Markeset Says:
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Most
consulting firms tout
broad transportation sourcing
savings in the 5% - 15%
range and, with the notable
exception of the capacity
crunch of a couple of
years ago, our experience
matches that.
What
do you say? Send
us your comments here
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On
Supply Chain Digest’s
excellent “Your
Questions Answered”
service, we recently responded
to a question about the expected
benefits from formal transportation
sourcing programs, often using
software to support so called
“Carrier Bid Optimization”
processes.
We
responded in brief (see Reader
Answer) but that got us
thinking about the subject,
and we wanted to discuss the
issue in more detail in this
regular Transportunities
column.
Most
consulting firms tout broad
transportation sourcing savings
in the 5% - 15% range and, with
the notable exception of the
capacity crunch of a couple
of years ago, our experience
matches that. However, if you
are trying to build a business
case to engage in this kind
of project, a “top down”
experience-based saving estimate
like the range above usually
only gets you the right to keep
talking.
We
find that some kind of “bottom
up” validation of that
range is usually needed to actually
get approval for the project.
That “bottom up”
validation might be: recently
contracted or “known”
rates well below your general
rate levels; price variance
among modes justifying some
mode shift; changes in demand
or distribution footprint that
justifies consideration of changes
(say a drop trailer program);
essentially any real-world /
your-world operational example
of the savings range. With both
a “top-down” savings
range and a “bottom-up”
operational example, you have
a much better chance of actually
starting the project.
There
are definitely factors, however,
that will affect the potential
or achievable savings range:
1.
How
good have you been?
The simple truth is it can be
hard to create savings now if
they have been captured before.
That is not to say that even
the best transportation organizations
can’t drive savings with
sourcing; they can because the
market and their operations
both change. Nor is it to say
that a client can’t be
in such bad shape that it is
actually hard to drive savings;
this happens mainly when data
is so bad as to be fundamentally
misleading. But, in general,
if you have clean data from
an effective TMS implementation
and you have sourced transportation
rigorously every couple of years,
you may have a hard time hitting
the high-end estimates and,
conversely, if those things
aren’t true, there may
be more opportunity. So, be
honest; how good have you been?
2.
How
good will you be?
If you have had trouble creating
transportation savings in the
past you need to, again honestly,
figure out what will be different
this time. It could be that
transportation now has executive
visibility and support in ways
you never had before; that certainly
is happening more and more these
days. It could be that competitive
pressure is forcing your company
to consider operational changes
that, politically, it never
would have considered before;
certainly many firms that were
happy to manage transportation
in a decentralized fashion when
the money was less important
are looking closer at the cost
of decentralized control. It
also could be that you never
had access to a tool set to
help you analyze your transportation
flows, compare strategies, present
that business to carriers, and
analyze results; the tool sets
have certainly evolved enormously
in the many years we have been
doing this.
If
there is one way that you can
change to be better, we think
the most important is to broaden
the scope of what you are working
with and sourcing. For example,
if you are sourcing the same
Truckload volumes in the same
lanes given the same planning
and execution process and the
same service requirements, then
the only thing you are likely
to capture are general rate
changes (which, don’t
get me wrong, can be large/important).
But if, for example, you are
able to get additional planning
time from earlier acquisition
of the upstream data so that
you are increasing the time
between tendering and execution,
if you are able to reduce transaction
costs by automating tending
and status messages so less
faxes and phone calls are involved,
or if you are able to reduce
carrier operational costs like
DC dwell times, then you will
have broadened the context of
your sourcing effort and given
carriers more to work with in
terms of lowering your rates.
3.
What
is your freight profile?
If you are a low-volume shipper
moving light bulky freight from
Hong Kong to LA that has to
sail at the end of the summer
or need a “reefer”
out of Florida after the citrus
ripens, you can only expect
to do so well or rather not
so well. If you have very regular
dense LTL shipments moving in
high-volume lanes under rates
that you have not sourced in
2 years, you are going to be
a star. Most of the really good
transportation managers that
I have met keep a reasonably
up-to-date few pages (usually
on PowerPoint for executives
and nosy consultants) that describe
the key characteristics of their
freight pretty well. That profile
of volume, density, geography,
seasonality, periodicity, planning
and execution time frames, pick-up
and delivery requirements, visibility
information requirements, etc.
is obviously critical since,
ultimately, this is what you
will be testing in the market.
4.What
is the state of the market?
While
we all like to think that we
have a great deal of individual
influence, the truth of the
matter is that if you were out-sourcing
your private fleet in the very
early 90’s (after deregulation
of intrastate trucking), instituting
a core carrier program through
much of the mid to late 90’s,
shipping containerized product
to Asia just about any time,
or negotiating your LTL rates
this spring – you probably
did pretty well. And if you
were looking for truckload carriers
during the capacity crunch of
a few years ago – you
probably did not do too well
(note: tide meet boat). Given
the downturn, or at least pause,
in the housing market and at
least an iffy outlook for the
near-term economy, this is a
pretty good time to be sourcing.
So,
in summary: start with
5% to 15% as a top-down estimate,
find some real-world / your-world
examples of savings, broaden
your sourcing effort beyond
“just” rate negotiation
(which alone can be critically
important) to consideration
of at least some other operational
changes, document your service
requirements, get and provide
clean data to carriers, run
a rigorous but fair bid event,
analyze the results using a
tool that helps you understand
the benefits of various lane
and carrier “bundling”
and, critically, enforce any
new carrier selections so that
carriers get the volumes you
led them to expect and you minimize
losses due to maverick spend.
Also,
we recommend using this exercise
as a way to have a bit of fun.
We get to move freight for a
living, which is not a bad gig,
but a transportation sourcing
effort is a chance to mix analytics,
operations, and money in ways
that are professionally challenging
and have real business impact.
Agree or disgree with our expert's
perspective? What would you
add? Let us know your thoughts
for publication in the SCDigest
newsletter Feedback section,
and on the web site. Upon request,
comments will be posted with
the respondents name or company
withheld.
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