Stop the waste and start the savings
Buyers and supply chain planners look to the trucking spend to streamline operations while cutting costs.
By David Hannon -- Purchasing, 4/1/2004 2:00:00 AM
Many supply chain organizations are taking the no-stone-unturned philosophy when it comes to reducing costs and eliminating waste in today's era of optimization. And logistics operations are getting their share of attention. Supply chain managers are drilling down into freight rates, processes and operations looking for ways to streamline and eliminate unnecessary waste and the less-than-truckload (LTL) spend is where many cost-cutters are starting, for a few reasons.
First, as market analyst John Fontanella of Boston-based AMR Research says, companies under cost pressure are looking for areas of undiscovered inefficiency, and inbound LTL is a classic example. Suppliers typically bundle freight cost in with parts prices and ship parts when ordered with little consideration for freight cost or consolidation of LTL loads into larger and cheaper truckload shipments. By letting the supplier pick mode, carrier and cost, buyers are missing a major cost savings opportunity.
Also, the LTL market has seen its share of changes in the past couple years, prompting more logistics and purchasing operations to do deep-dives in this area. Some LTL carriers combined to make larger carriers (FedEx Freight and Yellow-Roadway), and other major players disappeared altogether (Consolidated Freightways and countless regional players), leaving many buyers with a different LTL supply base than they had two years ago. Organizations that use LTL both inbound and outbound are reviewing volumes and contracts based on the new trends in the market and either reducing or increasing the number of carriers in the mix as needed.
"Transportation has changed a lot recently and lower transportation costs can be found through smart procurement or hard bargaining," says Fontanella. "This is especially true in LTL shipping. With fewer carriers, there is less capacity out there and what people are finding is that they have to be smarter in managing transportation."
Also, there are a host of new transportation-targeted technologies available today to help shippers source, manage and optimize their inbound LTL freight better than ever. As supply chain organizations try to do more with less, using optimization technologies or third-party logistics specialists could bring unexpected savings.
"LTL is very expensive compared to truckload, so it is a logical place for cost reduction," says Fontanella. "On the inbound side, there are two things that drive cost reduction efforts. The first is unusually poor service from suppliers and the second is the freight being tied into the cost and not broken out as a line item. A lot of companies are realizing they can bid their freight much cheaper. If you're going to look for lower costs or maintain the costs you have now, focus more attention on optimizing pickups and tenders and other aspects of LTL freight."
Breaking out
Steve Miller came to Wabash Technologies (Huntington, Ind.) a year ago as vice president of supply chain management and set a goal of consolidating and aggregating the company's logistics operations. As a supplier of electronic sensors to automotive OEMs, there was a high level of cost pressure at Wabash and it was clear more could be done in logistics to improve the bottom line.
To tackle the task quickly, Miller decided to seek the help of a third-party logistics service provider and came up with a name not particularly well known in logistics. Harte-Hanks, a Texas-based company known most for its experience with direct mail marketing projects, presented Wabash with a proposal that caught Miller's attention, offering to handle carrier management for its inbound freight operations and optimize all the shipments.
With that goal, Harte-Hanks spent eight weeks reviewing all of Wabash's LTL routes from its 250 direct materials suppliers into its plants. A lane-by-lane benchmarking analysis showed poor service from inefficient routing decisions and sky-high rates on inbound LTL.
"Each of our sites had a logistics contact who basically just called the local LTL provider to get things shipped from suppliers. We didn't have anyone really negotiating rates or classification codes. We allowed the suppliers to set rates and classify the codes, which is like giving them your wallet."
It became clear that Wabash could benefit from gaining control of its inbound LTL routing decisions. But Miller cautions that working with suppliers to break freight costs out of piece part prices is not easy and requires some "very frank conversations."
"For example, we have large resin suppliers and their transportation cost is built into their piece part price. We don't want the price quoted that way because they have margin on top of margin in there. I want control over it, but a lot of this is grandfathered in, so changing it is very difficult. We've been buying this way from them for 30 years and we want to change the way it happens."
