Shippers get strategic in comparing performance
By David Hannon, News and Transportation Editor -- Purchasing, 2/5/2004 2:00:00 AM
The increased emphasis on cost cutting in the past two years has affected the way transportation and logistics is bought and managed by manufacturers today. Where once service was king, today cost control is the mandate coming down from the top, while logistics buyers and managers struggle to track and maintain service levels in their supply chains. But what measures are purchasing and logistics organizations taking to ensure that their efforts to reduce costs don't undermine efforts to retain service levels as their supply chains get more complicated with a greater emphasis on offshore suppliers and manufacturers?
According to a recent survey from New Jersey-based consultancy Establish Inc./Herbert W. Davis and Co., cost is the leading driver of decisions within logistics, with service trailing by three percentage points. Logistics costs were reduced 4.7% as a percent of sales in 2003, according to the survey, and 64% of respondents said they were able to reduce costs in 2003, the highest number in 10 years. Bill Drumm, president of Establish, says purchasing has taken a much greater interest in logistics in the past two years in an effort to control or reduce costs.
Cutting inventory was one of the more effective methods of reducing overall logistics costs in 2003. Even those companies with inventory increases were able to show reductions in costs for transportation and warehousing.
"Logistics costs were cut aggressively by many companies in late 2001 and 2002 after Sept. 11, as the economy slumped," says Drumm. "But it was not the purchasing department cutting costs in that first wave of cuts. Following that initial knee-jerk reaction, there has been much more involvement of the purchasing departments with sourcing and buying transportation services for cost savings. The successes usually come when purchasing works in concert with the logistics staff to reduce costs. Purchasing departments getting involved without the help of logistics are seeing poor results."
Drumm says the best way to reduce costs and maintain or even improve service with carriers is to know the market well and work with carriers that want business in certain lanes. If a carrier has openings and wants the business, the shipper has a much stronger hand to play than if the carrier really does not want the lane because it does not match well with the rest of its business. In those cases, the carrier will usually charge higher rates and reduce service levels.
Outsourcing
Another popular method of reducing logistics costs has been to outsource part or all of the logistics function to a third-party logistics provider (3PL). But in a 2003 report, AMR Research analyst John Fontanella notes that what 3PL users want and what they get are often two different things. The report says performance measurements are too vague in 3PL relationships and specific accountabilities are often not assigned properly, which prevents users from matching business objectives with provider performance. Fontanella says users need to ask if cost targets are being met, if customer approval ratings are meeting expectations, and if systemic fixes are being made to broken processes in the supply chain.
Telecommunications giant Lucent Technologies has outsourced the vast majority of its logistics function and relies on its lead logistics provider in North America, Ryder Logistics, to answer most of its service issues. Lucent uses its service-level agreements with the lead logistics providers to set targets in three main areas of logistics: interval, cost and quality.
"In cost, we measure our inbound and outbound costs as well as our warehousing cost," says Pat Pruitt, manager of global logistics at Lucent. "For the interval tracking, we break up the logistics intervals from supplier to customer to make sure we are performing at our targets and improving on them. In quality, we measure things like space utilization."
Lucent uses a software tool called TradeStream, an internal supply chain event management software tool, to gather and view performance data from its logistics providers. The data from TradeStream is then fed into reporting tools which build detailed supplier scorecards.
"TradeStream enables a collaborative environment between Lucent, our lead logistics providers, their tier two providers, and connects to the warehouse management system so information flows to our installers in the field and gives them visibility into the supply chain," says Tony Damelio, director of global logistics at Lucent. Quarterly meetings are held with the lead logistics providers at the executive level to address any service or performance issues.
Lucent also uses a "pay per performance" program based on its service level agreements with its logistics providers. Under the program, the providers are eligible for bonuses or subject to penalties based on the results of data audits under the service level agreements.
"The service level agreements and TradeStream allow us to get much more strategic about how we balance cost vs. interval and enable our lead logistics providers to align to those goals," says Damelio.
Bringing it online
Technology and software today can both reduce costs through improved efficiency and increase service levels by providing more information on provider performance. Drumm feels manufacturers have not been leveraging transportation management systems effectively to date, rather, focusing on enterprise resource planning systems and warehousing management systems.
