White Paper. Managing Transportation Costs. Shippers And Carriers Working In Concert Can Reduce Risks And Improve Operational Performance

Transcription

1 White Paper EXECUTION is EVERYTHING Managing Transportation Costs Shippers And Carriers Working In Concert Can Reduce Risks And Improve Operational Performance

2 In the 1970s, the OPEC oil embargo sent shock waves through the transportation industry as diesel prices soared and gas lines wrapped around the block. The industry shifted again in 1980 when the trucking industry was deregulated. However, nothing has threatened more change in the transportation industry than the dramatic jump in fuel prices, with diesel prices going from an average of $2.40 a gallon in 2005 to over $4.30 a gallon in Will the industry go back to normal as fuel prices stabilize? Highly improbable, because many fundamental factors are changing at the same time. First, there are basic infrastructure issues that are being under funded by the government. The U.S. Department of Transportation forecasts that more than 18.1 billion tons of freight will travel by highway in the year 2020 a 75 percent increase from However, with budget deficits and the federal highway trust fund with a potential shortfall of as much as $3.2 billion, those issues are unlikely to be addressed. At a recent industry conference, a transportation expert summarized it best: "Funding for transportation is at best number five on the government's list. 1 Will the industry go back to normal as fuel prices stabilize? Highly improbable, because many fundamental factors are changing at the same time. Second, truckload capacity is leaving the market. The American Trucking Association reports nearly 1,000 carriers declared bankruptcy in the first quarter of 2008 up from 1,200 for all of According to Donald Broughton at Avondale Partners, more than 42,000 trucks 2.1 percent of the nation's tractor- 1 Adrian Gonzalez, An Unsustainable Model: Why Shippers and Carriers Must Innovate to Succeed, ARC Advisory Group, September

3 trailers were taken out of the market in just the first quarter of Capacity is also being constrained by the rise in fuel costs, increasing driver wages, hours of service regulations, general maintenance/equipment costs and congestion in major cities such as London, New York, Los Angeles, Shanghai and Singapore. A fundamental shift Most significantly, there has been a fundamental shift in the nature of supply chains. During previous shifts in the transportation industry, supply chains were relatively simple; they were generally short and linear. Once the latest crisis passed, carriers and shippers resumed their normal course of business. Today, supply chains are more like supply webs with companies sourcing goods from multiple locations scattered all over the globe and arriving in numerous ports. Today, supply chains are more like supply webs with companies sourcing goods from multiple locations scattered all over the globe and arriving in numerous ports, all of which have to be coordinated and delivered to customers. And these supply webs are quite dynamic. Due to increased competition and dwindling profit margins, companies must remain agile, seeking out the best suppliers and adjusting their supply chains at a moment s notice. Intense competition, economic volatility and increased business complexity are putting companies earnings predictability at risk which has made transportation and logistics a hot topic in executive suites. A best practices report by Marsh reveals that many successful companies are revising their supply chain practices on a much more frequent basis than their peers. 3 After 2 ibid 3 Beth Enslow, Fight Financial Volatility by Fixing Your Supply Chain Alignment, a Marsh Supply Chain Risk Management Publication, Marsh, September

4 all, most companies designed their supply chains when diesel cost $2 a gallon; at more than $4 a gallon, reassessing transportation strategies is essential to profitability. As companies reengineer their supply chains they re increasingly looking to form collaborative relationships with their carriers to increase efficiency, performance and customer satisfaction, and provide the flexibility needed to respond to market conditions. Achieving operational efficiency The ARC publication, The CFO s Guide to Transportation Spend Management, outlines several questions that help companies implement the right processes and technologies to achieve operational efficiency and financial success in transportation management: As companies reengineer their supply chains they re increasingly looking to form collaborative relationships with their carriers. Are we leveraging our total transportation spend when negotiating with carriers or is our spending fragmented across departments, business units, or logistics service providers? Are we engaged with the right set of carriers or are there other carriers that can meet our service level expectations at a lower cost? Are we consistently using contracted carriers and paying contracted rates or is there a lot of "maverick" spending taking place? In carrier selection, are we including all of our expenses, particularly fuel surcharge increases? Are we being invoiced correctly or are we paying too much? What's the cost of our freight settlement process and can we streamline it? Are our transportation costs aligned with the rest of the market or are we paying more or less than other companies? 4 The business landscape is changing as companies move away from the traditional view of enterprises as separate, independent entities toward a more collaborative model with an emphasis on 4 Adrian Gonzalez, An Unsustainable Model: Why Shippers and Carriers Must Innovate to Succeed, ARC Advisory Group, Sept

5 interconnectivity. There is growing recognition that supply chains will play a crucial role, helping sustain growth and profitability by enabling companies to be ever more flexible and adaptable. 5 Shippers and carriers must work collaboratively to identify how to: Become better business partners Work smarter not harder Gain business efficiencies Improve customer service Achieve greater profits Develop environmentally sustainable practices Building collaborative relationships There are established best practices on how companies can build a collaborative relationship with their transportation carriers to operate more efficiently and effectively to improve their performance, manage cost and work smarter for the best return. The business landscape is changing as companies move away from the traditional view of enterprises as separate, independent entities toward a more collaborative model. Concentrate on the core Using a multi-carrier approach can help companies mitigate potential supply chain interruptions, but they also tend to add complexity and lead to higher costs. Developing a consolidated core of carriers improves service levels, trust and communication frequency while reducing logistics costs. Determine an acceptable percentage of primary carrier tender acceptance and enforce it with your carrier base. Long-term contracts integrate carriers Entering into long-term contracts with carriers diffuses the traditional us (shippers)-versus-them (carriers) approach. Companies gain a new relationship with carriers as they become 5 Mahender Singh, Supply Chain Reality Check, MIT Sloan Management Review, Spring