Fontanella says identifying lanes where there is particularly poor service is a good place to start taking over management of carrier selection. "Especially if you are moving to a lean manufacturing model, you need a lot more control over inbound and [a lane with poor service] would be a compelling case."
Harte-Hanks worked with Wabash suppliers to break out the freight cost and brought in a new carrier to bid on more freight and create more competition in overpriced lanes. A routing guide was set up to optimize the lanes and drive more freight to the right carriers based on price and delivery times in lanes. Soon, the rates at existing carriers began coming down and service began improving.
Before it started the project, Wabash had all of its invoices input into a database, so the company could accurately measure the rate improvements it saw under the project. Miller reports that its LTL rates went from the mid-$70s cost per hundredweight down to $12 per hundredweight. A review of more than 400 LTL shipments under Harte-Hanks' control found all delivery times were perfect.
Pressure runs downhill
David Harrison, vice president of supply chain for Chicago-based Pechiney Plastic Packaging, says his company sells primarily to major retailers who are always looking for lower costs from suppliers, so cost pressures are a priority in every part of the business. When Harrison joined the company three years ago, Pechiney had not reviewed its warehousing and transportation operations as a potential area for cost savings in recent memory. Harrison's review showed the company was using more than 150 LTL and truckload carriers and had little control of which carriers were used. LTL accounted for 50% of its logistics spend and 70% of its shipments.
"It was typical of a company that had grown steadily but did not watch its freight," says Harrison. "My first priority was to get the LTL spend bid out. We had more than 20 plants and I wanted to get our cost structure down and get the major carriers to handle as much of our business as possible."
Pechiney approached the project in phases. In the first phase, an online reverse auction was held for the LTL spend and a list of 25 core carriers was established from that event. Thanks to a deep-dive analysis of financial performance, one of the major LTL carriers, Consolidated Freightways, was excluded from the bidding, which saved Harrison some headaches down the road when the carrier went under. The list of core carriers was circulated to all plants and shipping decisions were monitored for compliance.
The next phase focused on finding opportunities to consolidate shipments. To do that, Pechiney chose to implement technology from Manugistics. The technology not only provides shipments visibility, but also lists all freight shipments to the same customer base so they can be combined more efficiently. (Pechiney is in the latter stages of implementation at this writing.)
"This tool looks at demand from customers and decides what shipment times really need to happen and where we can combine shipments. Manugistics helped us get to a better level of monitoring supply and demand."
The result of the work produced more than 10% savings from having fewer shipments (including consolidating LTL into truckload) and using the right carriers at the right prices. Exception reports also help drive good practices and discipline across the organization.
Harrison says the philosophy was not to rush, but rather make sure the decisions made would push the company in the right direction.
"If you're bleeding red ink, you need one approach, but when you are working to improve a company, that is a different philosophy and you can be more methodical. I have given a minimum 3% cost reduction goal to my managers, which forces creativity in all areas, including logistics."
Pechiney is now evaluating the effects its improvements have on the amount of inventory the company has to carry. Harrison says the system has been a catalyst to challenge old ideas and inventory methods.
Too many carriers
While Pechiney's reduction from 150 carriers to 25 core LTL carriers simplified things greatly, 25 may still be too many carriers for some shippers. David Moody, director of distribution at Jelly Belly Candy Co. in Fairfield, Calif., says his company had 17 or 18 LTL carriers backing up to his shipping dock daily—mostly for outbound shipments—and the confusion became too much to manage with existing resources. In addition to constantly shopping for better rates, Jelly Belly's LTL service levels were dropping because of difficulty tracking which carrier took which shipment. And as Jelly Belly's customers were looking to reduce costs of inventory, service levels in areas like LTL become a higher priority to maintain its major contracts.
