The views expressed here are solely those of the author
and do not necessarily represent the views of FreightWaves or its affiliates. This
is part one of two articles on best practices to optimizing supply chains. Part
two will publish on March 24, 2020.
How do you optimize the freight usage side of your supply
chain? We have identified five themes
and and will cover two of them in Part 1 (shipping smarter and buying smarter)
and another three in Part 2 (network analysis/site location, partnership and talent).
Systems are an essential tool for embedding these basic approaches, but you
must understand what you are trying to accomplish before you can automate their
execution.
This discussion applies to all commodities in principle, but
my primary target audience manages the flow of industrial and technology
products. The perspective is from the shipper’s
side. Knowledgeable people can disagree with me on the following assertions. Freight
companies may have a different take, but it will be good for them to walk a
mile in their customer’s shoes.
Shipping smarter
The first factor for shipping smarter is making informed
decisions and establishing processes for mode of transport selection, routing
guides, and monitoring plan compliance. Internal communication with all the
supply chain departments, which have internal and external customers, is
critically important. The second fundamental
factor involves the location of factories, centers for assembly, distribution
and fulfillment centers.
Goods shipping supports the functional disciplines of (1) manufacturing,
(2) deployment of forward inventory (3) distribution to customers, and (4) reverse
logistics. The company’s chief supply chain
officer should provide direction on how quickly and in what quantity material
should be moving across the supply chain. This can vary because of the calendar, product
lifecycle, and manufacturing strategy. Few
companies take raw materials inbound and send out a finished product from a
single location. It is more common for
components to be built by internal and external parties. Original equipment
manufacturers assemble the end-products sold to customers using multi-faceted
supply channels.
Shipping complexity examples
Semi-conductor companies have some of the most complex
supply chains. A simplified cycle for making
a chip involves the creation of silicon wafers in one location, etching them in
another location, cutting them into chips elsewhere, mounting them in a
different location, testing in still yet another location, and finally distribution
from, yes, another location. Specific chips, like memory upgrades, are sold
directly to consumers with others going into the component sub-assemblies that go
into finished goods. Semi-conductor
manufacturing typically takes place across several countries or continents. The pieces are small, lightweight, and have
high value, therefore move via air services.
The automotive sector provides another good example. A big
piece of automotive manufacturing in North America (OEM and aftermarket) is the
dance between Canada, the U.S., and Mexico. The U.S. and Canada tend to do the most
complex work of developing technical components. Mexico primarily manages assembly and
packaging, which can also be done in the U.S. and Canada. It is common to see parts shipping south in
LTL quantities grouped into full truckloads at the U.S./Mexico border for
plants in Mexico. These are augmented by
parts that come from Asia and Europe in ocean containers or via airfreight. Finished goods move northbound from Mexico via
truckload (some rail) to the U.S. border and then to retail distribution in the
U.S. and Canada. Exports from Mexico can be directly exported to Europe, Asia and
the rest of the Americas.
Inbound shipments of finished apparel, electronics, and
consumer goods from China and other Asia points primarily enter through ports
on the U.S. coasts. Goods can enter from
large ports in southern and western Europe, while rail service from China to
Europe is now possible. Airfreight is an
essential option for high-valued time-sensitive items.
Outbound (domestic U.S. and intra Europe) shipping of
finished goods to customers depends a lot on
service commitments made to customers. Shipment speed, quantity (weight),
shipment size (bulk), and flexibility define the routing parameters required to
support customer expectations.
Today’s world pushes for ever faster delivery, which drives
up logistics cost. Delivery commitments can range from the same day to two
weeks. Most companies use a mix of LTL
(less-than-truckload), FTL (full truckload), intermodal, airfreight, and parcel
services. Companies have overlapping requirements dictated by different product
lines, competition, markets and whether full units or replacement parts are
being shipped. Fast shipping typically equals higher cost and slower
consolidated shipping equals lower cost. Be sure management understands the
impact of shipping speed.
Buying smarter
Service requirements are paramount. You only want providers
of the highest caliber who will consistently meet your service requirements. Significant effort should go into
understanding what is needed and what constitutes the right partner. Beyond that, you should get market competitive
rates (not necessarily the absolute lowest price). This can only be accomplished through a well-structured
competitive selection process.
Step one is to build a detailed model of current usage,
adjusting for projected changes in your company’s business plan. The model
should be built at the transaction level, including necessary logistics and
cost information from a representative time period. Cost levels must be established at the front
end, or you will not have a comparitive means of measurement at the conclusion.
This is a key step in managing upper management’s
perception, who will expect a comprehensive and quantitative report on outcomes.
