Thursday, July 31, 2008

Transportation Operations Effectiveness

Transportation operations are a big part of a retailer’s distribution functions. As I mentioned in an earlier post, AMR has estimated that these costs can be up to 20-30% of the total supply chain costs. Transportation costs have been brought back into focus with the cost of fuel as it is a large part of the overall transportation costs.

Managing the transportation operations will help manage the costs better. But what exactly do you manage? An old clich√© – you can’t improve what you can’t measure. So what do you measure to manage the transportation operations?

One of the difficulties in defining these metrics is that most companies define a more generalized set of metrics for distribution, and this generalization takes away the focus from transportation operations and dilutes it with metrics that measures warehouse operations, fulfillment rates, inventory efficiency, etc. While it is completely sensible to measure these metrics to keep a healthy distribution system humming along, the specific metrics mentioned below are more sharply focused on measuring the efficiency of transportation operations, and controlling costs.

To obtain the transportation efficiencies and reduce the costs, the emphasis should be on creating better loads, reducing miles through better route planning and route optimization, optimized carrier selection, and finally validating what you pay for freight.

Build Better Loads:

How many of your loads are TL versus LTL? What is the average capacity utilization of trucks or rail-cars or containers for each of the road/rail/ocean modes? You can measure these by some of the following indicators. If you are carrying too many LTL loads, there may be opportunities for consolidation and creating TL loads. If the average utilization is low, then you can improve on load-building, and review your ti-hi requirements and compliance to these requirements. Also keep an eye on the trending for these metrics as that can be a predictor of the efficiency of overall transportation operations.

  • Number of loads that were TL, LTL from the total number of loads
  • Average truck/container utilization that can be measured by calculating the total freight (weight and volume) carried during a time period divided by the total capacity (weight and volume) of the equipment used for the purpose

Reduce Miles through Optimized Routes:

Measure average number of miles for a ton of freight in your distribution system. For any given period of time, consolidate all tonnage carried, and all miles traveled. Divide latter by the former and study the trend. Are you driving more miles to deliver a ton of freight, or less? As companies grow so do their freight tonnage. But using better software to optimize the loads and routes, better efficiencies can be achieved so that this ratio does not have to grow in the same proportion.

  • Total miles traveled
  • Total tonnage carried
  • Average number of miles traveled per unit weight of freight

Optimize Carrier Selection:

Review your carrier selection during the transportation planning. How many carriers do you have in each mode? Do you have enough volume leverage for each mode? Are there lanes that are not covered by any carrier contracts? How does the carrier selection algorithm work for the shipments? Some of the metrics that can help you measure the efficiency of carrier selection process is as under.

  • Total number of carriers used by mode in a period
  • Total load carried by each carrier versus number of shipments
  • Total number of shipments carried with carriers with a contract versus general carriers
  • Total freight carried with carriers with a contract versus general carriers

Validate what You Pay:

Finally do you have a process in place that allows you to validate the freight invoices? Does your process allow you to estimate the cost of freight against the carrier invoice? What about the accessorial costs? Do you have a lot of claims? Some of the following metrics may be useful.

  • Accuracy of freight invoices, as invoices that were validated and found to be correct versus not
  • Freight invoice auto-approval, as invoices that were validated by the system and approved versus those that needed manual touch for any reason
  • Average cost of shipment per unit. If the freight units are a combination of multiple units of measurement, you may normalize this as the cost of a ton-mile of freight
  • Average cost of inbound freight (calculate same way as above)
  • Average cost of outbound freight
  • Total freight as percentage of COGS, further split by inbound freight and outbound freight costs
  • Total accessorial cost as percentage of total freight, same ratio for inbound and outbound freight
  • Total claims as a percentage of total freight costs

Friday, July 25, 2008

Increasing Fuel Costs Hit Corporate Bottom Lines

Last week Costco reported revised estimates for the wall-street citing higher energy costs. Higher merchandising costs, and higher freight costs were among the culprits identified. Here is the summary from the article cited above: Costco chief financial officer Richard Galanti mentioned that soaring energy inflation is affecting the cost of goods, leading suppliers to push higher prices onto Costco and other retailers at a faster and higher rate in the past six to eight weeks than before. Galanti also said that suppliers want increases of 5 percent to 10 percent and even more in recent weeks, compared to a range of 2 percent to 4 percent earlier in the fiscal year.

Higher fuel and energy costs seem to be one of the single largest factor affecting the upward cost spiral for retailers. The energy used in manufacturing processes cannot be reduced very quickly as any changes in manufacturing process reconfiguration are bound to have large capital and time outlays. The second largest energy cost is in the transportation. AMR estimates that transportation costs can amount to 20-30% of the total supply chain costs.

US Department of Transportation reported over 4,500 ton-miles of freight for the year 2005, and it has been trending upwards as you can see in the referenced report. The good news is that the GDP is growing faster than the VMT for the last few years. Like most complex scenarios, there will be many contributing factors to it but I would like to believe that one of the factors is the rising popularity of the Transportation Optimization among the corporations.

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Transportation Optimization/Management Systems can help you in many ways to address the rising cost of freight. Deploying these systems is not a quick fix, but they have a proven ROI, and have even better return in current times with fuel spiraling upwards steadily. Transportation Management Systems (TMS) can yield substantial results through reduction of miles, optimal load and long-haul profiles (shifting of LTL loads to more TL loads), increased use of multi-modal shipments to better utilize the transportation network, and finally by reducing the freight cost invoicing errors.

Load and Route Optimization: Reduce Miles, Enhance Long-haul Legs, Increase Cube Utilization

TMS applications create better loads, allowing more efficient use of the trailer, rail-car and container capacity. They can also plan better routes to create multi-stop routes, continuous moves, and by utilizing pool-points where such trans-shipments may reduce the cost of freight. These systems also have the ability to create multi-leg, multi-modal shipments that can leverage cheaper transportation modes. For example using rail for the long haul portion of the route, and road for the final delivery leg can substantially lower the cost of transportation. Line haul rates for rail, and ocean (where that makes sense) are much more favorable compared to road freight.

While the inter-modal transportation always adds some more process complexity, the TMS applications make this transition easier by allowing you to automate most of the interactions between the carriers, drayage services, and the warehouses. On-boarding the partners, and certifying such automated interaction will still pose a challenge, but the rewards more than pay for such an initiative.

Freight Invoice Audit: Look Before you Pay

TMS applications also typically help in auditing the carrier invoices by validating shipments, line-haul, and accessorial charges. These not only make sure that the freight invoices are paid only for the services, but also ensure that the freight is being calculated using the contractual rates, and that all the accessorial are valid. It also prevents overpayments to carriers thus avoiding collection fees to 3rd party debt collectors when carriers fail to respond to the debit notes.

Fleet Management: Enhance Utilization, Reduce Miles

Most distribution intensive business use dedicated or own fleets for delivery to their stores. TMS can help enhance the fleet utilization efficiency for dedicated fleets by reducing the fleet miles traveled through better route planning. This is primarily obtained through multi-stop routes while simultaneously constraining on the warehouse shipping and store receiving schedules. Every mile saved on the fleet not only saves on the direct fuel cost, but also increases the fleet life due to associated wear and tear.