Shigeo Shingo, one of the early proponents of the Toyota Production System, once said that “the most dangerous kind of waste is the waste that we do not recognize.” For any organization with a complex supply chain, vigilance is required to seek and recognize hidden waste. A complex supply chain requires specialization of labor, and that specialization can easily create silos–waste may no longer be owned by an individual person or work group. Huge opportunities can exist for cost-savings and waste elimination when responsibilities within an organization blur. We were able to find the hidden waste and help the customer grab huge cost savings.
Our customer has a very large distribution network; a portion of the business involves the collection of product at other major distribution centers, returning to the shipper’s own location. The highest volume lanes ship more than 4,000 loads per year. The shipper did design the workflow to be both productive and cost effective from several angles. The length of haul is normally minimized, there are favorable circumstances at the origin and destination to make them a shipper of choice, and the rates (compared to the market) are very reasonable. One thing had been overlooked here though.
The missing piece was the utilization of the available trailer space. My team pulled data regarding how full the trailers were, compared to the potential of how full they could be, and we found the impact was significant. For many locations, the percentage of cube capacity utilized was only 80%, sometimes as low as 70%. This resulted in many additional and unnecessary dispatched trucks, which was exaggerated by the size of the network. For the largest volume lanes, in one fiscal year alone, approximately 3,728 loads were moved wastefully.
It is fair to wonder how this much waste went undetected. This is the risk an organization runs if no one is tasked, either internally or externally, with innovation across the entire supply chain. In this case, the lack of cube utilization could have been the responsibility of at least six different parties in the organization, but no one considered this as an opportunity before. The total value of the opportunity is difficult to overstate; if cube utilization was maximized across the entire supply chain for returns, the freight cost savings amounted to over 5% of the annual freight spend, which includes outbound and transfers in addition to the inbound work this project effects.
The impact of this isn’t limited to a reduction in transportation spend though. There is additional value created by saved dock appointments at both the shipper and customer distribution centers, reduced staff required at the shipper location (both potentially dock workers and spotters), reduced CO2 and greenhouse gas emissions from the removal of trucks on the road, and when the shipper shares this as a best practice with their customers. Perhaps the largest impact is how the knowledge of this waste has changed the shipper engagement with customers. All renewed or new contracts have language around proper cube utilization, which will continue to embed this as a permanent continuous improvement initiative.
According to Maya Angelou, “I did then what I knew how to do. Now that I know better, I do better.” Improved data allows the identification of waste, and the knowledge of that waste provides opportunities to “do better,” which my team and the shipper were able to do here.
The first step in driving change is to better understand the opportunity by measuring the cost to serve your network. Listed below are some of the drivers that could have a significant cost impact on serving your network.
Order Behavior (Order Quantity & Cadence)
This can be analyzed by compiling the customer data and looking at the weekly order averages and the average size of the orders. This will provide visibility to consolidation or mode conversion opportunities to reduce overall freight spend (i.e. 1 Full Truck instead of 3 LTL’s per week). If an order pattern change delivers significant cost savings, splitting those savings with the customer could entice them to change their pattern.
Lead-time is the measurement of the delta between when the order is placed and when it must pick-up to deliver on the requested date. Short order lead-time can lead to a reduction in tender acceptance by primary carriers, increasing costs as higher cost carriers are executing the loads. Also, the cost to service the customer can be excessive in times where expedites or team drivers are needed to deliver on-time. Some companies install late order polices charging their customers higher transportation premiums if minimum lead-time deadlines are not met. If penalties are not an option, simply sharing the data with your customer and leveraging the relationship might promote change within their ordering process.
Detention /Flexible Receiving Schedule
Detention can be measured by itemizing the accessorial costs per customer location. High detention facilities can have a significant impact on carrier tender acceptance, again increasing costs as higher cost carriers are executing the loads. A potential solution may be to charge back detention charges incurred at consignee facilities for those carriers who arrive on-time for their appointments. Again, if penalties are not an option, sharing the data with the customer may promote process change.
Also, consignee facilities with marginal leniency for appointment times, missed appointment fees and other non-carrier friendly attributes could increase costs to your network. It’s important to promote change by identifying these attributes and the potential cost impacts and share them with your customer. If it’s cost effective, converting freight terms to have your customer control the freight may be a solution.
