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Freight management has entered a new era. Gone are the declining transportation rates and the readily available, steadily improving services that marked a decades-long buyers market. That market, which began with deregulation and was for years sustained by productivity gains and advancing technology, has been replaced with its opposite: an environment defined by capacity constraints, productivity declines, soaring fuel/driver costs and rising rates.
This shift is not merely cyclical. Much of the nation's transportation capacity problem is due to a systemic truck driver shortage and to aging, inadequate infrastructure that fosters congestion. The price of oil is unlikely to drop much below current levels and demand can only increase. By 2020, U.S. freight volume is expected to rise by 70 percent, requiring a near doubling of truck miles, according to the U.S. Department of Transportation. Demand for rail, air and ocean transport also is expected to outpace supply for at least the next two years.
"This is not something business people should be thinking they can ride out for a couple of years," says Tom Metzer, professor of marketing and logistics at the University of Tennessee, Knoxville. "Because of the infrastructure and demographic issues, this is not a problem that will go away before 2020."
To succeed in this environment, shippers and carriers need to get more creative about the way they do business and be more strategic about their transportation decisions. While many basics of freight management still apply-and need to be reinforced-new ideas and approaches also are required. This article will identify several best practices in freight management that leading edge companies are adopting to improve carrier relationships, manage capacity and ensure that their logistics operations remain competitive. These practices were gleaned from numerous resources and interviews, but special credit is due the report, "Best Practices in Transportation Management," by Beth Enslow of Aberdeen Group, Boston, and "Navigating Transportation's Perfect Storm," a paper by Peter Stiles, vice president of strategy and marketing for LeanLogistics, Holland, Mich.
1. Centralize Command and Control
Leading companies are increasingly centralizing transportation management as one means of increasing efficiencies. "The more transportation movements that you can consider at one time, the more opportunities you have for consolidation and optimization across the enterprise," says Enslow. Centralization enables companies to drive discounts by aggregating shipment volume across business units, provide one-source visibility to shipments in transit, and create a consistent and efficient way to tender shipments and communicate with carriers.
"We have customers who are operating from as many as 18 different corporate divisions, each one negotiating separately with carriers," says Stiles. When they centralize transportation management, they are able to see rate anomalies, to leverage their volume and to find backhaul opportunities, he says. "The most desired trip right now is under 300 miles, out and back in a day, which gets the driver home at night. The more you can look at your network holistically and schedule the type of trips carriers want, the better off you are. And you can only do that from a centralized standpoint," he says.
Some companies turn to third-party logistics providers for centralized command and control. Ryder System, Miami, manages domestic and international transportation for customers like Philip Morris, Snapple Beverages and Applied Materials. "Our Transportation Management Center and transportation management software give customers the kind of visibility and control capabilities they need to anticipate problems further out," says Tom Jones, senior vice president. "And we have an infrastructure, carrier base and systematic process to fill lanes where they may have a capacity problem."
TNT Logistics, Jacksonville, Fla., uses design tools to model transportation environments and then executes based on real-time signals, says Mike Morrison, senior vice president. "We look at it in a planning environment, then on a weekly or daily basis we use dynamic tools within our applications to make sure that the demand we saw in the plan and what we are seeing today match up, so we are able to make the best transportation decisions at the lowest cost to our customers."
Centralization also enables companies to analyze both domestic and international transportation in the same systems, says Enslow. This becomes more important as offshore manufacturing continues to increase. "With global supply chains there are many opportunities for things to go wrong, which often requires changes in the domestic transportation leg," she says. "If the information is in separate systems, you don't have the visibility you need to see that or to redirect incoming freight."
Another advantage of centralization is that it allows companies to more easily share transportation information internally. In Aberdeen's survey of 286 companies, transportation managers reported that their most intense pressure is to deliver transportation-related information to the rest of the enterprise. "Transportation is becoming a service center for the enterprise," says Enslow, with the shipment and delivery information being accessed by customer service, sales and marketing, purchasing, warehousing and even manufacturing. With web-based transportation systems, "we are actually seeing an 8 to 1 ratio between non-transportation department users who access the transportation system and traditional transportation department users," she says. "That is really a phenomenal number."
