Enterprise Minnesota Magazine - September 2012
HELPING MANUFACTURERS GROW PROFITABLY
10 Steps to a Smarter Supply Chain
Taking a strategic approach to product transportation can save time and money, increase access to capacity and improve service.
By Dan Ryan, vice president, C.H. Robinson.
When it comes to transportation, changes in economic and market activity are key drivers in determining the availability of capacity necessary in order to move manufactured goods from one place to another. When product demand is weak, less freight moves and more capacity is available. However, when demand increases and freight exceeds the available truck supply, a capacity shortage results. In tight capacity markets, service providers have a greater choice of business options resulting from increased demand and the possibility of increased difficulty in obtaining the equipment they need, often resulting in paying higher transportation rates.
Most likely, you are not interested in paying higher rates for the same service. Given these ebbs and flows in transportation capacity, it’s not too late to start taking a more strategic approach to truckload procurement—a mutually beneficial relationship between manufacturers and service providers. An ongoing effort to seek alignment between manufacturers and service provider networks is a strategy that can show benefits to both parties. Seeking alignment between business goals and outcomes of both manufacturers and service providers can result in better rates and exceptional service levels over time.
So how do manufacturers and service providers align their business goals so everyone is happy? That is precisely what this article will try to demonstrate by providing 10 insights on a strategic truckload procurement strategy and increased lead time. At the end of this article, manufacturers, by taking these steps, will have a better idea of how to obtain better access to capacity, better rates (three of the tips have been demonstrated to save more than $81 per load) and exceptional service levels, regardless of seasonal or economic conditions.
1. Don’t try to time the market. There’s nothing wrong with seeking competitive rates at a given point in time. At the same time, there’s no more likelihood you’ll be able to time the transportation market than the stock market. “Timers” in transportation—the people who try to lock in rates when they believe rates are absolutely at their lowest point—often get in at the wrong time and end up paying more in the long run than those who are more strategic about their procurement.
2. Benchmark. Understanding how last year’s transportation rates compare with this year’s is only part of the equation. A manufacturer needs to know whether current rates are good or bad, and how they compare, high or low, to the overall market. Manufacturers can also use benchmarking tools, which help set realistic expectations for both manufacturers and service providers.
3. Conduct a procurement exercise at the same time of year, every year. Reviewing rates and service provider options every 12 months allows for better alignment of your network for the long-term, and allows sustained pricing levels to stay at or below the market. Manufacturers who develop a robust process for contracting freight also build credibility in the market as reliable, even-handed customers. In fact, recent research by Iowa State University suggests1 that a freight transportation procurement strategy based on a predictable schedule and process can deliver substantial cost savings and network efficiencies. The research found that shippers in the study that annually rebid their freight achieve a rate reduction of $25.17 per load compared to those that seldom or never use this buying method. In addition, shippers can expect to capture lower rates, $15.27 to be exact, by virtue of a procurement event. The two savings combined are $40.44 per load. With an average cost per load of $907, regularly run procurement events can lower a manufacture’s freight costs by 4.46 percent at the time of implementation.
1 C.H. Robinson white paper: “Stale Rates Research: Benefits of Frequent Transportation Bids.” June, 2012.
4. Share the truth about the business. Manufacturers who make their freight look better than it is may get competitive rates through a procurement exercise. However, if moving that freight turns out to be more involved than expected, such as shipments that aren’t available until the end of the day, week, month or quarter, or shipment with consistently long loading times, service providers may decide to accept easier freight from other shippers in the marketplace. When the primary service provider doesn’t accept the freight, it’s common that backup providers may have also accepted other freight before being offered your freight. As the manufacturer continues down the routing guide, a document with straightforward instructions detailing what service provider is to be used for any given shipment; they usually pay above-market rates and may still have non-priority service levels. Conversely, if manufacturers don’t disclose to service providers what’s attractive about the freight, providers may assume the worst. In that case, they may make plenty of capacity available to the manufacturer, but not at the best possible prices.
5. Routing guide depth drives transportation costs. While a service provider’s rates in the shipper’s routing guide are contractually agreed upon, it is understood that a service provider will not always have the assets available to accept the load. If the load is rejected, the manufacturer tries the next service provider in its routing guide, and so on, until the load is successfully tendered. Sometimes, it takes more than five tenders before a service provider is found who will haul the load. A study by M.I.T.2 in 2008 shows that the first service provider accepts about 78 percent of their volume tendered. Of the 22 percent of the volume that the first service provider rejected, the second service provider accepts 13 percent, the third service provider accepts 4 percent, and the fourth service provider accepts less than 2 percent. Service providers below this on the routing guide accepted less than 1 percent of total loads. The deeper the manufacturer goes into the routing guide, the greater the rate per mile they will have to pay. Overall, with each step down the routing guide, manufacturers pay about $.06 per mile more in rates. This translates into an average increase of more than $26 per load each time the load is rejected.