In conclusion, as next year’s strategy is being finalized and the prioritization starts to take place, don’t be hesitant to look at the cost to serve your network. The cost savings could be significant and by leveraging the relationship, the solutions could be more feasible to implement than you think. Simply gather the data, collectively flush out the root causes with your customers and have a constructive conversation on possible solutions. One tip would be to be creative with possible solutions. A current LeanLogistics customer was able to reduce the amount of weekly orders by purchasing another freezer for a customer location, which will result in significant savings.
There are the software testing (or QA) folks who test the software before it ever gets set in the hands of our customers, in hopes of delivering the highest quality software package to our end-user. We also have expert end-users in our own building, folks with decades of experience and tons of knowledge who are willing to share, help, and mold the software features into something real, usable, and powerful. We hire experts from the logistics industry and bring them in-house to help with our managed services department, and we utilize their practical knowledge when implementing new features. They are our first eyes on the new feature and our first hands on the keyboard and mouse after the feature is ready for testing.
We have specialists on staff to help design the look and feel of the application and to ensure the screens flow together seamlessly. We want those transitions to be felt, but not be cumbersome. We want our software to be used, loved, and pushed to its limits. Nothing makes me happier than hearing positive feedback from our customer base. We want it to work as much as you want it to work!
This passion for developing high-quality software drove us to do some interesting things inside our four walls to help you out there in the real world… we have co-located everyone on the product creation team in a comfortable area that promotes teamwork and camaraderie. Yup, the product owners, developers, software testers and managers all sit together and work together toward the common goal: delivering excellent software. We praise each idea and question everything to ensure the best solutions are implemented, not just the first ones that pop into our heads. In addition, we’re not limited by our functional roles, as many software development teams are. We’re all allowed to play in each other’s wheelhouse. A software tester can offer up coding suggestions, and a sales person can help in testing new releases.
Speaking of testing, did you know we go through multiple rounds of testing to ensure the highest quality before the product ever gets released to the public? Developers create very small tests to ensure their code is working at the most granular of levels and then we have professional QA testers who ensure the integration of those code pieces perform flawlessly. Finally, we utilize every employee in the company to perform final system testing of the new (and existing) features before we update the software in the live environments. Our three annual releases help guarantee that we are delivering new features that you, our customers, are asking for and that we can react quickly to industry changes. This allows us to stay much closer to the cutting edge.
It is a true team effort. We all are building a better supply chain together.
Moreover, let me tell you from a relative short-timers’ perspective (I’ve only been with LeanLogistics for a little over a year), it takes a bit of getting used to, but once you do, it’s a remarkable place to work. Prior to joining Lean, I hadn’t had the pleasure of working in an environment where the team is so focused on the customer and the implementations go so smoothly. As a software tester in a traditional software house, the QA department was frequently looked at as a hurdle to jump over or a checkbox to check on the way to releasing software. That’s simply not the case here. QA is not a stop-gate to quality; it’s just another formalized step in the process.
Everyone understands the importance of testing the software all along the way, at every step of the development process. The sooner we can identify a potential problem and bring it to light, the easier it is to correct or to change our course. We would rather remove or rework a new feature entirely instead of creating a feature that isn’t going to be 100% effective. There is a definite pride in the software craft here.
The best part is that since we’re all adults here, we can have adult conversations, and no one’s feelings get hurt. None of the comments made around the office are mean or spiteful; there are no daggers in my back from a coworker trying to climb the corporate ladder. There are just meaningful conversations about work and how to best accomplish our mutual goals.
With everyone working as a team, we are able to create new software faster, smarter and more on-point than many other software development teams I’ve worked with. I’m excited to see what we can deliver in the next 12 months… hopefully you are too!
More ice cream? Yes, please! More sleep? Always a good thing! More data? Not so much…
There are 4 major trends in data analytics that are having a huge impact on the BI reporting space – BIG DATA, the Internet of things, data visualization and self-service analytics. Big data and the Internet of Things are everywhere right now. Analysts are discussing the endless possibilities of these massive compilations of data… with their massive team of analysts… and massive hardware and tools needed to analyze them.
With the increase in data that is available, it is critical to be intentional in how data is analyzed, effectively using the tools that are available, and displaying or communicating this data in a framework outside of the excel world.
Just a few years ago, a report engineer was required for an analysis with a significant amount of data. With the innovations over the last few years of the BI tools that are available, data visualizations are much easier to create. Data visualizations are becoming more of a common practice instead of the exception. Logistics professionals, from operators to executives, want dashboards that they can use to quickly gauge the performance of their KPIs. However, to make these dashboards effective with the amount of data that is available, the data visualizations need to be created with the key business issues in mind.
