Trimming Your Transportation Spend

Tags: Finance, Transportation Management

Transportation costs run high, but cutting your spend might be more feasible than you think.

Transportation spending is a perennial target of budget-cutting exercises, and a large, multi-faceted cost center for many companies; some may spend three to six percent of their materials costs on transportation. Seizing control of freight spend can improve operating income by five to 10 percent, and boost stock prices by 10 to 20 percent, according to an Accenture study, From a Shipper's Market to a Carrier's Market.

Improving the ability to analyze and automate true freight spend is a priority for almost half of respondents to Transportation Procure-to-Pay: Spend Management Trends Under Globalization, a February 2012 Aberdeen Group survey.

Cutting costs is not always easy, but because transportation spending comprises several dimensions, many opportunities are available to control that spend. Leveraging IT, reconsidering warehouse processes, and conducting periodic network optimization projects are just three of many strategies that enable shippers to not only trim costs, but ensure that transportation spending supports overall business goals.

Leveraging I.T.

Transportation costs are not only rising, they're also elusive.

"One of the most difficult questions for companies to answer is, 'how much do you spend on transportation?'" says Jason Cook, a managing director at Accenture, a global management consulting company. Many shippers can identify transportation costs associated with a specific product flow, business unit, or set of contracts, but many hidden costs make an enterprise-wide total difficult to ascertain.

The bundling of production and transportation costs into vendor contracts is one reason behind this difficulty. In the communications, media, and high-tech industries, for example, it's common for original equipment manufacturers (OEMs) to price goods on a cost-plus basis, with incentives to expedite hot products, such as the latest smartphone. This makes it hard for buyers to maintain visibility and control the transportation portion of a contract, and often requires revisiting contract terms and analyzing which party is best positioned to cost-effectively manage transportation.

With freight costs rising, the task of teasing out hidden costs is becoming increasingly critical. "Deconstructing the supply chain to isolate transportation costs is where the opportunity lies," Cook says.

He recommends a cohesive, step-by-step strategy to gain control of transportation spending, starting with the basics and layering on additional capabilities that enable shippers to reap the greatest benefits from that foundation. Those steps include:

  • Isolate transportation costs. Assess the current state of your company's freight management. Identify the who, how, and why of all existing transportation choices, and consider all the internal and external assets currently in use.
    Work with upstream suppliers to analyze their supply chain—including shipping costs, modes and mode-shifting opportunities, and order frequency—and how it affects your business. Unbundle those contracts to shed some light on the transportation portion—then start to manage it.
  • Migrate to centralized transportation management. Product lines, business units, or geographies often manage transportation, but pulling transportation management into a single, shared service opens up a host of savings opportunities. "Some synergies can be 10 to 30 percent of spend," says Cook.
    These synergies include consolidating carriers, rationalizing service agreements, and deploying internal distribution and transportation assets more efficiently by rebalancing distribution, rerouting, and using augmented line hauls, backhaul, and continuous moves.

    These two steps can reap a considerable return on investment. "These strategies establish quick wins, driving tangible and short-term savings that enable shippers to capture value in three to six months," says Cook.

  • Invest in technology. Once visibility and a control infrastructure are in place, shippers need technology support to maximize the benefits. Important enabling functions include the ability to look at order activity and volumes, aggregate capacity needs, plan and tender loads to carriers, and manage order requirements in real time. These functions must integrate easily into current logistics, invoicing, and procurement processes.

Transportation management systems (TMS) can typically handle many of these functions, but Cook argues that maximum transport spending control requires not only TMS, but execution systems. "Visibility and planning only take you so far," he says.

Another requirement is to ensure sufficient customer service levels when the TMS directs the shipper to the lowest-cost carrier for a particular route. "Shippers need tracing capabilities, such as order tracking, real-time visibility to shipment status, exception management, and compliance so they can manage across multiple carriers," says Cook. Such capabilities are commonly part of enterprise resource planning systems, not TMS.

Finally, shippers need routing, scheduling, and network modeling, which are incorporated into some—but not all—TMS.

The savings opportunities from this third step are considerable—as much as 30 percent of the cost—particularly for freight that shippers didn't previously manage.

These three steps represent a development curve for transportation spend management because only a small number of shippers currently have access to these capabilities. "Transportation spend management is an emerging capability, and the market has not yet reached a level of maturity to consistently execute these steps," he says.

Reconsider Warehouse Processes

Many shipment details that happen in the warehouse—how it's packed and loaded, what other orders it's packed and loaded with—significantly impact the cost of getting it to its destination. Whether the freight is a full truckload, less-than-truckload shipment, or a single parcel, distribution staff can take a number of steps to contain the ultimate cost of moving an order.

"Some retailers drive improvements simply by loading better," notes Dan Avila, a partner at Tompkins International, a supply chain consultancy in Raleigh, N.C., that helps e-commerce companies and retailers optimize their distribution networks and trim transportation costs through more efficient warehouse processes. "For example, techniques that reduce a slightly-more-than-truckload shipment to one full truckload can reap 25-percent savings."

Shippers are thinking outside the pallet when loading by using strategies such as floor loading, in which they maximize capacity by hand-packing cartons to the ceiling instead of palletizing them. Using conveyors into trucks, and load stands to reach the top of the trailers, can make floor loading safer and easier. While hand-loading can drive up labor costs, they may be offset by the more efficient use of space or making the load a better fit for the delivery point, such as a retail store loading dock that lacks multiple bays.