2 C.H. Robinson white paper: “Increase Lead Time, Decrease Costs.” 2010.
6. Tender lead time affects the likelihood that preferred carriers will accept a load. The same M.I.T. study shows that the deeper the manufacture delves into the routing guide to cover the load, the more important lead time becomes in the cost equation. In fact, the more lead time a service provider has between the tender and the pickup day, the more likely the first service provider in the routing guide is willing to accept the load. In the data, loads that had shorter lead times had a much higher level of tender rejections. Loads with lead times longer than two days were the least likely to be rejected by service provider. Even at 48 hours, there’s a real savings opportunity. It makes sense that a service provider would accept a higher percentage of loads one week in advance of pickup, since much of their trucking capacity is uncommitted at that point. The study also concludes that making even small changes in lead time, from less than two days to over three days, for example, would improve the service provider acceptance rate and save an average of $15.34 per load3.
3 C.H. Robinson white paper: “Increase Lead Time, Decrease Costs.” 2010.
7. Hire a procurement expert to run a procurement exercise. Experts can help diminish the burden of preparing for a procurement exercise and ensure that all the necessary elements are in place. They can provide experience modeling multiple scenarios and using a constraint based bidding tool in addition to providing a sounding board to help determine whether a solution is truly realistic, and how much risk the manufacturer may take with various scenarios. By choosing a consultant with experience conducting procurement exercises—preferably a consultant that also has web-based and constraint bidding tools to compare all the scenarios— manufacturers obtain an unbiased view of rates being offered and discern how realistic those rates really are.
8. After the procurement exercise, use a TM S. There’s no substitute for Transportation Management System (TMS) tools once a plan is in place for the year. A service provider should be able to provide and/or use a TMS that produces carrier scorecards, client scorecards, savings analyses, item and order level reporting, network and ship site performance, and overall financial analysis. A TMS is also neutral, delivering performance data and analytics without bias. Incorporating this kind of intelligence into annual and quarterly reviews with service providers leads to two important outcomes. First, it allows manufacturers to work with hard data instead of anecdotal information. They can compare real costs to both historical and planned costs in an effort to optimize the network and track routing guide leakage. Without this information, it isn’t clear why a plan succeeds or fails to meet the budget at the end of the year. Second, it gives service providers the insights they need to provide better service. TMS software and/or related services are widely available for purchase, lease, or as fee-based solutions with the trained people who can help obtain both immediate and sustained ROI.
9. Maintain a stable set of service providers from year to year. This doesn’t mean that manufacturers can’t add any new service providers. Competition is healthy. However, the manufacturer should measure how much freight they give to non-incumbents, and recognize that as more freight is given to these providers, more risk is added to the solution. Realignment with service providers where it makes sense, not constant provider turnover, drives real access to capacity and savings. Manufacturers can build stable relationships by developing a long-range mindset, which means conducting rate negotiations on a fixed cycle so service providers can plan their network around freight needs. Alignment over a sustained period of time is beneficial for both manufacturer and service provider as when both parties collaborate on a full-year plan using forecasts and modeling tools, there is a much better chance that capacity and cost will be aligned. Service providers gain an incentive to accept shipments and provide tools, processes and dedicated services that result in higher quality outcomes.
10. Understand what drives ongoing fluctuations in the market. As mentioned at the beginning of this article, the availability of capacity is driven by economic change. Capacity shortages, like the economy, are also cyclical. So, while there are no fail-proof ways to absolutely identify when a capacity shortage will occur, manufacturers can watch certain economic indicators to understand what is happening in the market and anticipate potential impacts on transportation rates. Various freight indices offer views of spot market freight that represent changes week-over-week, month-over-month and year-over-year in transactional capacity and rates and other indices, such as the Active Truck Utilization index from Freight Transportation Research Associates, provide helpful information for planning. Manufacturers who are aware of changes in the market can better communicate with their providers, offer details about their annual bidding cycle, and reiterate the desire to maintain an ongoing relationship, fostering a winning long-term strategy.
Dan Ryan is a vice president at C.H. Robinson based in Eden Prairie, Minn. The company, one of the largest logistics companies in the world, develops global supply chain plans, offers analytics and consulting services, provides door-to-door transportation, and executes freight services to meet the needs of its customers.
For more information about C.H. Robinson, visit www.chrobinson.com
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