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 cliché – 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

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