The Daunting Challenges of Transportation
Management
For companies involved in producing physical prod-ucts, transportation is a critical element of an enter-prise’s operations. It typically accounts for a large percentage of total supply chain costs—often as much as 25 percent—and plays a major role in keeping cus-tomer relationships strong. However, for a variety of external and internal reasons, many companies today struggle to effectively manage their transportation op-erations (Figure 1).
External factors
Consider, for example, the effect of rising energy prices on shipping rates. Between December 2008 and Febru-ary 2011, oil prices rose by 175 percent.1 This, in turn, has contributed to recent increases in transportation rates. Morningstar Inc. observed that the majority of less-than-truckload carriers implemented two general
rate increases of approximately 6 percent each during 2010.2 This impact clearly is being felt by shippers: Ac-cording to an Aberdeen Group survey, the biggest chal-lenge facing logistics professionals is rising shipping rates—cited by 72 percent of survey participants.3 Companies also must contend with increasingly de-manding customers. In an era when the Internet en-ables consumers to obtain real-time information on the status of a wide variety of transactions, and quickly compare pricing and service levels between potential providers, the trend toward less loyal, more demand-ing customers has extended to many industries. In fact, in the Aberdeen survey just cited, 43 percent of survey participants said increased customer demand for accurate delivery status and cost information was a major pressure they faced, and 31 percent cited cus-tomer demands for shorter cycle time.4
Generating Maximum Value from Transportation Outsourcing
By John DuBiel, CEO, Managing Partner and Founder, Supply Chain Edge
For companies involved in the movement of products, transportation has become an
increasingly important—and increasingly difficult to manage—function. With cost and service pressures intensifying, shippers are scrambling to identify appropriate changes in their
transportation activities to improve their performance in these areas. However, a variety of internal and external challenges often conspire to make implementing such changes difficult. Given such challenges, transportation outsourcing can be a good approach to boost the business value of transportation while enabling a company to maintain its focus on growth and market differentiation. The key is for companies to determine which type of transportation outsourcing is the best strategic fit (for example, engaging a third-party logistics provider to manage shipping only or a transportation advisory firm to assume responsibility for the entire transportation function); decide which activities they should outsource; and choose the right provider as outsourcing partner.
In the pages that follow, Supply Chain Edge (SCE) explores why transportation outsourcing may be the right choice for companies today and what organizations should consider to enhance their chances of generating maximum value from such a relationship.
Supply chain complexity, as well, is a growing chal-lenge. In one survey, more than 85 percent of compa-nies anticipate their supply chains will become signifi-cantly more complex by 2012.5 Greater than 75 percent of executives expect to serve more international cus-tomer locations by then, and more than two-thirds plan on providing more product variations to meet the needs of increasingly diverse customers.6
Yet these more complex supply chains are relying on a significantly consolidated group of carriers. Ac-cording to the Council of Supply Chain Management Professionals (CSCMP), “ruthless capacity reduction” is shifting the balance between transportation sup-ply and demand to benefit carriers.7 In fact, CSCMP states that more than 3,000 trucking companies have gone out of business in the past three years, shrink-ing capacity by 13 percent.8
Internal factors
In addition to these external factors, a company’s at-tempts to optimize transportation management can be thwarted by internal limitations, including outdated or inadequate technology. Clearly, robust technology tools are critical to the effective operation of any mod-ern enterprise. And with transportation growing more complex, the right technology is vital to helping a com-pany identify opportunities to reduce spend, optimize route planning, and boost collaboration across the sup-ply chain. Yet only about one-third of major companies currently use a transportation management system.9 Many companies also lack sufficient data and, in fact, often create demand forecasts based on the previous year’s data,10 a tactic that can compromise the accuracy of those forecasts. In SCE’s experience, companies of-ten struggle to compile such historical data, especially when they work with a large number of transportation providers and lack a systematic, technology-supported approach to transportation management.
