December 2002 | Commentary | 3PL Line

Transforming Density into Savings

Tags: 3PL

As companies continue to focus on supply chain management to increase efficiencies and drive down costs, they are examining every link in the supply chain—from manufacturing to logistics and transportation. But after carefully scrutinizing your supply chain and identifying strengths, one question remains: how do you turn those strengths into a means to achieve your goals?

Density Dynamics

One way is by taking a closer look at network density, a transportation component that is often overlooked and simplified. But when it's utilized properly, network density can yield significant increases in efficiency and cost savings. In transportation, the ultimate goal is to increase efficiencies within a carrier's network so that savings can be passed along to the shipper. When freight is located together geographically and moving at approximately the same time, carriers have more choices and opportunities. This is called density.

Density depends on location and timing. Although it does not automatically equal savings, it provides carriers with an opportunity to increase savings. When a truck makes a delivery and there is no load immediately available to move out of the same location, the driver can wait for a load or drive to another load. The former increases time spent not driving, and the latter results in empty miles—costs incurred without associated revenue. In an ideal situation, the truck would be 100-percent loaded by having the next shipment ready when the last load is dropped off.

Theoretically, density in an area increases the likelihood of this happening, reducing waste and creating a more competitive transportation market. Some large trucking and logistics management companies claim to have density by virtue of their size. By applying the concept of economies of scale, the shipper further increases the carrier's density and, as a result, helps to reduce average costs.

The Density Equation

While this sounds practical, three considerations—balance, flow, and trailer pool management—must be taken into account before density turns into savings.

Here's a look at each:

Balance. Density is not just a group of loads in the same location at the same time. The advantage of density comes from the balance of inbound and outbound loads. If there is a larger number of inbound shipments than outbound, the location becomes a capacity "sink" and only benefits a portion of the loads coming in; the rest are stranded. If there are more outbound loads, capacity must be found and imported. Balanced freight in time and location creates more usable density.

Flow. Once balance is established, it is important to consider the direction of the loads. Ideally, having the same origin and destination points for each load creates a steady flow of traffic between the two—a closed roundtrip. A less efficient network may flow out to a point near the distant origin, which results in the same situation, but with a short deadhead.

An alternative option might flow out to a second point, which then flows to a third point and back. There may be up to five legged patterns that get progressively harder to identify and to operate.

The least advantageous option is when the inbound flows from all different points and the outbound flows to all different points. Although this creates density, it does not increase efficiency. By combining flow and balance, you can reap the benefits of network density.

Trailer pool management. Consider what happens when you have specific carriers moving freight along established lanes or throughout the network. When drivers arrive at the customer, they have two choices: live unload or drop and hook. Inefficiencies occur when a driver has to wait for unloading and reloading, or for the availability of another trailer. In this instance, trailer pools are viable options. They must be managed, however, to ensure the right trailer is empty and available on the inbound side and the right freight is loaded on the appropriate carrier's trailer for outbound.

Trailer pool management may lead to the conclusion that using a limited number of carriers is best. However, limiting carriers limits your opportunities. Don't forget that density is an enabler; it presents the opportunity for efficiencies to fill out carrier networks. These efficiencies benefit the carriers who then pass the savings on to the shippers. Therefore, limiting the carriers works against the density by limiting the number of networks available.

Measuring density is a difficult task. It is often imprecise not only due to the number of loads that change seasonally, but also to the increase of time through "consolidation" (e.g. holding loads on Monday to combine with loads on Tuesday or even for the rest of the week).

There also is the natural fluctuation of loads that vary every day depending on a shipper's production cycle and random variation that occurs in many processes.

Some might argue that if you can't measure density accurately and consistently because of these variances, it's just another industry buzzword. The reality, however, is that transportation efficiency requires more than geographic concentrations of loads with the right timing.

Your business model also must be compatible. If it favors only four or five carriers you won't be able to take full advantage of the opportunities to populate individual networks. Business models that open the doors to 20 or 30 carriers have more networks to mix with these opportunities and can yield a better solution.

Achieving Full Optimization

To achieve full optimization, shippers should identify predictable patterns of freight for dedicated fleets and use a bid tool to assign freight by lane to a variety of qualified carriers.

One such approach is the Combined Value Auction (CVA) principle. The real value of CVA is the ability for both the buyers and sellers of transportation—shippers and carriers—to leverage their existing networks to develop strategic solutions that work for both parties.

By providing visibility into a shipper's network, CVAs enable carriers to identify and bid on packages of lanes that will optimize their assets. Rather than bidding blindly and risk over-committing and/or under-utilizing their assets, carriers can achieve greater density by accurately planning for fluctuations in shipper needs and aligning their network accordingly. Shippers benefit not only from the cost savings passed along by carriers operating at maximum density, but also from greater efficiencies within their own transportation network.

For example, a shipper with a nationwide transportation network incurs $12.5 million in costs by inconsistently using more than 100 carriers. If the shipper submits its transportation needs to a CVA, pre-qualified carriers could examine and match their networks of lanes and capacity to the shipper's network. Then it could review the package of bids and make a selection, reducing its costs by as much as eight percent and decreasing the number of carriers that are assigned by lane to as few as 22.

The long-term and mutually beneficial transportation contracts that result from the CVA bid process directly impact companies' bottom lines by driving costs and inefficiencies out of their supply chains.