In his First Thoughts column last week, SCDigest editor Dan Gilmore offered a number of ideas - some of them a bit out of the box - for reducing transportation costs. (See Smart Ideas for Reducing Transport Costs.)
Of course, soaring transportation costs are playing havoc with logistics budgets and even corporate profits, with a growign number of companies citing cost and capacity issues as impacting the bottom line.
Supply Chain Digest Says... |
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| A constant struggle is understanding true fleet costs compared to truckload pricing contracts, but that aside, levering the fleet is most often the lower cost option. |
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One idea Gilmore cited in his column came from Geoffrey Milsom, a senior director at consulting firm enVista. That idea - relative to balancing spot and contract market usage - was actually one of a number of good ideas Milson provided via email.
Here are the rest:
Strategic Ideas
• General Conversations: We have been asked by several very large shippers recently to help them address the rising (and theoretically) unavoidable cost increases in transportation, particularly in the truckload segment, on how they can address the rising costs due to the capacity crunch.
Our short answer is that you cannot beat the market on an on-going basis, but you can focus on "moving freight differently" and re-thinking your sourcing strategies, optimization, modal-shift, TMS-supported processes, carrier relationships, and the operation things that follow. The longer answer involves not asking us to provide an outlook to predict the truckload market trends to tell the CFO that this broader market issues are unsolvable at the shipper level.
• Network Design: The number 1 driver of transportation cost is the location of facilities (suppliers, DCs, and customers). While moving these, particularly for manufacturing, is very difficult, the lane pairs, mileage, and associated cost models (specific to LTL and parcel) creates a larger cost gap than just the modal decision once these points are fixed. The decision on where to put a facility then requires baking in more than just transportation cost (labor, real estate, inventory, etc.), though calculating these in unison can drive the most optimal total landed cost to the customer, while also adding in the service component, which has been disrupted by Amazon and other on-line only retailers.
Operational/Tactical
• Tactical Sourcing: We have been working with shippers across several verticals this year on how to tactically source lanes, with and without TMSs implemented. We have found, through analyzing their historical truckload shipment data compared to market spot and market contract rates, that shippers have a very hard time establishing the optimal mix on their lanes.
What this means is they "play" in the spot market when they shouldn’t, and don’t when they should. It’s unrealistic for any shipper to achieve the optimal mix (hindsight being 20/20), but our shipper clients have a tendency to miss by greater than 50% of the time. The point of the story is that if shippers can move to a more real-time understanding of the markets, supported by strong process design plus strong TMS applications, they can do a better job mitigating their cost increases.
• TMS Use: Planning and optimization – we have been working with shippers for years on this, and with TMS adoption still relatively low compared to other supply chain execution tools (we estimate TMS adoption at 55–60%), there is a lot of opportunity here. Even those shippers with a TMS, we still see things like modal decisions happening before planning amd optimization. What I mean is that shippers will create rules based on order/shipment weights before a TMS optimization plan is created, limiting the TMS optimizer's ability to truly plan based on set parameters and constraints available in the tools today.
• Integration: On external Integration, the API vs EDI conversation is happening daily. What we have found is while EDI is still the best option for traditional message sets (tenders and freight bills), there is value in leveraging APIs for more real-time rating, particularly in LTL volume shipments and truckload partials. LTL carriers are modifying their pricing on these on an hourly, daily, and weekly basis to attract freight where they have terminal-to-terminal load imbalances.
On internal integration, internally for shippers, the point-to-point integration of OMS-TMS-WMS-ERP i an under-published/under-discussed opportunity still today. We are working with shippers on improving their "Logistics Order Management," which means doing a better job of managing their purchase orders, transfer orders, drop-ship orders, and sales orders in a single planning scenario so that they can leverage the purchased transportation capacity and fleet/dedicated capacity.
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 • Private Fleet and Dedicated Contract Carriage (DCC): Increasing backhaul is always a priority, but of course with the market, this is getting emphasized more. A constant struggle is understanding true fleet costs compared to truckload pricing contracts, but that aside, levering the fleet is most often the lower cost option. There are a lot of HOS, equipment constraints, and "timing" issues, but that can be overcome through pilots and vendor/supplier-specific lane opportunities.
On fleet-for-hire (FFH), we are working with many fleets on establishing how they can offer FFH services. The best way to do this is through their broker network and posting their available capacity like common carriers.
Many DCC contracts have backhaul-revenue sharing terms in them, but the providers are not properly incentivized to use them. The DCC provider is not getting enough of the revenue, or they are getting pressured to have equipment back quickly and do not want to sacrifice service.
"One of my jokes is that the best way to reduce or eliminate transportation costs is to stop selling stuff," Milsom concluded in his email to SCDigest. "We are in a strong market, and we have a great problem to solve. Although shippers early this year wanted to know a lot about artificial intelligence, autonomous trucking, and blockchain, the tight market has helped re-focus us all on solving a lot of the same problems we have been working on for the last 10 years or so, and that is just doing what we currently do better."
What do you think of Milsom's ideas? What would you add? Let us know your thoughts at the Feedback section below.
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