Thursday, February 27, 2014

Outbound Transportation Costs: Why Are My Bills So High?

Outbound Transportation Costs: Why Are My Bills So High?

Our Carlisle supply chain benchmarks tell us, among other things, that for most OEMs, transportation accounts for roughly half of total supply chain costs, and that those costs keep rising every year. It’s impossible to be in the motor vehicle business without delivering parts to your customers quickly and reliably. In fact, transportation is a key enabler to customer satisfaction.

If transportation is essential to our business, it’s essential that you closely monitor transportation costs. There may be very valid strategic reasons to spend a significant amount on transportation, but managers should always be on the lookout for wasteful spending. Our experience working on transportation-related projects, as well as feedback from our OEM clients during conferences and roundtables, shows that there is often plenty of waste to cut out. That’s why you might want to ask yourself the following questions.

What Are Your Transportation Costs Compared to the Industry? Carlisle Supply Chain benchmarks collect and report transportation costs (without attribution, of course), providing an easy way to compare your own costs to those of your industry peers. By showing costs across the industry, benchmarks also provide you with a way to judge how much money you could be saving. Even if you’re on the good side of the cost spectrum, there are still ways to perform better. Keep in mind that Carlisle’s Focus Days provide a forum for learning how to do just that.

Are Your Transportation Modes Aligned With Your Terms & Conditions (T&Cs)? T&Cs should be the main driver in your choice of transportation mode. A stock order rarely requires air transportation, but you’d be surprised how often an ashtray is sent by air freight. At the very least, the people who choose how to send parts should follow a clear decision matrix. Ideally, they should have an automated tool that makes the choice for them. That would ensure consistency across orders. OEMs must also consider how critical the part is. I mean, who really needs an ashtray overnight? We hear folklore of ashtrays being critical to smokers and kingdoms being lost for want of a horseshoe. Are we questioning this folklore about criticality? Hmm… a lot of that sounds like excuses not to dig deep and understand what’s really going on.

What About Consolidation? What happens when a customer places two orders on the same day? Do you send these orders separately or consolidate them? The latter avoids superfluous costs. What about sharing freight between stock orders and emergency orders? You might even discover opportunities to share trucks with another OEM and switch from LTL to TL (or DDS). And if you are already using TL most of the time, do you know if your trucks are full? Are you only footing out or also cubing out? If your trucks are ‘full’ but transporting a lot of air, it could be worth investigating how stacking can be improved. In that case, does the ease of transporting stackable cages make up for their cost? Or maybe your trucks are too big. Or maybe there are simply too many routes.

Are You Checking Your Freight Bills? Don’t you hate it when you have to dispute bogus charges on your cell phone bill? Well, guess what: it also happens with your carrier invoices! For instance, we see too often that the pay weight of the parcel is determined by the driver when the truck is loaded (even if the OEM is weighing and providing weight data). Surprise: that often means the weight will be overestimated, and the OEM will pay more than it should. Every transportation department should perform this recurring analysis: review the past data on the cost of every parcel, and compare it to the actual rate you negotiated with the carrier.

Compare your own costs to the above charts. If yours are close to the graph on the left, then you’re in good shape. If you find out that the cost of each parcel is above the rates negotiated with the carrier, you should pay more attention to how each parcel’s pay weight is determined, and find ways to lower the costs (e.g. re-negotiate the pay weight conversion factors). Additionally, our project work has shown that the shape of the curve itself can vary significantly across different OEMs for the exact same level of service. What this means is that transportation management and negotiation skills are essential in this area; release your vigilance and you may be invoiced more than you should.

Are You Seeking Regular Bids for Your Most Important or Costly Transportation Routes? Every year or two, you should assess what carriers can offer you on select transportation routes. If nothing else, it will provide you with meaningful information about where your existing arrangement currently stands. And don’t forget to track the performance of your carriers (e.g., on-time delivery); that will help you come negotiation time. It is also worth considering that the lowest cost carrier is not always the best provider, just like potential quality and supply chain issues can offset the financial benefit of outsourcing your production to a low-cost country. Capabilities, performance, and stability of the service level also have a value. Moreover, providers can usually smell that you are seeking bids out of interest (as opposed to genuinely looking for a new provider) and will submit a low bid on purpose: they don’t really expect you to accept it. If you do, they may come knocking at your door in a few months requesting a contract renegotiation.

Bottom Line: Transportation is essential to our business, but it’s also a significant cost bucket and will likely remain so until this ‘teleportation’ thing becomes real or 3D printing takes off. However, there are many opportunities to cut waste and reduce the total amount of the envelope; better transportation management essentially pays for itself. As much as we would like, there are no silver bullets here. Most actions involve blocking and tackling; no magic required. Unfortunately, not all OEMs do it properly. If you feel like we could help or care to have a deeper discussion on the topic, feel free to contact us.

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