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.
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.
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.
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.
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.
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/