One approach to floor loading is brick loading—packing shipments left to right, to the ceiling, and locking them in place. Multi-stop deliveries can be separated by load bars or plastic sheeting, and loaded in reverse order for a multi-stop, full truckload run. Brick loading is common in the parcel industry and has spread to other applications.

Load planning software, integrated with warehouse management systems, can help shippers better allocate freight to trailers based on load sizes and routes.

E-commerce shippers are increasingly using the carton cubing functionality in their warehouse management systems to reduce dunnage. Carton cubing also helps reduce errors when selecting package size.

Consolidating orders is another important step. It is common for each item in an e-commerce order to ship separately, but "with time and processes in place, they can move in the same carton, reducing transportation costs," Avila says.

Another e-commerce trend is the use of single machines to accommodate the large number of single-item orders. Single machines create an envelope or corrugate material around an item, eliminating dunnage and enabling some items to ship via the U.S. Postal Service, which many e-commerce retailers consider more economical for the smallest shipments.

Of course, adopting these methods requires investment in new software, equipment, and processes.

E-commerce customers have a low tolerance for shipping fees and, conversely, a high expectation for speed. As a result, "e-commerce retailers are getting creative in cutting transit time when they're not close to the customer," says Avila.

That has driven an increase in zone skipping: Sorting small packages by destination, with splits for a parcel carrier's hub, then hiring a line-haul carrier to move full truckloads to a less costly zone closer to the end customer.

"E-tailers turn two shipping days into one by taking packages to a UPS hub and dropping them into a lower-priced zone. It saves money and time," says Avila.

Optimize Supply Chain Networks

"Companies tend to look at transportation processes in one of two ways," says Richard Patenaude, director of client integration and development for The Wheels Group, a non-asset-based third-party logistics provider headquartered in Mississauga, Ontario. "One is strictly as a procurement function: they issue an RFP, choose the lowest-cost provider, and they're done. The other is to view transportation as a strategic, managed process where inputs and outputs are measured beyond freight rates."

The second approach is where the opportunities lie to maximize the value of transportation spending, ensuring an optimal match between business requirements and supply chain network design.

Businesses that time a supply chain network redesign right make the most effective use of transportation spend.

That optimal match is driven by variables—businesses generate new product lines, customer demand patterns shift, sourcing locations change, fuel prices fluctuate. A change in any one variable can have a greater impact on the network model than many realize. Individual differences in businesses mean there's no one right answer to how often shippers should revisit their network models, but those that time it right stand to make the most effective use of their transportation spend.

At Wheels Group, Patenaude and his colleagues deliver network optimization services primarily to multi-national consumer packaged goods companies active in the Canadian and U.S. markets. Given Canada's smaller population, geographical challenges, and general shipment volumes, most freight moves via LTL rather than the full truckloads common in the United States. But the needs are the same: ensuring networks are as efficient as possible.

In the network optimization process, a shipper seeks to rationalize the complete array of production, distribution, and transportation services; locations; costs; and service levels within the network. For a food company, for example, that might mean looking at the entire farm-to-table process, or just a portion of it. Shippers can realize 10 to 20 percent in cost reductions through structural change to transportation locations and services alone, according to an Aberdeen Group report.

Depending on scope, network optimization projects can last anywhere from six weeks to four months, or longer. Network optimization comprises two basic steps: defining the base case, then using modeling software to run what-if scenarios with different network models. Attaining the best outcome requires incorporating the following practices:

  • Set a clear goal. Ensuring clear objectives and deliverables is key. Network optimization projects are ripe for scope creep: if you're considering whether to shift production, why not reconsider product design and materials?
    "Companies need a clear mandate for what they're trying to achieve," Patenaude says. It might be where to manufacture a new product, or validate the potential impact of a merger or acquisition, or adjust to the impact of a recent growth spurt. But the end goal must be clear.
  • Validate the data. Wheels Group spends about 90 percent of a network optimization project side by side with the shipper, gathering and validating the assumptions and constraints that define the network's current state. Just 10 percent of the time is actually spent running potential models, because they are only as good as the data supporting them. Documenting supply chain business processes and data flows as they evolve can help shorten the work on subsequent network optimization projects.
  • Allocate sufficient resources. "Network optimization projects are very detailed, and could be an intensive process as companies build models around different business constraints," says Patenaude. "Companies must be able to understand the current business to compare it to a potential new model." Members of the project team must have both the time and business knowledge required.
  • Look holistically. Companies that get too focused on the details could miss the larger implications. For instance, defining a source point based on freight rates between two different distribution centers (DCs) for a specific customer location may be short-sighted if the cost of delivering from plant to DC isn't considered as part of the total cost comparison. An optimal network balances cost with factors such as service levels that support overall business goals.
  • Ensure expertise. Tier-one companies often have the internal expertise and tools to conduct their own network optimization projects. Others turn to pure-play supply chain consultants or third-party logistics providers. Any partner "must have the tools, resources, and expertise to perform network optimization effectively," says Patenaude.

While all these practices are important, data cleanliness and accuracy is the most critical. "How available is the data? How constant? How useful is it to the supply chain today? Is there consistent information flow? It's all about the data," Patenaude says. Ensuring a company has the right stakeholders internally to consume, review, and implement the results is also key.