Furthermore, organizations may encounter substan-tial difficulty finding, attracting and developing the right talent. In a recent survey, 90 percent of execu-tives described supply chain management talent acquisition and leadership development as an im-portant issue.11 Processes are often lacking as well, with many companies’ transportation management processes being broken, clogged, fragmented or oth-erwise compromised. This results in high degrees of inefficiency and higher costs, and prevents organiza-tions from deriving the full potential value of their transportation functions.
Generating Greater Value by Outsourcing Transportation
For companies facing the preceding challenges, trans-portation outsourcing is becoming an increasingly attrac-tive way to generate more value from the transportation function. Indeed, outsourcing transportation can result in powerful benefits for almost any organization (Figure 2). Outsourcing transportation allows companies to fo-cus on their core competencies: Innovation, fo- cus-tomer service, cost reduction, speed, or which-ever attributes are part of their unique value proposition. In addition, by outsourcing trans-portation management, companies can benefit from deep expertise and cutting-edge technolo-gy that often are too expensive to bring in-house. Transportation outsourcing providers also can give shippers more complete and accurate data, and the means to analyze that data to make better deci-sions. Plus, with an outsourced transportation func-tion, a company can readily scale up and down its re-sources as requirements change. Outsourcing’s flexibility frees companies from large capital out-lays and from overhead costs, which can become es-pecially burdensome when conditions become more challenging. And it gives companies ready ac-cess to increased capacity when demand grows. Figure 1. Pressures on Transportation ManagementTransportation
Management
• Rising energy prices • Carrier consolidation • More complex supply chains • Increasingly demanding customers
External
• Outdated or inadequate technology • Insufficient data for effective decision-making • Broken or inefficient processes
• Difficulty finding, attracting and developing talent
Finally, for many organizations, outsourcing trans-portation to a third party that aggregates volume en-ables them to increase their market power and nego-tiating strength significantly.
Yet companies seeking to tap into these benefits face an overwhelming variety of choices—both in the aspects of transportation they decide to outsource and the out-sourcing provider they select.
For instance, shippers can choose from a multitude of transportation activities to outsource, ranging from freight audit and payment and customs house/ import brokerage to insurance/cargo liability and fleet management. According to one recent study, the most commonly outsourced transportation pro-cesses are those that are more repetitive and trans-actional in nature, including warehousing (74 percent of respondents had outsourced it), customs broker-age (58 percent), and forwarding (53 percent).12 And in SCE’s experience, companies sometimes determine that transportation itself is not a core competence, and turn over responsibility for the entire function to a third party.
Just as important as deciding what to outsource is deciding who will manage those activities. In this regard, companies must decide whether they should work with a third-party logistics provider (3PL) that offers immediate savings derived from their inherent volume advantages and technology expertise, or if they would benefit more by partnering with an ad-visory firm that can provide consulting and ongoing management services to achieve longer-term, more sustainable performance improvements (Figure 3). While there is considerable overlap between these two ways of outsourcing transportation services, they also have several significant differences.
Immediate Scale and Lower Shipping Rates via 3PLs
The primary value proposition offered by a 3PL includes lower transportation rates derived by pooling volume from several clients, as well as access to shared technol-ogy platforms and human capital. In effect, a 3PL allows smaller companies to gain the benefits of scale that other-wise might be unattainable to them which, in addition to more advanced technology and more powerful relation-ships with carriers, often include lower administrative ex-penses and optimized processes. The benefit of receiving one unified invoice for all transportation expenses—ver-sus multiple bills from several individual providers—is itself a powerful enticement to work with a 3PL for many companies. Indeed, such simplified billing often paves the way for more advanced analysis of and control over the company’s transportation spending.And for companies with little or no existing trans-portation management infrastructure or skills, 3PLs can add value quickly. Within a short pe-riod of time, such shippers likely will be obtaining lower rates, benefiting from more advanced tech-nology, and enjoying more control over and visibil-ity into their transportation spending.
However, when working with companies further along the maturity curve that may already possess inter-nal organizatiointer-nal structures, technology, and other transportation-related assets, 3PLs may not be able to generate the same degree of incremental value. In-formation related to transportation often resides in silos in these instances, making it difficult for a 3PL to establish unified control over the function itself, or effectively conduct a wholesale switch to new tech-nologies and business processes. 3PLs also are in the business of aggregating volume to drive down rates— not necessarily optimize service levels for specific cli-ents’ needs. Therefore, while many 3PLs are intensely customer-focused and service-driven, they may find that customizing service for individual clients—for example, meeting customers’ demands for smaller, more frequent deliveries to help drive down inventory costs—negates the speed and simplicity that often characterize their operational strategies.