For instance, a shipper is analyzing their transportation spend year-to-date (YTD). With transportation costs on the rise, it is critical to keep an eye on how their executed costs are comparing to their budgeted projections. Pulling a simple ad hoc report with YTD loads out of their TMS, they start with almost 110,000 loads’ worth of data. For a starting point, they look at the top 10 carriers by spend and compare the sum of their payable rates to the sum of their budgeted rates. This gives a high level snapshot on where to start digging into the data.
While in theory, this graph was exactly what they asked for, it tells them nothing. It takes extra effort to compare which carrier’s payable rates are higher than the budgeted rates they planned for. It is difficult to see if there are any actionable results.
By placing the related data next to each other, it’s much easier to see how the payable rates compare to the budgeted ones of the same carrier. However, this data visualization still does not show where the biggest issue is.
This graph easily shows that the carrier with the highest spend is not actually where the biggest issue is. By simply isolating the data down to the critical data set to which carrier has the greatest variance, this graph displays half as much data and is significantly more effective for the analysis. This quick snapshot of data gives actionable results and a clear starting point.
With the push for Big Data not slowing down any time soon and the number of products included in the ‘Internet of Things’ only continuing to grow, it is critical not to get caught up in a mess of unnecessary data. Analytical tools are more user friendly than their previous generations and more accessible to users at any level. In this data driven world, it is more important to be strategic on how data is analyzed, than simply to have more of it.
A few weeks ago, we shared some of the Do’s and Don’ts of handling an RFP. The post provided several great tactical examples of how to most effectively manage an RFP. But has the execution of the RFP itself become a daunting task? Companies that answer yes to this question often turn to Managed Procurement Services.
When do companies need Managed Procurement Services?
The decision to utilize Managed Procurement Services really boils down to resource availability and/or resource allocation. Conducting RFPs is a full time job for most companies covering an 8 to 12 week period of time. During that time-frame, a critical company resource will need to be either removed from their “real job” or try to stay engaged in both their daily activities AND managing the bid event. For many companies, re-deploying an existing resource just doesn’t make sense.
On the other hand, some transportation managers look at an outsourced solution and may feel a level of discomfort thinking that the execution of the process will now be out of their hands. What many managers don’t realize is that there is a chance that they could actually lose more money by not paying full attention to the execution of their freight compared to the potential gains from executing the RFP. Using a Managed Procurement Services provider allows the shipper to greatly reduce or eliminate the amount of time they have to spend related to the communication, data collection, and analysis of the large amounts of data associated with conducting RFPs. This allows a shipper more time to focus on the award process itself–rather than copying data from spreadsheets–while at the same time not neglecting existing freight.
With that outside expertise, shippers can focus on the quality while the Managed Procurement Services provider can focus on the quantity. Instead of 25 carriers, a shipper can now look at 50 carriers. No matter the size of the RFP, Managed Procurement Services can help “set the net” at the right size. A true Managed Procurement Services provider can also provide best practices regarding how to approach the marketplace based upon your specific business. This could also allow a shipper to work through the process with their Managed Procurement Services provider multiple times with multiple RFPs, then take the tools and processes back in house for future added benefit.
Determining when a company should invest in outsourcing their transportation procurement event is best done by looking first at the value drivers and then allocating resources where they can best be utilized.
How to best leverage Managed Procurement Services
As it relates to a transportation procurement strategy, the one-size-fits-all theory does not always end with the best results. The question a shipper should be asking is, “Based on my business requirements, what procurement strategy should I use and why?”
To answer this question, my suggestion would be to do a business review and look at the following:
- Contractual requirements – Are the requirements exceeding current needs or potentially adding unnecessary risk (and thereby inflating rates)? Some examples might be the Master Transportation Agreement / Fuel Surcharges / Accessorials / Operational Requirements / Etc.
- Origin or Destination operational constraints – What improvements can be applied at either endpoint? This can impact your “SOC” (Shipper of Choice) score that carriers are keeping.
- Execution / Carrier Compliance monitoring – Are those responsible for tendering (your team) as well as those accepting loads (the carrier’s team) accountable for what was committed to? What are your enforcement capabilities for each?
- Consistency / Incumbency / Commitment – Based on driving the best results for your business, this needs to be incorporated in your RFP schedule. How much risk can you allow in terms of displacing current incumbent carriers?
