Ground Tactics: Optimizing Transportation Networks
Battle-weary shippers design strategic networks to withstand market challenges.
The double whammy of a flagging economy and record high fuel prices is changing the economics of transportation in the United States. While every mode is affected, the dynamics playing out in the trucking sector are likely to have the most far-reaching impact on supply chain network design and strategy.
“The trucking sector is comprised of many small companies, and they are going bankrupt at a rapid rate,” reports Dan Van Alstine, senior vice president and general manager of Schneider National’s van/truckload division.
“The number of small company bankruptcies triples weekly. And every other week, a large carrier—with 300 to 1,000 units—exits the business. Six to nine percent of the total population of truckload (TL) carriers have left the business since the start of 2008.”
“During the first part of 2008, truckload fleets that operated five to 10 trucks went out of business,” notes Tom Barnes, director of transportation for Menlo Worldwide Logistics, a 3PL based in San Mateo, Calif.
“As we enter the third quarter, fleets with 70 to 90 trucks are going out. And large carriers are taking trucks out of service and putting them ‘on the fence’ to reduce capacity.”
Since 2004, Schneider National’s cost per mile has increased by about 80 percent, largely driven by fuel prices. “The mile is our ‘widget’,” Van Alstine observes. “When costs go up so tremendously, we are forced to behave differently. For example, we rethink where we hire drivers so we don’t waste miles getting them home.”
“Fuel is the killer for deadhead miles,” notes Morgan Anderson, global director of account management for Menlo. “Fuel used to comprise 15 to 20 percent of a TL carrier’s costs; now it’s more than 40 percent.
“In the past, carriers drove 50 to 100 miles to get a good load. Today, they can’t recoup that cost, so they have reduced the deadhead threshold drastically.”
The less-than-truckload (LTL) sector has been similarly hard hit. This year has brought two major bankruptcies—Jevic Transportation and Alvan Motor Freight—with the potential for three or four additional LTL failures in the $100- to $125-million range.
Both motor carriers and shippers believe a trucking capacity shortage is imminent, and that its impact will be significant.
“The high cost of fuel is driving trucking capacity out of the market more rapidly than people realize,” says Derek Leathers, chief operating officer of Werner Enterprises and president of Werner Global Logistics, Omaha, Neb. “Approximately 45,000 trucks left the market in the first quarter of 2008; more will leave in the second quarter.”
Schneider’s Van Alstine agrees. “Within 18 months, I expect to see a serious trucking capacity crunch,” he says.
While these issues are foreboding, shippers can take steps to reduce the impact on supply chain networks.
1. Partner with carriers. Shippers are locking down long-term capacity solutions, making sure their providers are financially viable, and negotiating rate structures that smooth out spot-market volatility.
This is exactly what New York-based Scholastic Inc., a publisher of children’s books including the sensationally successful Harry Potter series, has done.
“Scholastic has worked hard during the past few years to negotiate fuel surcharge ‘caps’ in many logistics supplier contracts,” says Tim VandeMerkt, vice president, global logistics for Scholastic. “As a result, a significant portion of our logistics spend is contractually protected against any material impact from higher diesel fuel prices.
“Our logistics partners, including Con-way Freight, DHL, UPS, YRC Worldwide and its subsidiary YRC Logistics, have helped us weather this period of elevated fuel costs by living within the terms and spirit of our agreements,” VandeMerkt adds.
“That is no small effort on their part. It demonstrates their character and integrity, as well as the long-term view they have taken of our business.”
2. Regionalize networks. To combat truck capacity and fuel challenges, many companies are re-thinking their physical distribution networks.
“Most supply chains and manufacturing networks were designed in an era when fuel prices were significantly lower and transportation costs were reasonable and stable,” says Brooks Bentz, partner, supply chain management with global consulting firm Accenture.
“Companies aimed to consolidate warehouses and manufacturing plants. Today, with fuel costs rising so precipitously, they are pushing toward having more facilities located closer to the customer,” he adds. “The point is to rationalize the network to shorten transportation time.”
Slowing It Down
In addition to regionalizing their networks, companies are slowing down their supply chains to reduce transportation costs. They are forgoing high-priced, high-service transportation and shifting to slower, lower-cost modes—switching air to surface, and truck to intermodal or rail, for example.
“Cross-country truckload transit takes five days unteamed, rail-truck takes six days, intermodal takes seven days, and boxcar a week or more beyond intermodal,” notes Anderson. “Companies are deciding that adding a day or more to their transit times can work.”
Shippers are pursuing mode conversion more aggressively than in the past, agrees Leathers of Werner Enterprises. “Shippers are showing significant interest in converting LTL to truckload,” he says. Truckload, in turn, is converting to intermodal.