Stronger Capabilities and Lasting Value
from Advisory Firms
In contrast, for more sophisticated, complex organi-zations that make correspondingly higher demands Figure 2. Benefits of Transportation Outsourcing
• Allows companies to focus on core competencies
• Provides access to deep expertise and cutting-edge technology • Delivers more complete, accurate data for decision-making • Supports variable, flexible resources and capacity to align to
changing business needs
• Eliminates the need for large capital outlays • Increases market power and negotiating strength
on transportation, it often makes more sense to part-ner with an advisory firm that can understand the company’s complete transportation situation includ-ing its goals, challenges, capabilities, and infrastruc-ture. These more strategic partners can craft indi-vidualized transportation strategies that may include the use of 3PLs, as well as other key changes to busi-ness processes, assets, and operations.
When deciding between a 3PL and an advisory firm, companies should determine the extent to which key transportation-related processes and information flows could be improved, and the effectiveness with which its transportation operations span mul-tiple functions. For many organizations, stakehold-ers from sales, customer service, supply chain manage-ment, procuremanage-ment, and other functions play roles in transportation. When handoffs and information ex-changes among these stakeholders are not opti-mized, an advisory firm may generate greater val-ue than a 3PL could on its own.
A more strategic partner also can help companies eliminate information silos, identify and address in-ternal issues that drive up transportation costs, and understand how much bargaining power they can gain by aggregating their spending with fewer providers. In sum, a typical 3PL will deliver value by “taking over” some aspects of transportation and thereby drive near-term rate reductions and scale advantages, while an advisory firm will work collaboratively with compa-nies to make structural and process changes that will lead to the most substantial long-term improvements.
Choosing the Best Transportation
Outsourcing Strategy
Ultimately, the approach a company takes toward outsourcing transportation depends upon its strategy and goals, the complexity of its business model and operations, the maturity of its existing transportation capa-bilities, and several other factors (Figure 4). Assess strategic fit
To begin with, companies should assess whether or not outsourcing is right for them from a strategic perspective. In particular, this means considering whether they are will-ing to relinquish control over some aspects of their op-erations and if, in doing so, they can execute their strat-egy more effectively.
One SCE client, for example, found that cutting its transportation spending while maintaining its po-sitioning as a provider of fast, responsive service required it to address several different aspects of transportation simultaneously. To help the company achieve these goals, SCE conducted a thorough re-view and benchmarking of the company’s shipping costs, using SCE’s proprietary database of transpor-tation spending metrics. SCE’s analysis of the com-pany’s operations revealed not only that there were several ways the company could cut its shipping costs, but also that the company was not utilizing courier services as effectively as possible. The SCE team also found significant cost and inefficiency as-sociated with the company’s in-house fleet of courier vehicles and 20-member support staff. For instance, the company lacked automated tools for routing opti-mization and data capture, did not perform any data analysis beyond cost measurement, and was using dispatchers in Florida to generate routes across met-ropolitan New York. In short, it was not running its in-house fleet as efficiently or effectively as possible, which was adding to its costs.
Overall, the SCE team uncovered numerous concrete opportunities for the company to cut its costs quickly and sustainably, and set several projects in motion to make those savings a reality. One such project fo-cused on cutting the drag created by the company’s in-house courier fleet and staff. Having identified the potential value of divesting this part of the business Figure 3. Choosing the Right Transportation Outsourcing Approach
Advisory Firm
3PL
• Lower rates
• Lower cost
• One invoice
• Short time to value
• Individualized transportation strategy
• Process improvement
• Better information flow
• New capabilities
to a dedicated courier firm, the SCE team screened a number of suitable companies and ultimately found one whose existing capabilities and footprint were a good match for the company’s needs.