- How to introduce the RFP to the marketplace – Even if you are in your way to becoming a “Shipper of Choice”, if your messaging to carriers is discouraging or contains something which makes them disregard your RFP, you lose. Also, if some of the rules in your RFP haven’t been evaluated for years, they might actually be costing you money.
In the end, when it comes to the optimal frequency or optimal time to conduct an RFP, there is definitely not a one-size-fits-all answer. My recommendation is simple as it relates to procurement strategy: Align your strategy to best support YOUR business versus trying to align your business with a “typical” strategy.
Dealing with the award
You may want to rely on one of your past events when deciding how to award. It’s a lot easier to understand the process when using data that you are familiar with and if you already have a good idea of what your results should look like.
With Managed Procurement Services, you can also run a two round bid rather than a single round. When doing a two round bid, it allows you to look at rates that are coming in, hit those against incumbents, and evaluate your options. It also allows you to give visibility to and work with your incumbents.
Analytics also support a number of alternate “what if” scenarios, but they are dependent on knowing what you are looking for regarding your award methodology. The variables are endless: low cost, incumbency, asset versus brokerage, preferred mode, equipment size, and equipment type are just a few examples. Another option is to limit the number of awarded carriers so you have a number of constraints that can be applied.
Allocation scenarios do not replace the need to fine tune the overall award. The intent is to get you close with the majority of the lanes and volumes to reduce the time for creating the final award solution. At the end of the day, a Managed Procurement Services provider delivers on the execution of the RFP so you can focus on the awards, and ultimately your business.
Other considerations when looking into Managed Procurement Services
Like many aspects of transportation procurement, there are no silver bullets and the target never stops moving even with Managed Procurement Services.
Who is in the best position to make business decisions when conducting a transportation bid? Without a doubt, it is you, the shipper. You know your business, you understand the requirements, you have the tribal experience with the current carrier base, and you have the power to negotiate and award business to the best carrier.
But when comparing the total time invested in conducting a transportation bid, the advance business decisions required only represent a very small part of the total time required to conduct an RFP. What many companies do not realize is that there is still time to reap the benefits of working with Managed Procurement Services even if the decision is made just ahead of the planned kickoff of the RFP. We have had many shippers that move from initially having doubts about Managed Procurement Services and the process to completely endorsing the process, and fully trusting the recommendations to the point they don’t even need to review the award. Managed Procurement Services provided by LeanLogistics is a great way to leverage procurement expertise and innovative technology to build better supply chains together.
A little over 6 months ago, I had the opportunity to talk about the most famous problem in Computer Science, the travelling salesman problem (TSP), and its real world corollary, the vehicle routing problem (VRP), which remains one of the most studied problems in transportation.
The issue with these problems and others like them is that they are hard – literally. That is, they belong to a set of problems known as “NP-Hard”, and to date, no one has found a good way of finding the best possible answer to any of them in a reasonable amount of time. Said differently, for large instances of these problems (like a TSP with thousands of cities to visit), all the computers on earth put together still wouldn’t be sufficient to find the optimal answer in millions of years. That’s how quickly the number of potential solutions grows and how difficult they are to solve.
So, that’s the end of it, right? The best we can ever hope to do on problems whose possible solutions grow exponentially is to get pretty good answers?
Let’s start with a different problem from the transportation space. Suppose that you have 3 loads you need to tender and 3 carriers (A, B, and C) with whom you work. Each carrier only has 1 truck available and each carrier has a different rate for each load. Which load should you assign to which carrier? In this simple example, there are just 6 possibilities (A, B, C / A, C, B / B, A, C …), and it’s easy to calculate the cost of each scenario and simply pick the best one.
What happens when we double the number of loads and the number of carriers to 6 of each? 720 possible scenarios is what happens. How about increasing the number of loads, the number of carriers, and the carriers’ capacities to what you might actually encounter in the real world? I think you know where this is headed … We encounter a mind-numbingly large number of potential solutions just like with the travelling salesman problem. But this time, we’re substantially less screwed. In fact, we can usually find the best possible answer in a very reasonable amount of time (i.e. typically, just a few seconds).
The difference is that the carrier selection problem described above closely resembles what is generally known as a linear programming problem, a mathematical model in which the constraints can be represented as linear relationships. It’s worth noting that in this context, “programming” actually has nothing to do with computers. The phrase was coined by George Dantzig during WWII when the solution algorithm he pioneered helped plan expenditures that would reduce costs while increasing enemy losses.
