Analyst Insight: Although transportation costs were depressed and capacity plentiful during the global economic downturn, freight costs and capacity are already showing signs of looming stress, even with a weak recovery. Companies must take immediate action to minimize the impact of increasing freight costs.

-C. Dwight Klappich, research vice president at Gartner

Freight capacity currently remains favorable for shippers, but market indicators suggest capacity is becoming constrained and current transportation market conditions threaten to propel logistics costs higher. These conditions, which include fuel price volatility, a looming freight-capacity supply and demand imbalance and more stringent operating rules, will permit an increase in transportation costs that will remain high for several years.

Because these market conditions will cause freight costs to increase and add complexity to planning and managing transportation, Gartner recommends that shippers consider the following capabilities to help minimize the impact of freight cost increases:

• Freight Sourcing and Procurement (Bid Optimization)
The first place to target cost-containment initiatives is during the annual freight-sourcing exercise.  Shippers of all sizes will benefit from automated freight-sourcing solutions, which include sophisticated bid optimization.

• Strategic Network Design
Redesigning a logistics network can positively affect all costs. Furthermore, the need for organizational agility is leading organizations to tactically use network design tools to more frequently evaluate fundamental or seasonal and cyclical changes in their business.

• Transportation Governance
Enforcing compliance with carrier-selection rules can have a significant impact on freight costs. It can also ensure compliance with other obligations, such as meeting carrier load commitments.

• Transportation Planning and Optimization
Transportation planning applications can help constrain costs by allowing companies to make better mode selections, consolidating orders for shipment by lower costs modes, such as moving from less-than-truckload to truckload, and selecting carriers with the lowest total cost structure, considering all rules and costs.

• Transportation Analytics and Performance Management
Transportation-focused analytics applications with the appropriate level of data and cost granularity are critical to identifying problems and opportunities to reduce costs. Shippers must monitor carrier, logistics service provider, customer and supplier performance to ensure their trading partners perform effectively.

• Evolving Transportation to a Global Shared Service
Innovative companies are beginning to structure transportation as a global shared service that manages the 'multis'- that is, the multiple modes, businesses, carriers, geographies and inbound, outbound and intra-company freight - on a common TMS platform. These companies believe coordinating transportation activities across multiple dimensions will allow them to further reduce costs and provide better overall service to their business and trading partners.

The Outlook

The bottom line is that freight cost increases will threaten company profitability if companies fail to take immediate action to minimize their impact. Organizations must evaluate their supply chain application portfolios and look to enhance or add supply chain solutions that target transportation costs. Those with annual freight spend of more than $25m are candidates for, and can justify, specialized transportation management solutions.