Friday, February 17, 2012

Trading Off Cost vs. Service – You Can Have Both with Collaboration

It’s the eternal challenge – deciding how to optimize the tradeoff between cost and service. In the parts business one of our biggest costs is transportation and one of our key service metrics is delivery frequency and timeliness. When serving dealers in major metros the cost vs. service tradeoff is relatively small, since the outbound distance traveled is short, and, with the high density of dealers in the area, dedicated delivery trucks are full and the distance between stops is short.

The bigger challenge is outlying dealers. Here, we have the issues of long travel distances and low dealer density. As such, we have to choose between expensive dedicated delivery service and less expensive LTL service. The latter provides a lower level of service, since it takes longer and doesn’t generally offer fixed delivery schedules, not to mention the damages from all the handling. Dealers hate receiving their parts orders via LTL.

It turns out that finding the optimal cost vs. service tradeoff when only looking within the boundaries of your own business can lead to suboptimal results. Last month, we facilitated a day-long Focus Day session on Supply Chain Collaboration. Nine motor-vehicle OEMs participated; representing a cross-section of autos and heavy equipment. The day was devoted to exchanging information about where OEMs have capacity to share and where they have a need for more. By the way, this wasn’t limited to just transportation lanes to outlying areas; think warehouse space, exporting, Alaska, Hawaii, etc.
Timeout: There’s nothing new about the concept of collaboration. OEMs have been sharing transportation routes for years. With recent changes in the economy, the pressure is on to increase efficiencies without compromising service. The key is finding the opportunities and then exploiting them.
At the end of the day, nearly all of the OEMs had identified at least one opportunity to collaborate with another OEM to raise the bar on the cost vs. service tradeoff. Many of these opportunities are worth hundreds of thousands of dollars per year, if not millions. Not bad for one day’s work. Well, ok, there’s a lot more work to do in order to cash in on the opportunity. Nevertheless, it was a day well spent by all.

This was our second year of hosting the Supply Chain Collaboration session. In addition to telling us how satisfied they were with the day, repeat attendees also commented on how it gets a little easier each year as OEMs get more comfortable with the process and give more thought to the collaboration possibilities.

Bottom Line: Optimizing the cost vs. service tradeoff without getting outside the boundaries of your own business will often yield suboptimal results. Unless you explore the possibilities, you’ll never know how suboptimal your results are. Given the ROI for the time spent to identify collaboration opportunities, think about getting involved the next time a collaboration opportunity presents itself.

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