Since then, the solution algorithms have continued to evolve and commercial, software-based mathematical solvers have been created to answer these problems quickly (in terms of time) and efficiently (in terms of computational capacity).
So how do you tell the difference between a crazy hard problem that you can only get good (rather than perfect) answers to and one in which you can find the truly optimal answer in a matter of seconds?
Unfortunately, there’s no easy way to tell the difference. Problems like network flow optimization can commonly be formulated as a linear programming problem and solved quickly. However, that situation can change quickly with the addition of certain side constraints or other requirements. The same goes for driver and vehicle assignment in fleets, award allocations in procurement events, and even bin and container packing problems.
Again, all is not lost. Equipped with this information, you can ask informed questions of your supply chain technology providers and perform more rigorous comparisons of competitive offerings. Something as simple as “Does your solution guarantee optimal answers?” is a great starting point. If it does, the provider should be able to explain how that’s possible. If it doesn’t, it creates an opportunity to discuss the heuristics used to find good answers in reasonable amounts of time. In the end, this knowledge and the discussions it fosters will help you and your technology partners build better supply chains together.
Lisa Kerr, Director Commercial Intelligence at LeanLogistics stops by the LeanLogistics blog to discuss the benefits of being part of a transportation network.
You’ve developed a well thought out, supply chain supporting, transportation plan. You’ve conducted a transportation procurement event and have agreements in place with carrier partners to provide the type of capacity you need, where and when you need it. You’ve communicated the final transportation plan and carrier strategy to your internal and external constituents, and essential business process changes have been made to ensure successful execution…ladies and gentlemen, start your engines….the “green flag” is waived.
Off you go executing your budgeted and approved transportation plan. Within the first few weeks, you discover a carrier who you awarded a high volume, VIP customer lane to, has had a change in their network and is not able to honor their capacity commitment. Within the first few months, you also learn a successful new product launched by your company has a 25% higher demand forecast for the year and a new co-packer who cannot accommodate drop trailers will be added to support this volume. In relation to the higher demand, you now have new customers who are taking forever to unload at their distribution centers and your carriers are threatening to raise rates as an offset to the delays. Are the wheels of execution coming off already? Is your transportation engine (“the plan”) on the verge of overheating?
You need to make a pit stop to address your capacity need. If you are part of a Transportation Network—inherent in a SaaS TMS environment (single instance/multi-tenant)—it is like having a pit crew ready and waiting. You will have immediate access to reach out to qualified, cost effective capacity with the thousands of carriers already servicing locations and requirements similar to your business, all visible in the Network. You have the visibility and agility that comes from being able to tap into the built-in EDI connectivity to those carriers who are in the Network. Your pit crew has provided new capacity that can meet your needs and is ready to go.
A few more laps around the track (or a few months later), you need to get back to the pit. This time, you know the business need (a product launch that has exceeded expectations) and you want to take a little extra time to select the right “tires”. You need visibility to cost and service benchmarks generated by the Network with which to measure not only how your original plan stacks up, but also the implications tied to making additions or changes to your transportation plan “engine”. What kind of on-time delivery performance or tender acceptance rates by mode, area and industry do other shippers in the Network experience? What time periods or geographies are most at risk for cost or service failures? A good Network will answer those questions for you. You can be assured that the Network offers quality carriers, connectivity, benchmarks, data and best practices, because you know it is made up of other high performing companies–shippers like you who are focused on making transportation a competitive advantage for their organizations.
There will also be times during the race when you choose to talk with the crew about ways to improve your overall driving strategy. Being part of a Network allows you to talk to your peers to share ideas, solve problems, and maybe even collaborate on cost reduction or service improving initiatives. The expertise within the Network comes from those who built it to those who participate in it and together, you can build a better supply chain. It will help you fine tune your engine and service the inevitable pit stops.
Need a pit crew for your race? Get a Network.
Noël Perry, Senior Consultant and Managing Partner with FTR, discusses the economic conditions of 2015 and the impact on transportation.
This is how FTR is thinking about 2015. It’s the tale with two halves. Both are quite real, and they oppose each other. The key is how you balance them.
