The Analyst Corner: Fulfillment/Logistics

Based on benchmarks and discussions with approximately 400 transportation and logistics managers over the past year, Aberdeen Group has identified transportation practices that consistently result in performance improvements for companies.

Re-examine that Roadmap

For most companies, now is the appropriate time to re-examine the existing transportation roadmap. Rising rates, capacity constraints, new customer mandates and a more globalized supply chain have intensified demands on the transportation organization. Combine this with the new generation of Web-enabled transportation management systems and on-demand, software-as-a service alternatives, and the scene is set for rethinking transportation processes and supporting technology.

Upset the Organizational Applecart

When asked what their main objectives are for transportation transformation initiatives, most supply chain directors reply, "Centralized control and collaboration." In many cases, this will mean upsetting the organizational apple cart to create more efficient transportation operations and more opportunities for shipment consolidation. Best practice leaders often gradually centralize more and more of the transportation process across locations and divisions, including outbound, intra-company and inbound moves across for-hire carriers and dedicated fleets.

Aberdeen has seen companies succeed with a variety of approaches to centralization, including:

1. Full centralization of all transportation activities by forming a central load control center. This is the route taken by PPG Industries, a $10 billion diversified manufacturer of paints, coatings, glass and specialty chemicals. PPG is powering its load control center with an on-demand system from Manhattan Associates.

2. Centralized planning via a load planning center while retaining local transportation execution. The Goodyear Tire & Rubber Co. is using this approach, leveraging planning expertise from its lead logistics provider, Exel, and transportation management technology from Manugistics.

3. Centralized transportation information with local planning and execution. Unilever Foods uses this approach to enable activity synchronization across its local transportation groups and with other parts of the organization. The local transportation groups all use the same transportation management system, an on-demand solution from LeanLogistics, enabling all carrier appointments, shipment statuses, costs and transportation plans to be accessed online by any stakeholder in the organization. Moreover, the shared platform contains tracking and resolution capabilities, enabling collaborative resolution externally with carriers and internally across departments.

The other big cost-savings opportunity is changing ordering behavior. "Under our previous process, customer service didn't understand the cost of order changes or how or why they should take orders that would balance fulfillment workload," said a transportation director for a consumer goods company. Best practice leaders forge closer relationships with sales and customer service organizations to help these groups better understand the cost to serve the customer and alternatives for reducing costs.

Ways to drive down costs include switching the customer order date, enlarging the delivery window, changing the frequency of delivery, minimizing last-minute order changes and combining orders (e.g., replenishment and promotional orders) into the same delivery date. Likewise, internal replenishment orders can be tagged with a lower priority to allow acceptance of more last-minute customer orders. Companies can use this same cost-to-serve analysis to create improved pricing structures for customers to ensure orders are profitable.

Play Nice With Carriers

If your company experienced double-digit freight rate increases last year, your carriers were sending you a loud message that either your freight was not a good fit for their network or that you were a problem-child customer for them to serve.

In speaking with the major carriers, they have been raising their rates by 2 to 19 percent. But they haven't been applying rate increases like evenly spread peanut butter. Rather, they have been jacking up the rates of their least efficient customers by 10 to 19 percent and rewarding easy-to-serve customers with 2 to 4 percent increases. In fact, in 2005 some of the more efficient companies have been able to negotiate rate decreases of 2 to 5 percent.

Whether it is a large enterprise like Unilever Foods or a midsize company like Orange Glo, a family run seller of household cleaning products, those organizations that make themselves more efficient for carriers to serve will receive preferential rates — and preferential capacity availability. In fact, companies adopting carrier collaboration programs often report 40 to 50 percent reductions in tender turndowns.

Key elements of these programs include:

  • Sharing rolling two- to four-week capacity forecasts with carriers;
  • Tendering earlier (two to four days in advance of a pickup) and electronically;
  • Reducing driver turnaround time at pickup and delivery locations (including at supplier or customer locations);
  • Increasing hours of operations or drop yard use to provide more schedule flexibility to carriers; and
  • Paying carriers faster and more dependably.

Turn on the Technology

Nearly 30 percent of companies Aberdeen surveyed say they are looking to add to or upgrade their transportation technology. Simple rules-based or manual order consolidation was appropriate for many companies when shipping options were few and capacity was abundant. But that is no longer the case. Today's dynamics of rates, surcharges, service options and capacity constraints mean that organizations using static routing guides or simple weight-break rules are leaving increasing amounts of money on the table.

"Once we started using a transportation management system that could factor in changing fuel surcharges and precise rates, we noticed our mix of load assignments to carriers on certain lanes had changed dramatically," said the logistics and distribution manager for LifeWay Christian Resources, a $428 million nonprofit publisher. "Certain orders that would have always shipped by hundredweight according to the old weight-break rules were now going out more cost-effectively by less-than-truckload." LifeWay was able to achieve a 14 percent reduction in freight costs in 2004 by deploying Irista's IristaTransport system, which supports audit-quality rates.

Become the Center of the Universe

Market demand for faster, lower-cost supply chains is creating the need for greater sharing of transportation-related information internally and with trading partners. In fact, better information sharing was rated by transportation managers as the top action they could take to improve their transportation performance and the value they deliver to their companies. However, at 76 percent of companies, stakeholders across the firm must still pick up the phone and call the transportation department for shipment status, freight costs, dock appointments and service options.

Best practice companies are adopting browser-based transportation system interfaces to facilitate information access for internal stakeholders and even key customers. Moving this information online helps the organization better source goods, plan inventory flow, smooth warehouse workload, enable manufacturing to take more high-margin rush orders and deliver higher service levels to customers. At these companies, the transportation department, in effect, is becoming the information and activity synchronization hub for the company and its trading partners.

Say Goodbye to the Doghouse

Because of rising transportation costs and constrained capacity, many transportation and logistics managers are finding themselves in the doghouse. To get out, logistics professionals must knock down organizational walls, challenge conventional wisdom about how to serve customers, reinvent hard-nosed relationships with carriers and be willing (and able) to share information freely.

The good news is that concrete actions like those discussed above make a big impact. Successful logistics managers are finding that there has never been as much opportunity to add value to the enterprise as there is today.

For a complementary copy of the complete report on Best Practices in Transportation Management, including seven in-depth case studies, visit www.aberdeen.com.

About the Author: Beth Enslow is vice president of research at Aberdeen Group, a research advisory company. Enslow leads Aberdeen's transportation, global trade and inventory management research areas. She is also a lecturer on transportation technology at York University's executive business school in Toronto.

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