The Transportation
Optimization Opportunity
By Ben Cubitt,
Principal, Tompkins Associates
In the
1990s, hundreds of businesses optimized their warehouses by
implementing best practices in a number of areas. Companies
created strategic warehouse designs and installed warehouse
management system (WMS) programs. Organizations looked to
logistics managers to streamline these operations by raising
efficiency and reducing costs while maintaining the highest
levels of customer satisfaction. Optimizing warehouse operations
is an important step in that process, but the best opportunity
to achieve these improvements is through transportation.
Gaining
visibility into your transportation operations all the way
from raw materials vendors to your end customers will open
the door for communication, process development, and management
skills that can be leveraged in other areas like inventory
management and procurement. A bonus is that many of the more
advanced supply chain visibility tools gaining rapid acceptance
in the marketplace are either part of a suite of applications
that combines WMS and transportation management system (TMS)
functions or have transportation management and optimization
as their base functionality. This acknowledges the fact that
transportation is the critical bond to upstream and downstream
links in your supply chain.
Where the Money
Is
To appreciate
the size of the opportunity that transportation presents,
it is necessary to understand the size of transportation spending.
North American freight expenditures are over $600 billion
annually, with 79 percent spent on motor freight. Within that
segment, the highly fragmented for-hire business of hauling
full truckloads of consignments accounts for more than half
of expenditures. The rest is divided among carriers who take
less-than-truckload shipments and smaller private fleets and
parcel carriers.
Transportation
is by far the largest logistics expense area for most companies.
Surveys done by the Council of Logistics Management (CLM)
have estimated that logistics expense represents about 10
percent of the U.S. gross domestic product and that transportation
spending by itself is six percent of GDP.
Companies
in every industry understand that transportation is too large
a segment of the economy and their business to ignore. Senior
management is focusing on transportation because a dollar
saved on transportation goes straight to the bottom line.
Corporate hierarchies are beginning to see how important the
transportation role is and to understand that improvements
in transportation operations are often very fast to implement
and require little or no capital investment. Transportation
optimization makes good business sense.
Transportation
Optimization Best Practices
Everyone
involved in transportation planning, optimization, and execution
is focused on two areas: cost and service. Managing these
two successfully can be a very difficult balancing act. Cut
costs too much and service may slip. Let service at any cost
become the accepted standard, and the company may spend its
way out of business. Often, service requirements are poorly
defined and companies pay for a level of service that their
customers neither demand nor expect.
Transportation optimization seeks to achieve the balance between
cost and service. There is a proven seven-step methodology
for optimization success.
Step
1: Establish a Project Team
The team
should include representatives from transportation and logistics,
information technology, and finance as well as any outside
resources that will be used (e.g., consultants). The team
should establish a project charter and confirm that it understands
the company's goals and objectives.
Step
2: Review Operations and Collect Baseline Data
The team
should check current transportation operations and confirm
key business planning assumptions in order to choose which
long-range strategy is the best. It should evaluate the transportation
pressures brought by each planning outcome and interview key
operations and transportation managers and supervisors. The
team will be more effective if it develops benchmark data
by talking with people in relevant industries. Finally, the
team must be aware of the transportation procedures and methodologies
used in current operations.
Step
3: Conduct a Leadership Roundtable
The team
should hold a one-day leadership roundtable and invite key
stakeholders. The optimal roundtable will include people from
senior management, sales, finance, distribution, and transportation.
The team must understand the company leadership's vision for
future business, growth parameters, and customer satisfaction
requirements. The first step should be to document specific
company goals and objectives for the project, including service
requirements and what will be needed for financial justification.
The team should formulate the qualitative factors that it
will need to evaluate its possible solutions after it has
looked at financial measurements.
Step
4: Develop Short-Term Solutions
The team
should analyze the initial data collected and identify short-term
improvements it can recommend. These will help the team build
momentum and credibility for the more complex strategic solutions
that it will devise later. To find the short-term benefits,
the team should:
- Analyze
the network to optimize transportation efficiencies across
the supply chain
- Analyze
the existing transportation system to streamline carrier
and mode selection across the network
- Implement
carrier consolidation programs
Step
5: Develop Strategic Solutions
The team
should develop and refine initiatives that will require capital
investments, long lead times, or larger corporate participation.
Those will be the long-term strategic solutions. The team
should:
- Identify
transportation information technology that will help optimize
carrier and mode selection, perhaps including a TMS
- Improve
the truckload and less-than-truckload bidding process
- Use
routing software for planning
- Investigate
pool distribution opportunities
Step
6: Perform Cost/Benefit Analysis
The team
should prepare a cost/benefit analysis for all the solutions
it creates, both short- and long-term. This work will help
identify the correct solution, and the process of creating
it will gather all the supporting data needed to justify a
choice. The team should:
- Define
costs and benefits in terms of implementation costs, forecasted
benefits, and the time frames needed to implement each initiative
- Prioritize
solutions based on those with the greatest potential for
rapid payback
- Establish
a time line for implementation
Step
7: Specify the Strategic Plan
The team
should develop a plan-aptly referred to as a road map-that
can be used to reduce transportation costs. The team should
summarize its recommendation, and then prepare a final report
and presentation for the company's leadership team. The report
should include a path forward for implementing the plan. The
team should:
- Translate
future transportation improvements into initiatives
- Define
the initiatives in terms of the steps required to implement
them, the human and financial resources needed, and the
time needed to implement
- Determine
the best implementation strategy
The efficient
movement of product through effective transportation management
offers the greatest opportunity to reduce costs and improve
customer satisfaction. Success, however, comes by developing
and using a systematic and measurable approach. Following
this proven seven-step approach can help companies optimize
their transportation and take advantage of the opportunities
created.
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