Setting the benchmark

Successful transportation benchmarking depends on proper alignment with a company’s strategy goals.    The job of a transportation director at a midsized to large shipper is fraught with pressure and expectations, but just as often a dangerous lack of perspective.
   On the one hand, those tasked with overseeing multimillion-dollar domestic and global transportation spends are expected to keep their rates below the market and their service levels above the market.
   On the other hand, those same people may have little actual insight into how they are performing against the rest of the industry, let alone their relevant peers.
   It is here that transportation benchmarking comes into play. The idea behind benchmarking is relatively clear: to ensure a company is performing well relative to the rest of the market, but also relative to its own strategic goals.
   That second dynamic is often what goes missing when companies think about undertaking a benchmarking initiative. Modern benchmarking is not about ensuring rates are at par or better than the market, it is about ensuring that the freight transportation process is helping a company meet its objectives.
   For example, it may not make sense for a transportation manager to work his or her carriers over on price to get below market rates if the most important element of the company’s strategy is speed to market and assured access to capacity.
   “Every company has a strategy, and they’re going to market based on that strategy,” said Steve Banker, head of the supply chain consulting team at ARC Advisory Group. “Maybe they want to have highest service levels in the industry. Maybe they want to have the lowest costs. They may want to have the coolest products, where logistics isn’t that high of a priority. But whatever the strategy, they definitely want to know how they’re performing against their competitors based on that strategy. And what benchmarks will be most important will depend on that company’s strategy.”
   It’s why benchmarking will often mean different things to different people. Banker acknowledged that most people think of benchmarking strictly along the rate dimension.
   “When I hear the term transportation benchmarking, it’s generally about companies wanting to understand, on a lane-by-lane basis, are they paying too much, or are they getting a great rate,” he said. “There are other forms of benchmarking, but that’s what most people think of when they think of benchmarking.”
   And for some companies, that definition suffices. Just knowing whether the rates they are paying to carriers are competitive—in a formalized, systemic way—is information they might not have had a decade ago.
   That initial level of benchmarking can also be critical for transportation executives in their personal journey to be seen as good at what they do.
   “Let’s say my title is ‘director of international supply chain,’” Banker said. “Part of what I’m trying to do is meet my company’s business strategies. But another part is to show that I’m good at what I’m doing, so if I’m benchmarked against my peers, I look good. It behooves managers to know how they’re performing against their peers.”
   But benchmarking, especially for domestic transportation modes, has evolved to encompass so much more than that.
   “There are huge performance expectations for transportation managers, and not a lot of tools to provide focus on how service and cost should be balanced,” said Matthew Harding, vice president of the Freight Market Intelligence Consortium at Chainalytics. The consortium provides benchmarking data services and market intelligence to more than 140 companies spanning all industries and major modes.
   “We’re all swimming in tremendous amounts of data, and the expectation from the executive level is that transportation managers will use that data to perform better. Analytics is transforming how you as a transportation buyer can do your job. Our mission through the consortium is to enhance market-focused competency within an organization,” he said.

Benchmarking Benefits. In a white paper written exclusively for American Shipper, the logistics services provider CLX Logistics laid out the benefits of benchmarking transportation, focusing on how shippers can use existing, often underutilized data from their transportation management systems (TMS) to conduct benchmarks.
   “The hard data available from a TMS can be used in a benchmarking process to provide insights into what’s actually happening for comparison against how the shipper is performing in the marketplace and in pursuit of its own objectives,” Mike Challman, CLX’s vice president of North American operations, wrote in the paper. “From this analysis, recommendations can be made for continuous improvements. Transport benchmarking also can help address the more pressing and immediate issue of finding capacity to handle increased production requirements.”
   In a trucking market that is expected to become more costly for shippers as capacity tightens due to a shortage of drivers, benchmarking exercises are even more crucial.
   “Benchmarking can help shippers become better positioned to secure more capacity, from both existing carriers and new carriers, by studying the transportation activity within their network and evaluating their interactions with carriers,” Challman wrote.
   The next question is what specific areas should be benchmarked. On the domestic transportation side of the equation, rates and service levels are the two primary areas. But benchmarking can also help a company better understand if its previously determined key performance metrics (KPIs) are actually worth tracking.
   “Benchmarking can also help to determine if the KPIs being used to evaluate supply chain performance are appropriate and informative (for example, do KPI measurements correlate with other information related to customer satisfaction and the ability to grow existing business?),” the CLX paper said. 
   In terms of the price and service dimensions, the paper noted a variety of nuanced ways shippers can use benchmarks.
   “If carrier costs are a primary concern, transport benchmarking can not only provide a comparison of current transport costs against competitive market rates, but also insight into wider market issues such as payment terms, price validity, contract duration and other commercial terms,” Challman wrote. “Benchmarking is particularly useful in providing the leverage needed to negotiate more competitive and appropriate terms with existing carriers.”
   On the service side, benchmarking can help a shipper better understand why its freight may not be attractive to carriers.
   “Too many plant delays impacting loading times, too many cancelled or re-booked loads, too many consignees with unloading delays, poor treatment at plants, slow or inaccurate freight payment,” the paper said. “These may be reasons why shippers cannot find sufficient capacity with existing carriers.”
   CLX said the first step in the benchmarking process is establishing a baseline of current supply chain costs and performance for comparison to results of comparable shippers and best-in-class practices. The company advocates using at least six months to one year of transportation data to establish the baseline. Information to build the baseline should be gathered from transportation managers, planners, procurement specialists and others involved in specific areas of supply chain operations “to develop a complete picture of transportation operations.”
   