"There are newer solutions that can help select the right carriers, do collaborative transportation planning and improve actual management," Drumm says. "Manufacturers get caught up in transaction systems that help get things shipped. But management systems can help shippers review and change the way they do things. The staff reductions in most logistics departments have not allowed them to do any real management. I think that's probably an area we'll see more movement in."
Consumer products giant Procter & Gamble (P&G of Cincinnati) does not view its logistics operation as a cost-only operation. According to Mark Weller, a senior project manager in the logistics R&D group for P&G's North American delivery systems organization, "We believe there is a value equation that looks at capacity and reliability vs. price."
So when it came to evaluating its transportation spend, P&G wanted to find a tool that would let them evaluate cost and service and performance of providers. P&G uses another e-sourcing tool successfully for much of its material spending, but Weller says it was not the right tool for P&G's $1 billion transportation spend in North America. P&G wanted a sourcing tool that was designed with transportation in mind.
"Most e-sourcing tools can solve very simple equations, but do not have any combinatorial optimization or transportation-specific experience," says Weller, using P&G's truckload spend as an example. "When we look at our 40-plus manufacturing sites, numerous contract manufacturers and raw and packing material suppliers, the execution of our sourcing strategy is a fairly complex problem. We have a spend pool in excess of 100 carriers and greater than 8,000 lanes of traffic, multiplied by the many different criteria that look at cost, capacity, reliability, and supplier diversity issues. That is a fairly complex problem."
P&G had done three previous e-sourcing events for transportation as far back as 1997 using a tool the company had co-developed around an algorithm to review multiple attributes. But the tool was not updated since its creation and was rapidly dating itself. In 2001, the company held a reverse auction for its transportation spend, which Weller says was helpful in terms of costs at a lane level, but was damaging to P&G's carrier relationships.
So it was no surprise that P&G's logistics group was interested when it came across the CombineNet (Pittsburgh) decision-guidance tool because it went beyond cost in evaluating providers and allowed users to put service-related constraints into the equation during carrier selection.
"We learned from the reverse auction event, as we do with all of our events," says Weller. "I think that helped shape our decision to use CombineNet and make it more of an interactive competitive bidding process with information after each phase of award. At first glance, the ease of use and the combinatorial mathematics and optimization capability from CombineNet were very intriguing. We used it first on a $20 million LTL spend. We got our feet wet there and got excited about putting our truckload transportation bid out on this tool."
Weller says individual business units want savings from the carrier selection process, but those who interact with carriers want reliability, responsiveness and improved transit times from suppliers. The challenge comes in balancing the success criteria of responsiveness with cost savings and corporate supplier diversity goals and sheer number of carriers that can be managed. P&G is able to feed supplier performance data into CombineNet so when a carrier logs on and is interested in bidding a lane, they can drill down into a lane and review metrics and decide what business they want to bid on.
"We are able to take and measure all those success criteria elements for a balanced output," says Weller. "We can feed everyone's needs into CombineNet and come out with service, cost and additional capacity where we need it. We are also using it to expand our supplier diversity program and match inbound and outbound more effectively. We saved some money, added some new carriers and increased the business with incumbents that were successful in our network."
Benchmarking the top players
Another tool that can be used to both reduce costs and improve service in logistics is benchmarking. Lucent's Pruitt says she sees more benchmarking in logistics than in the past, as logistics organizations strive to strike a balance between cost and service.
Drumm says his company gets more requests on logistics benchmarking today than in the past and puts benchmarking into two different classes— benchmarking to know and benchmarking to act. Benchmarking without an action plan is a fruitless exercise, he says, but if a shipper really wants to bring down expenses, benchmarking against industry costs is valuable.
Drumm emphasizes that, in transportation, companies need to benchmark both logistics costs and rates. "You could have the lowest rate for a certain lane, but your costs as a percent of sales might be high because you are shipping in an inefficient manner. If your rates are good, but your costs are high, you must be using the transportation rates inefficiently somehow— shipping in the wrong pattern."
Drumm says that if 2004 brings the kind of economic strengthening most manufacturers are hoping for, shippers will spend more time looking into increasing market share and increasing logistics service levels than in the past two to three years.
"You cannot just abandon service as a shipper," says Drumm. "You have to maintain service levels. I think right now shippers are doing the minimum that is required. If it has to be there in five days, they do it in five days. But in a growing economy, they want to get it there in three days and use that to win more business."
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