Rail-truck intermodal is well-positioned to handle the additional volume. By most estimates, 10 to 20 percent of TL freight could still switch to intermodal, Leathers reports.
Part of the reason for intermodal’s increasing popularity is that railroads have boosted train velocity by several miles per hour system-wide over the past two years.
The challenge of mode shifting—and buying transportation in general—lies in keeping service levels high while reducing costs. The retail sector in particular—known for its demanding service requirements—will have to thoroughly assess its cost and service tradeoffs.
“Consumers do not want to walk into a store and find a $7 pair of flip-flops with a $2 fuel surcharge slapped on,” Bentz observes.
3. Weigh nearsourcing vs. farsourcing. Escalating fuel prices are beginning to impact production strategy—causing companies to take a fresh look at low-cost country sourcing.
Several years ago, fuel represented 35 percent of the cost of running a container ship; today, it comprises 65 percent. Ocean freight rates have risen accordingly.
To conserve fuel, many ocean container lines are slowing their vessel speeds, which in turn lengthens transit times. Longer transit times translate into higher carrying costs for shippers.
The convergence of higher ocean rates with inventory carrying costs means that some companies offshoring production to the Far East are not realizing the benefits they thought they would.
“Transit time from the interior of China, Malaysia, or Myanmar to a consumer’s home in Chicago can take one month or longer,” Bentz says. “From Mexico, transit time is one week. Some companies are wondering if offshore sourcing is all it’s cracked up to be.”
“Businesses aren’t picking up their whole sandbox and moving to Mexico yet,” notes Griffith. But they are bringing some production back to this continent—reeling in at least a portion of their supply chain.
The declining value of the dollar relative to other currencies is accelerating this trend. “In effect,” Griffith says, “companies are building dual supply points—bringing some closer to home rather than relying solely on Asia.”
4. Mesh transportation networks. A handful of leading companies are changing the way they secure optimal transportation service coverage for their network requirements.
“Shippers operate a network of inbound and outbound freight flows,” Bentz explains. “They also collect volumes of data about where their freight comes from and goes to. What they don’t have is a view of carrier capacity. Only the carriers know where they have freight, where they would like to have it, and where they need it.
“There are 700,000 trucking companies in this country,” Bentz says. “Shippers that match up their networks with the carriers’ flows get the power of overlapping networks. If they get it right, they reduce empty miles, give carriers what they want, and earn better service.”
Shippers should let carriers figure out which freight fits their networks, Bentz believes. This differs from the traditional approach of putting specific lanes out to bid and seeing what carriers come up with. It enables carriers to truly optimize their assets while providing shippers the best service.
When it comes to the state of the U.S. trucking industry and its impact on corporate supply chain networks, there’s no such thing as status quo. “Companies are redesigning their distribution networks in new ways,” Leathers says. “They are questioning everything. There are very few sacred cows.”
Werner Co.: Retooling the Network
“We are a truckload shipper, first and foremost,” says David Conn, senior vice president of logistics and supply chain for Werner Co., Greenville, Pa., the world’s largest manufacturer and distributor of ladders and related climbing products.
“However, we use more less-than-truckload (LTL) than we would like—25 percent of shipments move via LTL,” a consequence of the small customers Werner serves.
Werner has been hit hard by the impact of high fuel prices combined with revised driver Hours of Service rules. “Before the revised rules took effect, we lived in the world of LTL consolidation,” explains Conn. “We used to send five or six separate customer orders on each truck.”
The amended Hours of Service rules, however, now limit the number of stops per truck trip Werner can schedule. Drivers run out of hours and the economics of such scheduling are no longer favorable. So some of the company’s multistop freight has migrated, by necessity, to LTL. Alternatively, the company sends out lighter truckloads.
To reduce transportation costs, Werner has retooled its distribution network extensively during the past five years. Interestingly, this change runs counter to the network regionalization trend.
Six years ago, Werner operated four domestic plants with distribution centers attached to each. As a result of a manufacturing strategy change, only one of the four plants is still operating. The bulk of the company’s production relocated to Juarez, Mexico, and certain products were offshored to China.
Werner is in the final stages of consolidating its full-service DC network to a single facility in El Paso, Texas, just across the border from its largest North American production plant.
The manufacturer also operates a combined plant and DC in Merced, Calif., as well as a network of small warehouses to provide product availability in key metro markets for quick turnaround, will-call, and regional LTL shipment.