2. Collaborate with Carriers to Manage Capacity
One key way that shippers can help ensure they have capacity when they need it is to give carriers more advance notice of their shipping needs. This typically takes the form of a two- to six-week rolling forecast of expected requirements, says Enslow. "Most companies that do this convert their sales forecast into weight or loads by lane using a spreadsheet," she says. When coupled with an effort to tender freight earlier-a day or two in advance of actual shipment-results can be dramatic. "We are finding that these two simple steps enable companies to reduce their turndown rate from carriers by 40 percent," she says.
This is important since having to go to a secondary carrier costs time and money. A recent study by Chris Caplice, director of the Master of Engineering in Logistics Program at MIT, Boston, examined the impact of carrier turndowns on overall freight costs and cycle time. The survey revealed that, on average, one in four loads is declined by the primary carrier. Of these, 58 percent are accepted by another carrier within one day, but 42 percent required two or more days. Ultimately, these turned-down loads moved at rates 2 percent to 7 percent higher than the rate contracted with the primary carrier.
The argument that carriers can't use such information when given in advance "is simply no longer true," says Stiles.
"And it is particularly not true for unusual volumes, such as promotional events." One LeanLogistics customer that runs numerous promotions for different brands used to notify carriers two to three days in advance of a planned spike in volume, he says. Because the company was having trouble securing capacity it initiated a program in the fourth quarter of last year to convert its sales forecast to a load forecast and share that information with carriers two months ahead. Since beginning this program, "the company has covered all of its capacity needs without an issue," says Stiles. "This is the number one thing that has made a difference for our shippers."
Often the third-party logistics provider is the entity receiving the advanced information. "We ask our customers, whenever possible, to give us visibility to their orders as soon as they receive them from their customer, even before the orders go to credit check," says Steve Lanter, executive vice president of Ozburn-Hessey Logistics, Nashville. "In order to really do proper optimization, you have to have some lead time," says Lanter. "When you are able to throw more loads and freight into the mix, that is when really get the value from optimizers." OHL uses a transportation system from G-Log, King of Prussia, Pa., to optimize shipments.
Manugistics, Rockville, Md., has created a collaborative capacity management solution by combining various supply chain management functions of its software, says Dawn Salvucci-Favier, director of transportation and logistics management. This process starts with an accurate demand forecast created in Manugistics' demand planning solution, which is converted into a load forecast that can be shared with providers. "Just as in supply planning, forecast accuracy is essential," says Salvucci-Favier. "And as actual demand triggers change, it is critical that the transportation capacity plan adjust to those changes." Manugistics uses a CPFR (collaborative planning, forecasting and replenishment) type process to share capacity forecasts over multiple time horizons with transportation providers, she explains. This enables carriers to see a customer's capacity needs several weeks out for planning purposes and then to actually negotiate capacity commitments on a more real-time basis. "Once a company reaches final agreement with its carriers on committed capacity, that information is loaded into our transportation planning solution and optimized to actual carrier availability," she says.
3. Enable Carrier Flexibility
"Ten years ago the paradigm was to get the carriers in a room and beat them down to get the lowest possible rate. When you used up one carrier, you would go on to the next one," says Phil Glass, senior manager of procurement at Menlo Worldwide, San Mateo, Calif. "That just doesn't work anymore." The scenario today is to ask the carrier, "What works for you? What areas and lanes are the best fit for you?" he says. "It is up to us as a transportation management company to find the best fit for our customers and for our carriers."
Menlo shares portions of its network capacity needs and its network flow history with carriers so they can see what matches with their systems, says David Cooper, truckload procurement manager. "Most sophisticated carriers today have some sort of modeling tool, so they can take that information and throw it into their system and see what fits," he says. The company offers the same kind of data to smaller carriers on a spreadsheet, he adds.