In addition to coordinating this restructuring, SCE managed a nationwide request-for-proposal (RFP) process to rationalize the company’s large pool of couriers into a smaller group of the best available providers. Finally, SCE worked with the company to transform several aspects of customer service with one overall goal: Maintain excellent service and rap-id turnaround while reducing costs. Overall, these changes helped the company save more than $2 mil-lion annually, while staying true to its strategy of achieving differentiation through speed and service. Confirm complexity of operations
The complexity of a company’s operations and busi-ness model also plays a significant role in whether and how an enterprise should outsource transportation. Larger companies with highly complex supply chains are more likely to be a good candidate for transpor-tation outsourcing. For such enterprises, managing transportation in-house often distracts them from their focus on the core business, and makes imple-menting quality improvements and cost reductions more difficult and time consuming. The key is to as-sess the potential of outsourcing within a given com-pany in an objective, fact-based manner. External op-erational benchmarks can be invaluable during this process, enabling companies to understand more clearly what “good” means for their specific industry and size bracket, and thus set goals that are both at-tainable and meaningful.
The maturity of the existing transportation function is important as well. If a company’s existing trans-portation function is not up to the task and mak-ing it so would be cost-prohibitive, outsourcmak-ing is a good alternative. A thorough assessment of all facets of the function, including talent, technology, data, and business processes can be helpful in mak-ing such a determination.
Consider, for instance, Hayward Industries, the largest supplier of residential swimming pool equipment in the United States. The growing company has a diverse prod-uct line and a worldwide footprint that includes eight man-ufacturing facilities in North America, Asia and Europe.
With widely dispersed operations, Hayward has many moving parts to manage across its global sup-ply chain. And as is the case with other organizations of its type, this geographic dispersion had resulted in substantial complexity and numerous opportuni-ties for redundancy and inefficiency to creep into the system. The company also stood to benefit from a higher level of management insight and transparency in the logistics and traffic area. Hayward employed SCE to get a better handle on where it was spending its transportation dollars, where it could save mon-ey, and what changes to its processes and practices were necessary to realize those cost savings both im-mediately and on an ongoing basis.
SCE began its work by conducting an extensive bench-marking of all modes of transportation at Hayward against what the firm considered to be world-class performance across all industries. SCE also compared Hayward’s methods, management style, acumen and contracts for shipping and traffic against those of lead-ing companies. At the end of the assessment, SCE iden-tified where Hayward was performing well and where it had immediate opportunities for improvement. Impressed with the results of the assessment and SCE’s recommendations, Hayward gave SCE the re-sponsibility for managing and operating the com-pany’s entire transportation function. In just four
months after outsourcing transportation to SCE, Hay-ward saved approximately $1 million in transporta-tion, and the company expects even greater ongoing savings in the future.
Of course, there are circumstanc-es—albeit rare—in which a compa-ny may not want to outsource. For instance, highly innovative compa-nies may eschew transportation out-sourcing due to their need to control intellectual property, while organiza-tions that differentiate themselves based on service may wish to keep transportation in-house to protect their brands. Or in some instances, a company simply may be able to do better itself, as SCE helped one cli-ent discover.
This particular company possessed several key char-acteristics that made “in-sourcing” a more logical choice than continuing to work with its 3PL. For in-stance, while companies that lack bargaining power can benefit from the 3PL model, this client enjoyed substantial clout over its suppliers. The company also had a very simple supply chain, which it could manage easily on its own, and its talented supply chain staff were ready to assume new, optimized roles. In sum, the company had strong potential to achieve major cost savings and performance im-provements by bringing transportation management back in-house.
In fact, the net potential benefit to the company of shifting freight in-house was between $1.7 million and $2.3 million a year. SCE worked with the company to achieve this goal, including scoping the new trans-portation management function, determining which roles would be required, recruiting new employees, choosing and implementing a new transportation management system and, ultimately, requesting pro-posals from motor carriers. By the end of the proj-ect, the company’s new freight management function was on track to achieve $3.3 million in savings in the first year, or a 10X return on investment.