Where To Turn? Banker pointed to Chainalytics as being on the leading edge of transportation benchmarking in that the firm wraps analytics around simpler-to-measure metrics like rates.
   “They’ll take your data and say, ‘just because you don’t have the best rate on a lane doesn’t mean you deserve to have the best rate,’” he said. “Maybe you’re actually doing well based on other characteristics.”
   Harding said Chainalytics’ benchmarking proposition is tied to a few key pillars: that there is information available that can enable companies to change the way they have done things; that it’s key to use tools that accelerate the process; that transportation buyers must be able to communicate what they’ve learned internally and externally; and that benchmarking allows a transportation buyer to aggregate industry expertise from across the group.
   “The first area of focus is giving you the information you need to transform your business,” Harding said. “As a manager of transportation, I can change aspects of what we do. I can change carriers, how I compensate for fuel, what accessorials we’re charged. There are half a dozen levers to transform the business.
   “Big data is a noun. It’s stuff. It’s not action. That’s where big data gets lost. The piece that’s missing is, what are those business levers, and under what conditions would you change them? Maybe I have a critical partner giving us critical service and I’m over benchmark on the rate, but maybe I don’t do anything different. Maybe if I’m below benchmark, I invest more with them,” he explained.
   The second issue is the speed with which companies can use the information they have at their disposal to make informed decisions about transportation procurement.
   “Companies only have a finite amount of attention they can take away from running their business to focus on analytics,” Harding said. “The idea is to give the transportation buyer more time to make decisions.”
   The third area Harding noted was communication.
   “You have to be able to communicate to everyone from marketing in your company to the carriers you work with,” he said. “When you manage $100 million in spend, there is a huge requirement to explain your decisions. If you do that within your four walls, there will always be skepticism. For example, if you have the sense that rates are going up, your carriers are not going to tell you otherwise.”
   Finally, Harding emphasized the benefit of learning from a group of practitioners with similar objectives and pressures. 
   “The notion of a consortium where you are within a group of buyers, is that consortium in itself has centuries of business experience,” he said. “It’s individuals like yourself who have a fiduciary responsibility within the strategy of their businesses. There’s a network effect, and you can’t enhance competency without that social aspect.”

Other Options. There are other places to turn for a start in benchmarking. Most transportation management systems vendors provide some form of benchmarking. That could range from measuring your rates lane-by-lane against other users of their system to providing more detailed performance measurements of procurement, visibility, and planning.
   “Some of the TMS suppliers have network-based solutions,” Banker said. “If that network data can be aggregated, you can get benchmark-by-lane type data. From a lane perspective, if I am at the top, getting a great price, I’d ask myself if that’s good. Maybe one or two months down the line, the carrier has better options, and they might stop accepting tenders from you. Maybe the average and top quarter is optimal, because once you get to a really great rate, that should give you pause.”
   In many ways, benchmarking can be as holistic and inclusive as a company wants it to be. Benchmarking freight transportation alone can be useful to a director of transportation, but it may be more instructive for a company to benchmark several parameters of its supply chain, from manufacturing to last-mile delivery. And many of the larger TMS providers (with suites that automate sales and operations planning all the way to final mile) are equipped to help companies understand how they’re performing across those multiple functions.
   The benefit of this approach is that companies using a TMS get a comparison to other users of that system, allowing them to focus on areas where they can better leverage their investment in that technology.
   For companies not using a TMS, benchmarking is still a possibility. They can turn to industry associations. Or they can look to consultants, who can search for companies with similar freight transportation characteristics, ask for their rates or other performance metrics and share the benchmarks across the group. But Banker said that can be an expensive endeavor for the company that initiates such an exercise.
   Shippers can also turn to their logistics services providers for benchmarking, though Banker cautioned there needs to be trust between the shipper and LSP to ensure the resultant data isn’t beneficial to the LSP in some way.
   “It is important to note that any type of benchmarking is only as good as the quality and availability of the data upon which it is based,” Challman noted in the CLX benchmarking white paper. “Many companies use third party logistics providers that not only have an established and proven methodology to conduct a benchmark study, but real-time and current market intelligence to make a strong analysis. Logistics service providers can tailor analysis and recommendations to address individual shipper profiles and specific operational requirements.”
   CLX said LSPs are also adept at helping shippers arrange benchmarking priorities, based on economic feasibility, service impact and return on investment. Projects might be prioritized according to whether a benchmark yields gaps that are easy to fix, ones that are larger and require change management across multiple supply chain functions, and ones that would yield significant improvement but would also require significant process change. 

