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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  August 27, 2015  
     
 

An August Logistics Challenge

 
 

For one of the few times ever, SCDigest editor Dan Gilmore is turning over the mighty First Thoughts column platform to an outside contributor, David Schneider, president of David K. Schneider & Associates and former logistics executive in the retail industry.

Schneider has contributed two or three such columns over the past few years - we're glad to have him back. Something a little different this time, as below Schneider summarizes a logistics/transportation problem he encountered recently at a mid-sized manufacturing client - and asks SCDigest readers to offer what their solutions would be. We would love to have your ideas, using the Feedback button at the end of the column. Some sort of prize for the best response.

Gilmore Says:

I know what I presented to my client. What I want to know is what you would suggest.


Click Here to See
Reader Feedback


 

By David Schneider

 

"The problem with managers is they do the first thing that pops into their heads."

I remember hearing this the first time in the first few months of my first management job. The guy who said it was a college educated fork truck driver. I was the manager in question.

If you think that I took offence and became defensive about it, you win a gold star. I did and I was.

And, he was right. The problem appeared, and I started working on the first solution that I thought of. It wasn't until I worked at the problem for an hour that I started to realize that my solution was crap. That forklift driver, with the degree in history, was standing next to me when I voiced my frustration about my idea not working.

In answer to my defense, the guy only said that if I took a few minutes thing about the options, the right answer would appear. "You're a smart guy, it will come to you," is what he said as he walked away.

He was right.

Not long ago I worked with a client that had a problem. Well, they had a lot of problems, but the one that we will talk about had to do with their freight costs. $31 million in freight costs, far above what expectations. The company freight manager had recently quit, and the role landed on the lap of another manager. The manager with the new responsibility did not want the job, but it was his. Moving with swift efficiency, he declared the freight rates too high and started to call the carriers to talk about rate reductions.

You can imagine how much success he got from those calls. Oh, the carriers came to the meetings, politely listened to the manager's requests, and then told him that, unfortunately, there would be rate increases, not decreases, given the driver shortage and the tight capacity in the market. When the manager said he would put the business out to bid, each carrier told him good luck.

The rates went up. That is when the company president called.

One of the first things I did was sit down at the desk of the departed freight manager. His desk was clear, but all of the papers and files were there. His computer was too, and I could see his email. I spent a day looking at everything, and constructed a tale of frustration, woe and despair. The poor guy was qualified, smart, and knew what he was doing. I found the material he used to conduct the last rate bids; it was all there. He got fair rates, for the way the company shipped. The problems were not the rates, but the way the company behaved, the way it managed shipping.

Actually, the way the company did not manage shipping was the real problem. The freight manager knew it too. He attempted to change things, having meetings and sending emails, trying to get the people in the different branches to plan their shipment better, not use expedited serves so much. He got a few people to comply, but most people dismissed him, saying that they had to use the expedited service because that was the nature of the company, they often had to expedite to fill orders on-time.

One of the last messages in the freight manager's inbox came from one of the branch managers, telling the freight manager that he should stop bugging them about expedited freight and work harder on finding lower rates. Ten minutes after that the freight manager tendered his resignation, by email.

The next day I looked at the data. This freight manager did a good job pulling together the shipments, using data from his freight audit service to pull together aggregated volumes he used for his bid process. Digging around in the hard drive I found the raw data, and looked at the shipments. There were lots of under 500-pound shipments, sometimes as frequent as every day, between branch plants. Some lanes stood out, with many expedited shipments using Forward Air and not the usual LTL carrier. One lane used Forward Air for over 40% of the shipments, at a premium rate.

Something struck me about that lane. The two plants were only 300 miles apart. Why Forward Air? I looked at the LTL transit time between the two facilities and it was next day service, for about 70% of the cost. Why Forward Air? I dug into the shipment detail, learning that on some days the shipping branch plant used both the LTL carrier and Forward Air in the same day. Looking to the data, the LTL shipments picked up about the same time as Forward Air, but consistently arrived before the Forward Air shipments delivered.

Why Forward Air, indeed!

For the next few days, I talked to different branch plant managers and shipping supervisors to understand how they made decisions about carrier selection and shipments. About half of the shipping supervisors knew the LTL transit times from their facility. Only one plant manager did. After two days of calls the picture emerged, the plants where the shipping supervisor knew the LTL transit times used Forward Air the least. The branch where the manager knew the LTL transit times used Forward Air three times in a year.

The company had 26 locations around the country. All of the branches distributed the same core products, but custom mixed ingredients based on customer orders. If a plant ran low on one of the additives, the production planners called a few neighboring plants and scrounged what they needed to make a production run, so there was a lot of inventory trading and transferring. Looking at the intercompany transfers, and the shipment lanes, branches did not cross-country transfer, with 90% of the transfers moved less than 750 miles.