On the good side is the long-awaited acceleration of the U.S. economy. The optimists have been forecasting this since 2011 when the economy slowed after its initial burst of enthusiasm. After three years that forecast came true last year, and most people, including FTR, think the stronger performance will continue through at least 2015 and probably 2016. The new drivers are the energy situation, of course, but more important is a gradual improvement in consumer spending and the belated revival of small business. Although such belated acceleration is rare in recoveries, a study by the International Monetary Fund predicted exactly this pattern, slow but eventual full recovery, back in 2009. Their work was based on a pain-staking analysis of banking failure recessions during the past 50 years. There were more than 20 in their global database. Importantly, FTR’s own research has shown that mature recoveries do tend to feature consumer spending and small business expansion, especially in the service sector. Think about it, most small businesses sell services. Got a haircut recently? Seen your massage therapist this week? This means that the unusually strong performance of the heavy manufacturing sector so far in this recovery may fade some, but the other facets of consumer spending will accelerate. In freight terms, this means slower growth in bulk commodities and heavy manufacturing goods like machinery but an expansion in dry van freight. Finally, with capacity still relatively tight, carriers should get solid pricing to go along with good volumes.
On the bad side are two factors. First is the simple age of the economic expansion. We are in the sixth year of the current expansion. The average for expansions is 5 years, although the last three have averaged eight years and the record is nine from the 1960s. So, unless something fundamental has changed twenty-first century economies, we are due for a recession sometime over the next three years. It makes sense, after six years of strong durable goods sales and business investment. Only the housing market has disappointed this recovery. Any economy alternately overbuys, then underbuys. We are about due for an underbuy.
The second factor is the situation in the global economy. Although many economists remain doggedly optimistic about 2015, debt problems in Europe, South America, and many of the developing countries are serious enough to threaten major slowdowns over the next several years. Greece, with its intractable debt problem, is merely the tip of the iceberg. As it now stands, global problems are enough to lower U.S. GDP 200 to 300 basis points. Should they worsen, as is likely, the global drag could be enough to tip the U.S. into recession. That would certainly happen if the problems cause a banking crisis. Lest you think that unlikely, consider that only Germany’s willingness to continue to make highly risky loans to Southern European countries is the only thing preventing a collapse of the European Monetary Union and its common currency, the euro. Here’s the point: although the chance of recession starting before the end of 2015 is small, by the time we reach the end of 2018 it will top 80%. Any multi-year planning you do should include a serious recession scenario.
So this complicated tale sums up to good times now but bad times to follow. What to do? We suggest three things that are well-suited for such late recovery situations.
- Relationships: This is the time to cement relationships with customers, suppliers, and employees that will survive the trials of recession. It is relatively easy to lay the groundwork for strong long-term relationships when times are good and people are secure. Looks like you will have two or maybe three years to get current or new relationships right before the stress of recession will test them.
- Asset management: This is the time to build cash reserves and strengthen the balance sheet. We are at or close to the profit peaks for carriers and suppliers. Husbanding those gains will enable you to emerge from the coming recession strong, just when the opportunities for market gains are strongest.
- Capital spending: This is a great time for quick return projects, especially if they will provide market strength or cost control to help you in a downturn. Capital costs are still low, and the chance of good initial volumes is strong. This is, alternately, a bad time for projects with longer maturing yield curves. A project with a three or four year break-even timing may well have a five to seven year timing if recession hits in 2017 or 2018. Ironically, those kinds of projects are better started in the downturn when asset costs are at their minimum. Moreover, they mature just as the market is expanding and when competitors are still digging out from recession.
One final point in closing. Keep in mind that conventional economic commentary seldom deals with the chance of recession. It is apparently too risky for the tastes of my economists – or their primary clients. So you will see very little talk about the risks to the U.S. economy we outlined above. That view, however, does not reflect reality. Recessions do occur whether economists help you get ready for them or not. FTR stands out in our willingness to give you that help. Not because we have discovered a crystal ball that solves this mystery, but because we acknowledge its reality. We know something about recessionary economics and how it links to managerial strategy and market conditions. That enabled us to predict the current driver shortage in 2008, at the bottom of the last recession. It should help you benefit from the last several good years of this recovery, while, at the same time, preparing yourselves for what follows.
Noël Perry is the rare economist to specialize in transportation and logistics. Noël provides strategic work on customer logistics economics, North American transportation demand, carrier competition and ground-breaking research on truck driver supply and demand. His innovative work in freight demand modeling, modal price competition and driver labor economics are in wide-spread use. He also maintains his extensive relations with the logistics analysis community, from security analysts to analytical vendors to trade associations.