The reason behind Werner’s DC network consolidation is simple. “A 53-foot trailer full of flat screen TVs or digital cameras can total $500,000 to $1 million worth of merchandise,” Conn observes. “But the wholesale value of a truckload of ladders is less than $50,000. We cannot afford extra freight cost because it eliminates our margins.
“Our goal is to handle product as little as possible prior to sale—which helps us from both a damage and cost perspective,” Conn explains. “It costs $3,000 to move a truckload of ladders from Juarez to the Erlanger, Ky., DC (now closing), just to position it to move again to the customer.”
“At one time we thought we could maintain stand-alone DCs,” Conn says. “But when we analyzed our total supply chain costs and looked at transportation prices, we realized that model would not work. “We have taken millions of dollars of cost out by collapsing our DC network to match our manufacturing network,” he adds.
As for transportation, Werner Co. believes in cultivating long-term relationships with carriers that meet its needs. Maintaining those relationships, however, has not always been easy.
“We’ve had our ups and downs with LTL carriers, in particular,” Conn notes. “When freight was plentiful, several LTL carriers walked away from our business. And some don’t exercise the proper level of care with our product, so we experience a high damage rate.”
Werner Co.’s closest transportation services relationship is, coincidentally, with Werner Enterprises, a general commodities truckload carrier based in Omaha, Neb.
In addition to hauling a high volume of Werner Co.’s freight, Werner Enterprises acts as a transportation broker in areas it does not serve.
“Werner Enterprises maintains relationships with thousands of carriers on lanes it doesn’t run,” notes Conn. “Werner can match us up with a carrier in the value-added network that wants to move our freight on backhaul.
“These rates are up to 30 cents a mile cheaper than what we could get on the market. Werner Enterprises understands capacity availability and can leverage it on our behalf.”
As it looks to the future, the ladder company continually evaluates its mix of offshore and North American production.
“Because our product is so freight-intensive, we recognize that we are always ‘on the bubble’ of nearsourcing our China production,” Conn explains. “In fact, in 2007 we brought certain core products back from China because the economics had changed.”
Rock-Tenn Co.: Collaborating to Save
When fuel costs began to skyrocket, Rock-Tenn’s first response was to “control the impact on carrier pricing,” recalls Ben Cubitt, vice president of supply chain.
“We concluded that high fuel costs are here to stay, so we needed to build a strategy around them. We had to make our supply chain as efficient as possible.”
Rock-Tenn, Norcross, Ga., manufactures packaging products, bleached and 100-percent recycled paperboard, and merchandising displays. It operates 92 facilities in 26 states, as well as Canada, Mexico, Chile, and Argentina.
Reducing empty miles across the supply chain was one immediate goal. “We started identifying empty miles not just in our own network, but in our customers’ and suppliers’ networks as well,” Cubitt says.
“We looked at our customers’ dedicated truck fleets and empty miles, and began matching our collective inbound and outbound freight flows. By tying our internal moves with customers and suppliers, we reduced empty miles across the network.”
Rock-Tenn met with customers and suppliers to explore these opportunities. “We started by helping fill empty miles on one customer’s dedicated fleet,” Cubitt reports. “We have also begun to match up our inbound and outbound loads.”
The manufacturer had examined filling empty miles with a few customers in the past, with little success. “But today, with fuel prices so high and capacity constraints so imminent, our business partners are getting serious about these efforts,” Cubitt says.
Such collaboration is impossible to achieve without real-time visibility into supply chain activity. Rock-Tenn embarked on a multi-staged approach to gain this visibility.
First, it outsourced its manual freight payment to Cass Information Systems, a Bridgeton, Mo., payment and information services provider. “By outsourcing freight bill payment, we gained access to data concerning our freight flows—a rear-view mirror on what we ship,” Cubitt explains.
Next, Rock-Tenn outsourced transportation management to Transplace, a non-asset-based third-party logistics provider based in Plano, Texas.
“Using Transplace’s transportation management system and load management center in Arkansas, we gained the, technology, visibility, carrier selection, and optimization tools we needed to first link our internal inbound and outbound freight, then look for matches elsewhere in our supply chain.”
Although Rock-Tenn is only in the early stages of implementing these network consolidation and optimization efforts, Cubitt is pleased with the progress.
“If you look at the impact of matching networks with individual customers, the results could be considered disappointing,” he says. “But if you look at it across 20 customers or suppliers, it makes a significant difference.”
As for the future, Cubitt says he is “very concerned” about carrier capacity over the coming months. “We measure and watch carrier tender acceptance and on-time pickup and delivery performance very closely,” he notes.
“Nationwide capacity shortages are coming, and we’re worried. So we’re trying to align with strong carriers that will survive and thrive.”