Competitive Edge Magazine

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:

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:

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:

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:

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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