Expert Insight: Transportunities
  By Stephen Craig and Erik Markeset  
  July 10 , 2007  

Transportunities: What Kind of Results Can You Expect from Carrier Bid Optimization Projects?


Question to SCDigest Has Us Thinking about CBO and the Factors that Impact Potential Savings

Markeset Says:
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

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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