6 an integral part of the organization with shared strategies and business growth plans. Long-term contracts are also beneficial in stabilizing pricing and easing service issues, however, putting all your eggs into one basket has risk and may lead to a loss in flexibility. Increase visibility of information Companies that provide their core carriers with product forecasts and plans, projected sales volumes and market segmentations strategies can align more closely with them to build better relationships, increase communications, reduce costs and increase their ability to adjust to seasonal peaks and troughs. Managing transportation more efficiently Transportation Management Systems (TMS) provide increased transparency, allowing companies to manage the transportation function more efficiently, with greater control and higher levels of customer service. TMS also enable shippers to manage costs, monitor carrier performance and improve security for higher value goods. Companies gain a new relationship with carriers as they become an integral part of the organization with shared strategies and business growth plans. Telematics and onboard diagnostic systems, which have become much more cost-effective, enable fleet managers to monitor fuel purchases, optimize routes and vehicle performance, and monitor for excess speed, braking, fuel usage, idling and driver compliance with route optimization. These technologies, like Ryder s RydeSmart telematics system, can reduce fuel consumption up to 15 percent per truck per day. Convert Less than Truck Load (LTL) to Truck Load (TL) The cost and control advantages of shipping a full truck load compared to partial capacity are obvious. Increasing the capacity of each truckload shipment from 60 percent to 90 percent significantly reduces costs. In addition, having one truck carrying multiple loads reduces emissions and fuel consumption, benefiting the environment. 6

7 The use of third-party logistics companies allows economies of scale that are not feasible in a single supplier-customer relationship. By consolidating loads from multiple suppliers located near each other, companies can realize full truckload economies. Of course, there are additional handling and administrative costs for such consolidations or multiple pickups, but the savings often outweigh the costs. 6 Outsource your fleet Dedicated contract carriage (DCC) provides companies with a customized solution that includes the management of drivers, vehicles, maintenance services, route design, delivery and administrative support, saving them the cost of operating their own private fleet. DCC integrates seamlessly into companies, enabling them to focus on their core competencies. DCC integrates seamlessly into companies, enabling them to focus on their core competencies. Supply chain characteristics that lend themselves well to a DCC model include: High capacity Specialized fleet requirements Special delivery requirements Routing challenges Multiple stops Increasing driver recruiting and retention issues Pooling to increase efficiency Pooling programs allow companies to work more efficiently and provide higher levels of customer service. A trailer pool program allows companies to load and unload products into trailers deposited by the carrier at pre-assigned times in the loading bay. This method allows shippers to work more efficiently within their scheduled distribution center hours and avoid wasting idle driver hours. 6 Hau L. Lee, V. Padmanabhan, and Seungjin Whang, The Bullwhip Effect in Supply Chains, MIT Sloan Management Review, Spring

8 Royal Mouldings saves by outsourcing Royal Mouldings, the largest low-cost producer of decorative polymer and 100 percent cellular vinyl PVC moulding extrusion components and systems in North America, was trying to manage high service requirements from customers including very restrictive store delivery hours for primarily LTL shipments with inefficient manual processes. To manage its service-intensive volumes more effectively, the company entered into an integrated Ryder dedicated contract carriage and transportation management solution to manage all product shipments to customers from small package to truckload. We have been able to reduce our transportation costs significantly by letting Ryder do our transportation procurement, said Gary Peacock, senior vice president of operation for Royal Mouldings. In fact, just a month in to the program, we started to realize savings about a 4 to 5 percent overall reduction on our transportation costs. Pool distribution points place inventory in regional hubs close to customers. Although expensive to run and maintain, they are low in complexity in terms of products/skus stored onsite. By limiting the distance between products and the final destination, companies typically realize a significant improvement in customer service. Green saves Sound environmental practices are not only good governance and corporate citizenship; they can also save organizations money. Companies that are leading the industry with their environmental programs are finding that those same initiatives have left them better positioned to mitigate higher transportation costs. We have been able to reduce our transportation costs significantly by letting Ryder do our transportation procurement. In fact, just a month in to the program, we started to realize savings about a 4 to 5 percent overall reduction on our transportation costs. Gary Peacock, senior vice president of operations, Royal Mouldings Limited For example, digitizing transportation billing, auditing and payment services can help reduce or eliminate paper processing and reduce a company s carbon footprint. At the same time, using an advanced electronic system provides a business with the visibility and data needed for a strategic analysis of the transportation network to identify opportunities that improve efficiencies. 8

9 Other programs originally inspired by a desire to go green can have an impact on reducing transportation costs. Optimization from a LTL to a TL model can have a dramatic impact on reducing carbon emissions and freight costs. Bringing distribution centers closer to demand can help reduce mileage that generates emissions, at the same time driving cost savings to the bottom line. And integrating green vehicles into a fleet reduces emissions and fuel consumption. Collaboration is key in managing transportation The transportation industry is in the throws of the most dramatic changes in its history. The best way for companies to mitigate rising costs and improve customer service is by building a successful shipper/carrier relationship. Collaborating with its core carriers allows companies to identify smart solutions for business process enhancements, rather than simply resorting to cost cutting exercises which may have an adverse affect on service levels, profitability and the company s reputation. Stonyfield Farm, a $320 million manufacturer of organic yogurt, ice cream and milk, realized dramatic savings by implementing green transportation practices. To find out how, visit: Whatever you manufacture or wherever you store and distribute your products, Ryderʼs supply chain solutions are designed to fit perfectly with your companyʼs unique needs. Unmatched experience, flexibility and innovative thinking. This is what we offer to leading manufacturers and retailers of electronics, autos, consumer products and industrial products worldwide. Visit us at or call us at RSC-464 9