Wednesday, September 25, 2013

Cutting Transportation costs in Supply Chain

Transportation spending is a perennial target of budget-cutting exercises, and a large, multi-faceted cost center for many companies; some may spend three to six percent of their materials costs on transportation. Seizing control of freight spend can improve operating income by five to 10 percent, and boost stock prices by 10 to 20 percent, according to an Accenture study, From a Shipper's Market to a Carrier's Market.

Leveraging IT
The bundling of production and transportation costs into vendor contracts is one reason behind this difficulty. In the communications, media, and high-tech industries, for example, it's common for original equipment manufacturers (OEMs) to price goods on a cost-plus basis, with incentives to expedite hot products, such as the latest smartphone. This makes it hard for buyers to maintain visibility and control the transportation portion of a contract, and often requires revisiting contract terms and analyzing which party is best positioned to cost-effectively manage transportation. With freight costs rising, the task of teasing out hidden costs is becoming increasingly critical.
Isolate transportation costs. 
Work with upstream suppliers to analyze their supply chain—including shipping costs, modes and mode-shifting opportunities, and order frequency—and how it affects your business. Unbundle those contracts to shed some light on the transportation portion—then start to manage it.
Migrate to centralized transportation management. Product lines, business units, or geographies often manage transportation, but pulling transportation management into a single, shared service opens up a host of savings opportunities. These synergies include consolidating carriers, rationalizing service agreements, and deploying internal distribution and transportation assets more efficiently by rebalancing distribution, rerouting, and using augmented line hauls, backhaul, and continuous moves. These strategies establish quick wins, driving tangible and short-term savings that enable shippers to capture value in three to six months.
Invest in technology. Once visibility and a control infrastructure are in place, shippers need technology support to maximize the benefits. Important enabling functions include the ability to look at order activity and volumes, aggregate capacity needs, plan and tender loads to carriers, and manage order requirements in real time. These functions must integrate easily into current logistics, invoicing, and procurement processes.
Another requirement is to ensure sufficient customer service levels when the Transportation Management System directs the shipper to the lowest-cost carrier for a particular route. Shippers need tracing capabilities, such as order tracking, real-time visibility to shipment status, exception management, and compliance so they can manage across multiple carriers. Such capabilities are commonly part of enterprise resource planning systems, not TMS.
Finally, shippers need routing, scheduling, and network modeling, which are incorporated into some—but not all—TMS. The savings opportunities from this third step are considerable—as much as 30 percent of the cost—particularly for freight that shippers didn't previously manage.
Many shipment details that happen in the warehouse—how it's packed and loaded, what other orders it's packed and loaded with—significantly impact the cost of getting it to its destination. Whether the freight is a full truckload, less-than-truckload shipment, or a single parcel, distribution staff can take a number of steps to contain the ultimate cost of moving an order.
Shippers are thinking outside the pallet when loading by using strategies such as floor loading, in which they maximize capacity by hand-packing cartons to the ceiling instead of palletizing them. Using conveyors into trucks, and load stands to reach the top of the trailers, can make floor loading safer and easier. While hand-loading can drive up labor costs, they may be offset by the more efficient use of space or making the load a better fit for the delivery point, such as a retail store loading dock that lacks multiple bays.
One approach to floor loading is brick loading—packing shipments left to right, to the ceiling, and locking them in place. Multi-stop deliveries can be separated by load bars or plastic sheeting, and loaded in reverse order for a multi-stop, full truckload run. Brick loading is common in the parcel industry and has spread to other applications.
Consolidating orders is another important step. It is common for each item in an e-commerce order to ship separately, but with time and processes in place, they can move in the same carton, reducing transportation costs.
Another e-commerce trend is the use of single machines to accommodate the large number of single-item orders. Single machines create an envelope or corrugate material around an item, eliminating dunnage and enabling some items to ship via the U.S. Postal Service, which many e-commerce retailers consider more economical for the smallest shipments.
E-commerce customers have a low tolerance for shipping fees and, conversely, a high expectation for speed. As a result, e-commerce retailers are getting creative in cutting transit time when they're not close to the customer. That has driven an increase in zone skipping: Sorting small packages by destination, with splits for a parcel carrier's hub, then hiring a line-haul carrier to move full truckloads to a less costly zone closer to the end customer.

"Deconstructing the supply chain to isolate transportation costs is where the opportunity lies. One of the most difficult questions for companies to answer is, 'how much do you spend on transportation?'" asks Jason Cook, a managing director at Accenture.

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