Tim Dalton, Manager of Procurement Services at LeanLogistics, discusses items for shippers to consider as they look to RFP planning activities to support their transportation strategy
This time of year, many shippers are reviewing and updating their transportation plan for the back half of the year and many will be considering issuing RFPs for new or changed capacity needs. I am often asked what shippers should consider (beyond the obvious of reducing cost) when deciding whether to go to market with a transportation RFP and what the associated best practices are.
Going to market
While there isn’t a “one-size-fits-all” answer when deciding whether you should go to market, there are considerations that can be reviewed by shippers. Although these are not the only considerations for issuing an RFP, these provide a solid framework to help make that decision:
DO go to market with an RFP if:
- Current rates are nearing expiration
- Spot market usage has substantially increased
- Business is significantly growing
- Need for rationalizing your carrier base and build more opportunities/relationships with fewer carriers
- Network Changes – New Customer Requirements – New Product Launches are planned
- Known market conditions, risks, or recent changes of capacity availability (loss of incumbent carrier(s) capacity)
DON’T go to market with an RFP if:
- Awarded carriers continue to honor their contract rates at agreed to service levels
- Only motivation is to save money on freight rates
- Certain business processes need to be fixed –e.g. long delays at either origin or destination.
Communicating your RFP plan
After deciding going to market is in the best interest of your organization, one important step so often missed (and that can lead to how the success of your RFP is perceived), is the need to communicate within your organization. RFP’s give you the opportunity to negotiate/award freight rates that will have a major impact on your budget for the year. So, first and foremost, communicate the potential impact of changing transportation plans to your leadership team. They rely on you to keep them informed of the current market conditions and challenges within transportation that may cause variances.
To ensure that your leadership team is up-to-speed on the current market conditions, consider the following actions:
- Be a student of your industry and create/distribute a monthly or quarterly update internally (trends, challenges, etc.).
- Speak to your carrier partners and solicit their point of view (what are they seeing?)
- Benchmark yourself against historical and current market indexes.
- Listen to analysts/economists and educate yourself. Build that intelligence into your budgeting process.
- Think outside the box, and look for opportunities to leverage continuous moves or dedicated operations to lower freight expense.
- Prior to going to market, meet internally with stakeholders to review risk/reward and overall expectations. Allow expectations to guide your strategy; i.e. if you are expecting a large rate increase by going to market, you may consider working with your carriers to extend pricing or negotiate modest increases.
- Average seasonal spikes into the overall output to the leadership team. Help them understand the fluctuations in volume during different parts of the year and how the business drives those spikes.
- Use only your data to determine benchmarks for your next RFP. Are you sure your rates are in line with market fluctuations?
- Disregard internal business initiatives that could create volume changes. Work closely with the broader supply chain team to understand which initiatives could have an impact on transportation.
RFP’s are beneficial to ensure that you are in line with market rates, as it becomes more challenging to secure capacity. Whether the market is favorable or not, the more informed your organization is, the better off you will be to navigate through the process.
Align with your carrier strategy
In addition to effectively communicating the potential risks/rewards internally, take the time to review your processes. Has your team taken the time to either review or create a carrier strategy that supports your transportation strategy and therefore, the supply chain strategy?
When we are managing a procurement event for a customer, the project will kick-off with a discovery call. One of the items we address with a shipper is to ask what their goals are (related to the event or transportation in general) and what their sourcing philosophies are around the # of carriers that they would ultimately like in their carrier base (not to exceed “x”), or x carrier not to represent more than x% of overall spend / revenue (yours or theirs). We also ask about Asset/Broker % goals, KPI’s, etc. I am usually surprised by the answers that we get from shippers and I’ve come to the conclusion that many shippers are still formulating their carrier strategy or haven’t even started. Your RFP will be much more successful with a documented carrier strategy. So, here are a few tips to guide you in completing or beginning the creation of an effective carrier strategy:
- Document your:
- Carrier Vetting Process (Size, type of carrier, safety rating, etc.)
- Performance Management Process
- Escalation Process
- Carrier Review Methodologies (who, what, where, when)
- Procurement Strategy (Annual RFP, Targeted RFP, etc.)
