American Shipper

Commentary: Cutting cost without a rate reduction

Tom Cook, managing director of Blue Tiger International, discussed the types of contingency plans supply chain executives should be creating in order to manage potential supply chain disruptions.

   Every supply chain executive’s primary responsibility is to find ways to reduce risk and cost in their company’s supply chain.
   Typically, negotiations take place between principal shippers and the carriers and service providers that move their freight on an annual basis. These negotiations can be intense and sometimes even a “slug-fest,” where freight rates are reduced either not enough or way too much, depending upon your perspective.
   But shippers have myriad other options for reducing supply chain costs without impacting freight rates. In our consulting practice, for example, this is often the “challenge” we face in meeting customer expectations.
   Our first task with most companies is to assess to what extent the company’s demand planning systems are in sync with its logistics operations. Too often, these demand projections don’t match up with contracted transportation capacity, and as a result, supply chain risks and costs increase.
   For example, this can cause an excess of less-than-containerload (LCL) orders, instead of a dominant mix of full-containerload (FCL) shipments, which can be as much as 20 percent to 30 percent less expensive than LCL by cubic volume.
   Demand planning also includes understanding inventory needs and placing replenishment orders on a timely and lean basis.
   Many times, companies find they must utilize airfreight, which can be as much as 18 times more expensive than ocean, because product needs to be moved more expeditiously than ocean shipping allows. Too often, this is not a strategic planning event but a negative consequence of poor planning or a lack of coordination between the various fiefdoms and verticals in any organization responsible for inventory, replenishment, purchasing, demand planning, and supply chain and/or logistics.
   The best run supply chains require a tight and intense collaborative process between all stakeholders to make sure they understand the potential impacts of each and every decision made on how efficiently freight will move from supplier to destination or from manufacturer to customer.
   Technology that allows an interface between all of the internal stakeholders, service providers, carriers and suppliers is an integral component of any well run global supply chain. For inbound logistics, these systems often referred to as “PO management systems” and can become an invaluable tool in the arsenal to create well defined efficiencies in supply chain operations.

If you use fewer carriers to better leverage spend, placing more of your proverbial eggs in one basket, then you’d better watch and manage that basket proactively.

   This kind of technology can be built as an extension of a corporation’s operating platforms or purchased as a “value-add” from quality service providers, 3PLs and carriers. At its best, it helps companies create a platform for the timely transfer of pertinent information, as well as transparency, lean practices and accountability between all the vested parties involved in an international transaction.
   As we discussed last month (February 2017 American Shipper, “Managing risk in the global supply chain,” page 6), every global supply chain will encounter disruptions, ranging from the very unexpected to the more predictable. These disruptions can add both risk and expense to any import or export operation.
   In managing these exposures proactively, global supply chain executives should be creating contingency plans in advance, including strategies and action steps designed to mitigate these risks and the costs associated with various disruptions.
   Another strategy in reducing logistics costs that has proven successful is limiting the number of service providers and carriers with which one does business. Some experts on international transportation will rightly caution against “putting all their eggs in any one basket,” but I have found that in practice, the risk inherent in this strategy can be mitigated if properly managed.
   If you reduce the number of providers and carriers to better leverage spend, placing more of your proverbial eggs in the basket, then you’d better watch and manage that basket proactively. Over the last seven years or so, as more companies have pressed hard to run leaner supply chain operations, we have advised them to reduce the number of carriers and service providers they use because the benefits often outweigh the potential consequences.
   For very large companies with diverse and expansive supply chains, we may move 90 percent of their spend into one solution and the balance with another in order to keep at least one other player involved as a contingency.
   Another strategy available to shippers with freight originating in southern Asia is referred to as the “sea-air combination.” Freight is carried via containership to various Middle Eastern cities like Dubai and then transferred to aircraft, which transports it the rest of the way to Europe, North America and South America.
   Using this combination mode, shippers can realize cost savings of up to 45 percent from airfreight direct and a reduction in transit times from 28 days on pure ocean to as little as 14 days. The sea-air option both reduces cost and risk within the global supply chain, while creating added efficiency and convenience, something well worth examining for those who operate global supply chains.

  Tom Cook is a seasoned global supply chain professional author of 19 books on global trade, and managing director of Blue Tiger International. He can be reached by email at