May 2006 | Commentary | IT Matters

Transportation Operations Planning: How Do You Rate?

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Many companies are quickly falling behind their competition as they continue to run transportation operations without the process and technology sophistication required to manage the volume and velocity of today's transaction levels.

With increasing customer demands for service, speed, and price, and escalating levels of aggressive competition, there is no better time to evaluate your transportation and logistics operation and identify ways to turn it into a market advantage.

Use this reference guide to determine the level of your organization, and identify areas where your transportation planning activities need to evolve. Most companies fall near the center of the scale, which follows a bell curve.

No matter where along that curve your company lands, the question to ask is: will you benefit significantly by moving along the scale?

Level 1—No Planning

Level 1 organizations have simple shipping needs that they handle ad-hoc, and coordinate between a warehouse manager or directly with a third-party provider. Level 1 companies negotiate prices, schedules, and loads, which vary each time. Customer service weakens as the company cannot guarantee delivery schedules, and shipping errors become the norm. These labor-intensive operations incur significant costs.

Level 2—Fire Fighting

Level 2 organizations have evolved to a state where transportation planning continues to rely upon intuition, with predictable and unchanging business environments. Transportation management remains primarily paper-based, with manual procedures to coordinate and track shipments.

Due to their larger volumes, Level 2 organizations face an extremely challenging and cumbersome task. They are unable to coherently consider all the information available to them to make optimized transportation decisions. They are unable to effectively manage operational problems such as delayed deliveries, long lead times, high volumes of damaged goods, and lengthy freight audits. Invariably, the result is higher-than-average per-unit and total freight spend, as well as ongoing service problems.

Level 3—Tactical Rule-Based Planning

Most companies are at level 3, where transportation is planned at a tactical level. Using entry-level information systems, Level 3 companies are able to define generalized business rules that allow them to pre-plan transportation and distribution activities—"Ship to Chicago every Wednesday," for example, or "Ship all orders weighing less than 2,000 pounds through the Memphis hub."

Usually, these rules are formalized inside a transportation management system that enables the company to perform repeated tasks in a fairly automated, disciplined, and predictable manner.

A major problem for companies at this level is that the transportation network changes too frequently to adapt. Therefore, the system is not able to respond quickly to deliver optimized shipping schedules, routes, and costs.

Level 4—Strategic Batch Optimization Planning

Level 4 companies use transportation management and optimization systems daily to assess the impact of delivery times, load sizes, delivery frequencies, lane rates, and other factors. These companies can view all deliveries that must be shipped over the operational planning horizon—12 to 48 hours. Within minutes, their systems can analyze thousands of shipments and derive an optimized, least-cost solution given physical and organizational constraints.

For every 10 shipments, there are 100 theoretical combinations for how to execute them. Certainly, many of these combinations are not feasible and some are more expensive than others. But what happens when 250 shipments or 1,000 shipments need to be processed? That amounts to one million respective theoretical combinations! Without a sophisticated transportation management system, most companies fall back to level 3 and follow the sub-optimized business rules approach.

Level 5—Continuous Optimization Planning

Level 5 companies are typically early adopters of technology systems whose processes have evolved through the previous levels. Their transportation management systems are finely tuned to perform analysis on all shipments in real time, delivering fully optimized transportation operations.

Level 5 organizations recognize that transportation is a critical element to the success of their business. Their goal is to actually use their logistics departments to gain significant competitive advantages within their markets. They can adapt immediately to changing consumer demands, ensure shipments are optimally consolidated, automatically coordinate shipping schedules, maximize delivery speeds, and minimize transportation costs.

Companies using advanced transportation planning systems can extract more than 15-percent savings over those using simple systems. This level of savings can amount to millions of dollars each year. In addition, companies using these systems continuously improve precision, compliance, cost control, and customer service levels.

So, where does your company fall along that normal distribution curve? And where do you want to be?

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