Hewlett-Packard, Palo Alto, Calif., encourages flexibility in its carriers by giving less information. "It used to be that when we sent out an RFQ we told the carriers everything there is to know about that movement of goods-which gateway it should go through, which mode to use and so on," says John Frasca, director of global logistics and procurement. "Of late, we have torn apart that model. Now we just say, 'I need to move this from Shanghai to Minneapolis. You tell me the best way.'" That not only allows the logistics provider to get creative, it enables them to leverage their current customer base, he says. "Therefore, we get a better solution for less."
Ryder System performs logistics engineering studies to help its customers understand issues that drive inefficiencies for carriers. "For example, if a company has 18 loads on Monday and three loads on Wednesday, that is probably not a good deal for the carrier," says Jones. "Maybe it should change its shipping pattern to have 10 loads one day and 11 the next." If a company ships on an inefficient schedule, the trucks may be there but they definitely will be more expensive, he says. "We try to smooth out shipping schedules so that carriers can plan better. As a 3PL, I think that is one of the most important things we can do."
Bob Belshaw, chief operating officer of Insight, a supply-chain software company based in Manassas, Va., says he is just beginning to see leading customers approach their carriers in a really collaborative way. "They are asking what is good for the carrier's network and how they can make themselves more attractive as a customer," he says. "They want to know how to create flexibility so that a year from now, when their network changes, they don't start getting rejections on 40 percent of their loads. I think these conversations are just the starting point."
4. Be Driver and Freight Friendly
Good drivers are worth their weight in gold, especially to truckload carriers where driver turnover rates frequently exceed 100 percent. Customers that help keep drivers moving so they can maximize hours of service and that help create continuous tours to get drivers home more often will be far more likely to get the trucks they need at the rates they want.
"It is the responsibility of the shipper to recruit drivers for their carriers," says John Gentle, global transportation leader at Owens Corning, Toledo, Ohio. "Shippers do this by keeping drivers moving and ensuring that they are treated with respect and provided with courtesies such as water and rest facilities," he says.
Enabling carriers to make their own appointments over the web is another way companies can eliminate driver waiting time, as well as saving the phone and fax time needed to set up appointments, says Stiles. If repeated loading or unloading delays occur at a supplier's dock, the shipper should consider requiring that supplier to pick up the freight, he says. "This does not eliminate the problem; it only shifts the burden. It does, however, remove the delays and operational costs from the shipper's own carriers."
Another good practice is to monitor trading partners' performance-to-plan on appointments (and detention) and inform them of any schedule anomalies, Stiles says. "Armed with this information, shippers can work closely with their suppliers' customer service or their customers' buyers on a continuous improvement program to reduce carriers' operating costs."
Hewlett-Packard works to improve the efficiency of it and its carriers by taking the air out of shipments, using a Design for Logistics process. "We want to put as much weight and density into the trailer or container as we can," says Frasca. "That is one of the big things we are working on and we have seen tremendous results," he says.
Last year the company doubled the number of computer monitors it could fit into a container by simplifying the way the monitor is attached to its base and separating the two for shipment, he says. This also allows HP to maximize the number of cartons on a pallet, which saves on damages because there is no overhang or loose loads. "It sounds simple, but you can imagine the number of things that go into this," he says. "It springboards all the way through the supply chain."
One final way to be more carrier friendly is to provide self-invoicing. "This is very big right now," says Salvucci-Favier. Rather than waiting for carriers to submit invoices, best-practice shippers ensure that their systems contain audit quality rates and then release payment when they receive a proof of delivery, she says. "This not only saves overhead for the carrier, it shortens the payment cycle, which improves the carrier's cash-flow position."