- Mix of large and small carriers
- Update your contract terms & conditions to reflect your company and customer needs & requirements
- Carrier Recognition Program (if any)
- Put off establishing a strategy or updating an existing strategy. Many transportation professionals are saying that if a shipper doesn’t already have a documented carrier strategy, they are behind. The good news is, it’s never too late to start one.
- Roll out your strategy without your carrier partner’s input. Their input can be valuable in making the strategy work for the entire carrier community.
Once you have finalized your strategy, be sure to communicate with your carriers so they are aware of how they will be measured; a Procurement event is the perfect opportunity to implement your strategy or to make any changes to existing requirements (FSC Program, Accessorial changes, Service standards, etc.).
Whatever approach you choose, my suggestion would be to remain consistent. Go to market on a schedule known to you and your partner carriers along with a predetermined number of rounds. Many shippers think they can time the market to garner better rates, but research proves that can backfire and disregards strong partnerships with your carriers. Deciding on the timing and cadence of your RFP, aligning that with your current strategy, and effectively communicating the plan is the key to conducting a successful RFP and building a better supply chain.
LLamasoft’s Rebecca Koke drops by the LeanLogistics blog to discuss the importance of optimization in creating a transportation strategy
It’s a volatile time in the transportation industry. With the driver shortage and recent West Coast port strikes, changing government regulations, natural disasters of recent years, and the changing landscape of customer demand, getting materials and products from one point to another is becoming more complex each year. That coupled with internal factors like mergers and acquisitions, adding SKUs and product lines, and globalization, many organizations are struggling to keep pace. These factors emphasize that the need for a smart and agile transportation strategy is more important than ever. Many of the world’s most successful companies utilize transportation optimization to create and implement a smarter transportation strategy.
How can a company begin designing a better transportation strategy? The challenge can often lie in where to start. A complete overhaul can seem daunting, and organizations may not even be aware of the root cause of inefficiencies. There are hundreds of what-if questions to ask, and the calculations far too complex for spreadsheet-based solutions. Using a transportation modeling tool, analysts can visualize and optimize the as-is transportation network and answer all those what-if questions with a single model.
In order to identify existing inefficiencies and test potential new strategies, they first need to visualize the current end-to-end transportation network. Using data they have collected-even down to the SKU-level-companies can build a living model of their current-state transportation network. Using this model they can analyze their existing network and pinpoint inefficiencies with greater accuracy.
With that “baseline” model complete, as well as a greater understanding of the challenges facing their transportation network, transportation and logistics professionals can then utilize modeling technology to run what-if analyses to test various strategies and tactics for improvement. Those scenarios can range from consolidating shipments, to utilizing multi-stop routes, to developing sailing schedules, to things even as large as selecting a new site for a distribution center or adjusting fleet size. From the risk-free confines of the modeling environment using data from their actual current-state transportation network, organizations can make the smartest possible business decisions to foster success.
The ability to test alternate potential transportation strategies prior to implementing them in the real-world can foster great innovation within a logistics team. Additionally, using scenarios based on real-world data from the existing supply chain, logistics professionals can more easily garner support and buy-in on a new strategy from the larger organization and executive team. And what follows – the ability to develop a logistics strategy that supports your transportation strategy executed through a TMS – will ensure you capture the modeled results.
For example, one major provider of fresh and frozen seafood products wanted to centralize their transportation network instead of having it managed completely by their 3PL. After building a baseline transportation model, the company developed optimal multi-stop outbound distribution routes to deliver frozen seafood from 20+ regional warehouses to more than 1,800 customers throughout the US. Then, they built in a less-than-truckload (LTL) comparison capability to determine the optimal proportion of multi-stop routes and LTL shipments (for small and/or distant remote shipments) for the company’s revised strategy. They were able to uncover approximately 20 percent in outbound transportation cost savings.
By adopting transportation optimization as an ongoing business process instead of an ad-hoc project, businesses can design transportation strategies to minimize costs as well, develop living models for continuity planning for planned and unplanned supply chain events, and also encourage innovative and strategic thinking for analysts who will design the transportation networks for future success.
Rebecca Koke is the product manager for Supply Chain Guru at LLamasoft, Inc. Having worked as a transportation product engineer and as a solution consultant for numerous multinational companies, she has a deep knowledge of supply chain logistics and transportation issues. LLamasoft is a trusted LeanLogistics partner and provides software and expertise to design and improve supply chain network operations. LLamasoft combines enterprise-level simulation with full-feature network, transportation, and inventory optimization within a single modeling application. Click here to learn more about LLamasoft.