After some careful evaluation, Jelly Belly decided that consolidating the vast majority of its LTL with a single carrier would solve the problem. Moody evaluated several of the top national LTL carriers that could handle its demands and decided that Roadway (now Yellow-Roadway) was the best bet.
"Having a national contract saves us a lot of time because we don't have to rate shop anymore," says Moody. "The move was partly to reduce costs and partly to improve the quality we were seeing. The service levels at a lot of the smaller carriers we were using just were not up to the level we needed. You can tell by the way they handle problems. Everyone has problems, but resolving them is what separates the good carriers from the bad ones. There is always a cheaper guy in town somewhere, but you get what you pay for."
The online capabilities offered by Roadway's Web site for shipment tracking and quoting was another major selling point, as was Roadway's advanced EDI capabilities. Jelly Belly is currently integrating the data from Roadway's Web site directly into its warehousing management system and working on digital signature capture to streamline the billing process for shipments.
With outbound LTL the early priority because of its impact on customer service, Jelly Belly is now applying what it learned to the inbound side.
"We are a manufacturing company and have a lot of inbound shipments that we need to get a handle on, so inbound is our priority now," says Moody. "Just as we are asked to do more as a supplier, we'd like to talk to our suppliers about being on time and making their commitments to us. We're looking at EDI and advance shipment notifications for our suppliers on the inbound side."
Not enough carriers
But while some shippers work to consolidate shipments with fewer carriers, there are others that feel they do not have enough carriers to keep a competitive environment. When Chip Purcel took over as director of global purchasing and supply chain at Quaker Chemical (Conshohocken, Pa.), he realized that the company's LTL spend had not been bid out in a few years and the rate structure reflected that. But the idea of organizing an LTL bidding project right off the bat with the existing resources was somewhat daunting to Purcel.
Outsourcing provider ChemLogix of Blue Bell, Pa. had approached Quaker about bidding out its LTL spend to reduce costs and possibly improve the efficiency of its LTL shipping.
"There were two things we were originally looking to do with our LTL," says Purcel. "One was improve our rates, but we were also looking to consolidate and match inbound and outbound and backhauls. But when we looked into it, the latter piece just didn't work for us because our delivery leadtimes are too tight to consolidate many shipments. Making truckloads out of LTL just was not possible with our shipping and leadtime patterns. The savings found versus delaying the shipments was not worth the customer service effects."
Purcel says the decision to work with an outsourcing partner was based on two things: level of internal resources and level of logistics sourcing experience, both of which were areas that ChemLogix could add value. Also, Quaker was planning on bidding out its more complicated bulk freight later in the year and planned to use the LTL bid as a test run for ChemLogix.
The original plan was to use an online reverse auction to bid out Quaker's LTL spend, but upon deeper examination, it was decided that Quaker's mix of shipments and existing carriers were not well suited for a reverse auction and a traditional negotiation might make more sense. While Quaker is national in its scope, most of its customers are in steel and metalworking industries located around Detroit and a couple other key regions where there are a lot of steel mills. As a result, the company relies more on regional LTL carriers for its inbound and outbound shipments than national ones.
Quaker had been relying primarily on two carriers for its LTL, but during the rebidding process, that mix was increased to four carriers: three regional carriers that offered strong price and service in its densest regions, and one national carrier to handle shipments that went beyond those regions.
The results of the LTL bid with ChemLogix—both in cost and service—exceeded Quaker's expectations, producing double-digit percentage savings, while maintaining or increasing service levels.
"Leadtimes in all cases were at least equal to or better than what they were before the bid," says Purcel. "Some even got shorter by a day or two with the introduction of the new carriers. There was a lot more money there than I originally thought."
With its carrier base set, Quaker has implemented an online shipment routing guide from ChemLogix to further optimize its LTL shipments where possible. Quaker inputs the shipment parameters (destination city, state and zip code and weight) and the tool comes back with the preferred carrier and any alternates based on leadtimes. Purcel says the tool also helps monitor compliance to corporate contracts and identify rogue buying.
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