5. Initiate Two-Way Communications
Improved communications at all levels is crucial for carriers and shippers to understand one another's business needs and to develop a win/win partnership. "The process of trying to work more collaboratively with carriers started among best-practice companies some time ago, but with the capacity issues and rates going up, that whole effort has taken on a new dimension with the shipper community," says Razat Gaurav, vice president of global logistics at i2 Technologies, Dallas, a supply chain planning and execution software provider. "Many shippers are trying to assess and analyze how they can make it easier for carriers to do business with them."
Technology is helping provide data to make these discussions more meaningful, says Ron Lazo, senior director of professional services at Manhattan Associates, Atlanta, a provider of warehouse and transportation management solutions. "The key is to capture and provide visibility to the events or services being performed at the shipment level," he says. Profitability analysis and yield management tools can then help both sides understand the impact of these services on costs. "Both carriers and shippers want to lower costs but they don't want to do it at the expense of service," he says. "By using technology to capture the events and services and to analyze the impact, they are able to sit down and have a fact-based discussion, which is something they could not do before."
Carriers also emphasize the importance of communications. "One of the most prominent characteristics of the new environment is the focus on communications and collaboration with the customer at the highest level," says Carole Ishii, assistant vice president, customer relationship marketing at BNSF Railroad, Ft. Worth, Texas. BNSF uses customer advisory boards-high level executive groups that meet regularly with BNSF's top executives-to move beyond transactional issues to "in-depth listening," she says. At these meetings, "our executives dialog with our customers to examine and anticipate changes in each of our businesses," she says. BNSF also has processes in place to obtain customer input at the tactical level. "Our contact center works very closely with customers on a day-to-day basis to make sure we communicate any changes in our operations or policies and that we understand their needs," says Ishii. The company also leverages the capabilities of its web site, BNSF.com, to give customers access to the entire life cycle of their shipments.
Carriers emphasize, however, that they are not trying to force unwanted change on shippers and that the customer's needs always take precedence.
"We take the track that the customer defines the supply chain they want to execute," says Doug Duncan, president and CEO of FedEx Freight, Memphis. "It is our job to meet their requirements." With today's lean inventories, he says, "a missed shipment is not just an inconvenience on a service report at the end of the month. It is an empty shelf, a missed sale, an irate customer. We understand that."
FedEx Freight "certainly goes to customers and gives them ideas as to what they can do to help us operate more efficiently," he says. "But more times than not, they will come back to us and say, 'Well, we appreciate that, but this is how we need to operate our supply chain. And if I have to change that for you, then there are four other changes I will have to make that are a lot more costly."
"Every customer's needs are distinct," agrees Scott Wolf, vice president of Averitt Express, Cookeville, Tenn. "Sometimes the things you would like to pull together require two or three different customers to adjust something they are doing. When you start talking about multiple customer collaboration, it takes some effort and planning to mange those dynamics. So, yes, if a shipper or consignee could adjust their expected departure time or arrival time by an hour so a driver could maximize his hours and get home, that would be great. But it's not a perfect world and that doesn't always happen. In every case, though, the customer supply chain takes priority."
"I give logistics professionals a lot of credit," adds Duncan. "They have done a dynamite job of generating some great results out of these supply chains and they have certain requirements they have to meet. There are good reasons for some of these things."
6. Re-evaluate Old Decisions
Best-practice companies recognize that decisions which made sense-or seemed unimportant-in a buyer's market may need to be re-evaluated in light of changed conditions. "We are finding that because of the way carriers structure their weight breaks and fuel surcharges, even a pound difference in package weight or a penny difference in a surcharge can change the way something is moved-less-than-truckload or parcel, for example," says Enslow. "So this tells us that companies that have been relying on static routing guides to determine how to ship something are probably leaving a lot of money on the table. Companies using a routing guide should update it frequently and should consider moving to a transportation planning system that can do per-shipment optimization," she says.
