, motor freight is a heterogeneous, segmented market comprised of:

  • Parcel/min charge freight
  • Small mark LTL freight
  • Medium mark LTL freight
  • Large mark LTL freight
  • Less-than-full capacity truckload freight
  • Full capacity truckload freight

Each of these segments is, in fact, its own mode within the motor freight market. Asset utilization is maximized by:

1. Building larger, more economical loads within any one of these modes, or

2. Shifting from one mode to a more economical mode.

Best Practices

The 10 Best Practices (see chart, previous page) represent a portfolio of optimization strategies that target specific modes within the motor freight market and achieve one of these two asset utilization objectives.

Co-Loading

Increasingly, shippers/receivers are looking beyond their own supply chains for collaborative cost savings opportunities. Co-loading (Best Practice 9 in the chart) is one of these opportunities. Co-loading is simply non-collaborative consolidation (Best Practice 8) transformed into a multi-shipper or receiver collaborative scenario.

In an individual routing scenario:

Customer A's 25,000-pound order ships 1,200 miles at a TL rate of $1.50 per mile, for a cost to Shipper A of $1,800.

Customer B's 15,000-pound order ships at an LTL rate of $7 per cwt, for a cost to Shipper B of $1,050.

Combined transportation costs to Shippers A and B are $2,850.

Now assume Shipper A and Shipper B are in relatively close proximity to each other and their respective customers are also in close proximity to each other. Under a collaborative shipping program, both orders may be "co-loaded" under a single pickup/stop-off bill of lading.

Assume total route distance in this co-loading scenario is 1,500 miles. Total transportation costs are now:

Combined transportation cost savings to Shippers A and B are $2,850 less $2,350, or $500—a savings of 17.5 percent.

Asset utilization has been maximized by mode-shifting the 15,000-pound order from a large mark LTL shipment to a full capacity TL shipment, and mode-shifting the 25,000-pound order from a less-than-full capacity TL shipment to a full capacity TL shipment.