I talked to the plant production planners next. The company promised customers a 3-day lead-time before shipping, and shipped all orders LTL, only committing to the ship date. Orders received on Monday shipped on Thursday, so planners had three full days to get the order processed through the network. The custom formulations required some planning and sequencing in the plants, because the process included a heating and mixing process to blend the additives into the base ingredients. Mixers and kettles had to be cleaned between batches, so the planners attempted to consolidate orders for the same blends into larger batches to help reduce the cleaning and set up between batches. The planners also jockeyed orders around when they ran short of additive ingredients.

By the end of the week, I had a good idea what was going on, and what the company could do to lower the freight costs. My solution had nothing to do with rates. The total solution would not be easy to implement, but could be done with enough resolve.

It was time to talk to the president.

Now, if you are reading this article and have gotten this far, you are likely to have formed your own set of answers. I know what I presented to my client. What I want to know is what you would suggest. What would you do? How would you do it? In what order would you do it? How much do you think it is worth? There are easy answers that bring modest gains, and hard answers that result in larger savings.

There is a Feedback below. Please use that to share with us what you think the best answer is. Dan will later share the feedback of your answers, and I will share my plan that I presented to the company president. However, things are always more fun when you take a chance and play the game.


What would your recommendations be to solve this logistics challenge? Let us know your thoughts at the Feedback button or web form below. Some sort of prize for the best response.

 

 
 
     
     

Recent Feedback

I found your article very interesting and see the dilemma you described: “Overall spend is high, so it must be the rates”. Far from true. Companies need to have competitive rates, no question. But this task should be done later, once the network is understood completely. There are better things to start with. 
 
So, in your article you bring up a few insights:
 
Each shipment was sent on its own without consolidation
Placement of orders and requirements/timing for delivery were not coordinated
Expedites were used when “normal” mode would have sufficed
Implied was also that the local plants make their own decision and did not care for “corporate” involvement
 
Let’s start with the order process: Few plants simply produce without an order or a related production plan which is based on customer demand. While different industries have different order patterns, i.e. dynamic (daily, hourly) or more static (weekly, quarterly), there usually is either a plan or a dependable forecast of what might happen tomorrow, next week etc.

 

One way to gather that information is to have the plants enter the shipping requirement into a common system. Portal applications usually work well and can be implemented quickly.
The information should contain shipping volume, weight, destination, also the required delivery date.
Sophisticated portals also offer the option to “rate shop” to ensure that the cost and delivery requirements are met.
But my favorite feature of a system is that it gathers shipment information for later analyses. 
 
The next step would be to convert the orders into manageable loads:

 

Transportation Management systems, SAAS applications have basic functionality and can combine shipments and do basic optimizations. This would ensure that there are not three different LTL orders shipped to the same destination on the same day. It would provide a lower cost and - if the person entering the shipment was honest about the need-in-plant date - even ensure delivery at the right time.
Later on, static optimization, using route optimization software and engineering support, can be created. Bu for now, let’s keep it simple. 
 
Now actual load and shipment tenders to the carriers can be created. But which carriers do I use? Are my rates good?

 

I always believe that it is best to start with the existing carriers and once patterns emerge, maybe after 2 months or so, to put lanes out to bid to see what the market is doing.
Data from all plants should be combined and carriers/partners be chosen based on the entire data set. 
 
In my experience, controlling the freight payment process is controlling the network. Few companies check whether the service invoiced was actually provided as described:

 

Did the trucker actually use a tarp/flatbed/under deck space?
Did they wait for 5 hours before they got offloaded?
Did they ship 500 pounds of freight?
Furthermore, who authorized an expedite shipment?
Who authorized a certain carrier to perform the transportation (yes, we all have an uncle who owns a truck and we all want to give him business)?
By tying the carrier tender to payment, you control who gets paid and unauthorized carriers will not have a chance of receiving payment. Carriers learn really quickly what the process is.
What works even better is self-billing options. We do that in our company and our carrier base loves it and it provides us with the correct accruals for timely payments based on real events. 
 
But how will you get the plants to play along? Budgets are often held de-centralized at the plants, allowing local decisions to interfere with the common good of the company. I found that third party service providers, Lead Logistics Provider or Control Tower operations can provide the necessary “glue” to put network together, manage carriers and costs. But more successful companies have centralized their logistics and have put into place checks and balances, even consequences for non-adherence: Requirements are understood for the entire company, authorities are distributed adequately and rate negotiations are done with the entire network in mind. 
 
There is certainly more to it and  I could write about this all day. Thank you for your article, would like to correspond more with you on this subject. 
 


Christiane Meyer
Strategic Account Executive
Penske Logistics
Sep, 18 2015


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