International Gap. Much of the focus on transportation benchmarking has been on the domestic market, and for good reason. Truck moves are largely self-contained (meaning none of the trade compliance paperwork and other complexities inherent in international moves), and shippers have a plethora of options when it comes to carriers.
   “It’s behind the curve,” Harding said of benchmarking international modes. “The international side has the greatest potential for improvement.”
   He cited some challenging factors for ocean shippers looking to benchmark.
   “The economics behind the rates are often arbitrary moves by carriers that happen quickly,” he said. “You have these threads of negotiations occurring simultaneously. It’s like the Super Bowl happens every year (referring to annual contract negotiations in spring). So there’s this mass seasonal reset. And there’s the impact of how that affects the asset side. Unlike in trucking, you have these major tectonic moves that occur.”
   He also noted that part of the allure of benchmarking truck procurement is the availability of options in North American surface modes. Those options are much less plentiful in the ocean market.
   “I don’t know if you can compare that model to ocean,” he said. “The industry is going the opposite way. Consolidation will challenge the data-driven approach, because relationships are so important. You have levers [in trucking modes] because you have options.”
   American Shipper’s 2015 Transportation Procurement Benchmark Study, released in April, found that roughly two-thirds of shippers and 3PLs consider ocean procurement primarily a relationship-driven industry as opposed to a technology-driven one. 
   Harding, meanwhile, also noted that service has a bigger role to play in ocean than in trucking because of the lack of options.
   “You may have negotiated a rate $100 lower than the benchmark, but if your containers are rolled in Asia, you may have to shut down production,” he said. “You don’t want to be in a penny-wise, pound-foolish situation.”
   That said, Harding is optimistic benchmarking will become more prevalent in ocean freight, especially as more shippers start to understand that technology for one mode can overlap into others.
   “The data and the dynamics of the market impact it,” he said. “But TMS and other technologies will make it easier to amplify processes that have already developed on surface modes in North America. It’s ripe for improvement.”
   There are software providers on the global transportation management side that have established benchmarking groups, like GT Nexus’ Shipper Council. In an American Shipper webinar in May, Joshua Bloomfield, general manager of international inbound and trade compliance for Caterpillar, described how he benchmarked his company’s response to West Coast port congestion in 2014 and early 2015 against other GT Nexus users. That comparison provided an invaluable tool for Caterpillar to determine whether it was adapting to rapidly deteriorating service levels during a crisis that impacted almost all North American importers and exporters.
   In terms of spot rate benchmarking for ocean freight, a host of rate indices that largely measure rates provided by freight forwarders and non-vessel-operating common carriers have sprung up over the past few years. Those indices provide transparency into spot rates, but offer little clue about how contract rates behave.
   London-based Drewry Supply Chain Advisors manages a so-called Benchmarking Club that collects contract ocean rates from shippers and then shares them on an aggregate basis with members of the group. The club is designed not only to help shippers benchmark their ocean rates, but also provides clarity on contract terms.
   Other companies, like Norway-based ocean procurement software provider Xeneta, provide rate benchmarking capabilities, as well. 
   Those examples, however, are fairly few and far between.
   “I don’t think anyone’s doing anything as mature on the global side as what Chainalytics is doing,” Banker said. “You need a critical mass to benchmark. A lot of transportation departments are siloed between international and domestic. But there are optimization opportunities between those two and you’d be foolish not to take advantage of those opportunities.”
This article was published in the August 2015 issue of American Shipper.