Most companies do not run an efficient selection process,
thereby selling themselves and their shareholders short. Poorly conceived or short-cutted selection processes
often conclude with inadequate results. Logistics
management teams are stretched these days, and staffing may not have bandwidth
to generate bids and do complete vendor evaluations. Companies can end up abbreviating
the process without properly considering new providers. It is far easier to simply renew existing
logistics vendor contracts and take an increase, while maintaining but not
improving service, technology, etc.
Benchmarking has become popular today, and utility in
helping companies determine where they stand versus similar firms. Buyers are always receiving quotes from
prospective vendors, which can be insightful. Buyers can improve the process through
comparative information by finding a partner or an independent source. This is
an interim exercise because there is no substitute for a well-constructed
competitive bid process.
The bid process
A Request for Information (RFI) that collects non-pricing
information may help narrow the field, help understand optional services and optional
approaches. We suggest this be brief
while allowing prospective companies to provide original thinking. This will help flesh out your requirements
document. The RFI should include a robust description of your business along
with useful data.
A Request for Proposal (RFP) may follow the RFI or it can incorporate
the RFI piece. Documents distributed to potential vendors should include a firm
timeline, which should be adhered to as a matter of credibility and
professionalism. Freight buyers have
distinctly perceived personalities in the marketplace. A buying company that is known for consistency
and fairness will achieve long-term positive outcomes.
Pricing considerations
Market-based or cost-plus pricing is something to consider
for both buyers and sellers. Cost-plus pricing
would seem a safe and fair method. Unfortunately,
the process of establishing precise actual costs is nearly impossible for
individual shipper/provider relationships. Full truckload shipments are the exception in
that they have fixed labor and equipment cost allocated to each transaction.
Market-based pricing considers the cost of providing
services, but is dependent on freight vendor competition. Pricing from individual freight companies can
fluctuate based on whether they are on a market share binge or are trying to
improve yields. Without a market-based
pricing influence, cost control can become less essential to cost-plus
providers, who may even benefit from allowing costs to balloon. Healthy competition incents freight companies
to continually search for efficiencies. Freight
vendors need to buy well from their providers and find ways to streamline operational
practices.
We prefer simplified pricing structures, which enable quick
and easy auditing and readily support cost projections and cost per unit
calculations. Shippers need to share details of their inbound and outbound
product movements and special requirements. Service providers should be given
data so they understand what is involved in servicing your account. If they are
forced to guess too much, pricing levels will reflect buffering to cover their
perceived risk.
Shipping considerations
Multiple shipments loaded by service providers on a ship,
airplane, or truck will spreads costs out in ways that are difficult to
allocate across individual shipments. Consider
the effect of density when containers and trailers are loaded. The ideal load for a service provider combines
dense and fluffy freight to yield high revenue while averaging cost. The fluffy
freight gets billed at an enhanced dimensional rate while the dense freight
mitigates the overall volumetric penalty. A mixed quantity of each type of freight can
pay for the whole container/truck, thereby making any other freight loaded
effectively free. Using an average cost
per unit does not account for this critical reality.
Individual large freight companies represent that they have
solved this conundrum by indexing pricing to loadability factors, but
everything is still based on averages. They
may deem freight to be less desirable due to bulkiness or other factors. Individual shipments do not in themselves justify
purchasing the next ship, airplane or truck in a provider’s fleet, so how does
this allow for determining the cost of your specific business?
Shippers can do a lot to become desireable customers. Managing your dock in a manner that is
efficient for freight service providers is essential. Packaging designs can improve density and
avoid odd-shaped loads. Sharing
anticipated volume patterns is a good way to partner with freight carriers. Paying your bills on time is a significant
value add for service providers that operate cash flow intensive business
models. There are “Shipper of Choice”
programs, where trucking providers rate shippers on their efficiency to do
business with. It is advantageous to be
highly rated, and you may be eligible for lower rates.
Conclusion
Shippers should have a good plan and work that plan each
day, month, quarter, and year. It’s
tough to be disciplined on a consistent basis. However, without the right approach,
performance will suffer, and there will be much more pain than doing it the
right way. Rewards that accrue from optimizing the process of managing freight
services are significant for companies and careers.
I welcome any and all thoughts and perspectives.
Phil Ramsdale owns and operates Transport Solutions LLC based
in Long Beach California, which assists shippers with improving their
efficiency. Phil is active with CSULB’s Operations and Supply Chain Management
program and with CSCMP. He cane be reached through his LinkedIn
profile: https://www.linkedin.com/in/phil-ramsdale-0b09122/