Johanna Boller, vice president of enterprise software product management at Pitney Bowes, Stamford, Conn., says shippers should " dust off their contracts and review the fuel surcharge provisions, particularly whether there is a cap. You want to make certain that the surcharge is included in all rates that you use for comparison," she says. Because surcharges change so frequently, Pitney Bowes allows users to enter the figure themselves. "If the shipper is passing along the freight costs to the end customer, they also need to make certain they are including the surcharge in the rate quoted at the time of commitment," she says.
Another option that is receiving a new look from many shippers is dedicated contract carriage or private carriage, says Enslow. "This is probably the number one way that companies have solved the capacity issue this year," she says. "It is cost effective if you are able to keep dedicated trucks busy, but if you are not able to use them well or efficiently, then it will cost you more than it would to use a common carrier."
Network design is perhaps the biggest area that companies need to re-evaluate in light of market changes. "An efficient network at $1.80 gas can look a lot different with $3.20 gas," says Belshaw. "We are seeing a huge surge in overall redesigns of networks."
Hewlett-Packard recently launched a new internal group called Logistics Analysis and Network Engineering (LANE) specifically for this purpose. "It's all about modeling to optimize product flow," Frasca says. "You look at things like where you are consolidating and what gateways you are using and whether those need to be streamlined or changed." Menlo's Vector unit developed a sophisticated supply-chain design tool for a major automotive customer, says Mani Manivannan, director of engineering. "Our tool basically takes a total cost approach to whatever supply-chain activity is being evaluated," he says. In one project, Vector examined how the customer was procuring wheel assemblies. Before the analysis, these assemblies were shipped daily from a plant in California to an assembly operation in Ohio at an annual freight cost of about $1m. The analysis identified an opportunity to source the same product from one of the supplier's other facilities. "The tool looked at all of the supplier's locations and at the capacity at each and then determined the cost savings impact," he says. This analysis revealed that by sourcing this product from a plant in Indiana instead of California, freight costs would drop to $75,000 annually, a savings of $925,000.
7. Measure More Effectively
Standard performance metrics are no longer sufficient in today's environment. Shippers need to measure their own performance as well as that of their carriers and both need to be using the same yardstick.
"Traditionally, companies were very focused on measuring their carrier's performance so they could beat up the carrier when it came to rate negotiations," says Enslow. "The new best practice is for companies to also look at what they are doing internally that may be preventing transportation from working more effectively." Aberdeen calls this process 360-degree scorecarding.
"Some of our large consumer-packaged-goods clients have done internal surveys that showed that half of their on-time delivery problems were self inflicted-caused by things like too much congestion at the dock or appointment schedules that weren't kept or last minute order changes," Enslow says. "If you are able to scorecard not only your carrier's performance, but your own performance and even that of your suppliers and customers, you can cut lead times and make the supply chain more reliable." More importantly, she says, is that this type of scorecarding provides quality documentation for carrier negotiations. Cleaning products manufacturer Orange Glo International, for example, used this type of information to show Wal-Mart that its transportation practices made it a very good partner, which resulted in the company getting more of Wal-Mart's business. "So, 360-degree scorecarding is all about tracking what is happening on a real-time or weekly basis and then using that data intelligently to improve relationships with carriers and customers," Enslow says.
Menlo Worldwide developed an on-time delivery performance program for a consumer electronics customer that improved performance on "delivery to commit date" from below 60 percent to well above 90 percent, says Jeff Sacker, supply chain manager. One of the key elements of this project was to standardize the criteria that each supply chain segment was measured against. Before, different segments defined "on-time" delivery differently and in ways that often had nothing to do with the commitment date to the customer, he says. "We aligned all the partners to a common standard so a single standard was driving what those different parties needed to achieve." This avoided the situation of having different segment owners all report 98 percent performance levels, while achievement of the ultimate goal remained sub-optimal. "Now, if one segment fails to meet a milestone or to achieve their part, other segments have got to adjust in order to recover that on-time delivery," he says.
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