Finding the Right Outsourcing Partner
If a company has determined that outsourcing is right for its business, it should seek a partner that suits its
specific needs. While this is a straightforward notion, in practice it can be difficult to navigate the various positioning statements and sales pitches of the many firms vying for a company’s business. Three
consid-erations are critical factors in this decision: qualifications, flexibility, and value generation.
At the most basic, a com-pany must feel comfortable that the provider is quali-fied to handle its business. While this sounds obvious, for
var-ious reasons companies
of-ten do not conduct sufficient due dil-igence or evaluate candidate pro-viders deeply enough before mak-ing up their minds. In particular, companies considering 3PLs should have a for-mal and rigorous process in place that includes a de-tailed request for proposal, in-depth interviews with candidate providers, and extensive site vis-its by finalist 3PLs (see sidebar). A third-party advisory firm can helpful in leading and manag-ing this process to ensure the 3PLs are proper-ly identified and vetted for suitability to the ship-per’s business (both from a capability and a cultural perspective).
Another important consideration is the provider’s flexibility. Especially for organizations that are new to outsourcing and have managed the function in-house for several years, it is critical that an outsourc-ing provider be willoutsourc-ing to address individual chal-lenges or opportunities on a case-by-case basis. By thus gradually shifting responsibility for transporta-tion management to the provider, companies can as-sess their true readiness to outsource this important function, and can “test-drive” the provider’s ability to generate value in a collaborative fashion. Companies can begin by focusing on discrete pieces of the trans-portation function, such as freight auditing, payment, custom house and import brokerage, insurance and cargo liability, and fleet management. Once they have outsourced these activities successfully, com-panies can shift more of their transportation function to their chosen partner.
Perhaps the most important consideration, and one that many companies overlook when considering
out-Three considerations
are critical factors in
choosing the right
outsourcing provider:
qualifications,
flexibility, and value
sourcing, is the way the outsourcing providers gener-ate economic value for themselves. 3PLs generally do so by buying freight services in bulk and reselling them at a mark-up to their clients. While this practice promises healthy margins to the 3PL itself, it also gen-erates immediate savings for its clients—especially those companies that lack negotiation strength and significant transportation experience, and whose busi-nesses are not all that complex.
In contrast, more strategic advisory firms usually are compensated for identifying and achieving long-term, process-related cost savings—whether or not those involve freight rates. While these savings may take more time and effort to generate, they often persist longer than the savings related to more ag-gressive rate negotiations (which can be re-versed when fuel prices rise or shipping capac-ity falls). Most importantly, some advisory firms tie their compensation to cost savings actu-ally generated, not just projected, meaning they don’t make money unless the client saves mon-ey. Such arrangements are especially attractive to com-panies that are unwilling or unable to make sub-stantial upfront investments in consulting
help but still have ample opportunities for perfor-mance improvement over time.
Conclusion
The challenges facing companies today are manifold: Shipping rates fluctuate with fuel costs, vendors con-solidate and gain market strength, and companies must reach increasingly demanding customers through more complex supply chains. At the same time, many organizations lack the technology, talent, or focus that generating value from transportation demands. Should all companies address these challenges by outsourcing transportation? Not necessarily: As dis-cussed, there are circumstances when in-house con-trol over the function can generate the greatest value. For many companies, however, outsourcing will be the right choice. The question for these companies is the extent to which they outsource and which pro-vider or propro-viders they should choose.
In SCE’s experience, 3PLs can bring fast, substantial savings to smaller companies with simpler supply chains, which readily benefit from these providers’ market power, economies of scale, superior
technol-A Formal Process for Evaluating and Selecting a 3PL
Third-party logistics (3PL) providers often are a good option for companies seeking to quickly reduce their shipping costs and gain access to rate-bargaining clout. However, it’s critical for a company to choose the 3PL that is right for its specific situation and goals. A formal and rigorous process for vetting and selecting a 3PL is a powerful tool that can help companies achieve that goal. A key component of the selection process is a comprehensive request for proposal (RFP). In SCE’s experience, an RFP must in-clude key data that potential vendors will need to craft the right solution for the company. Such data typically inin-cludes financial and operational performance metrics on the company’s transportation and distribution activities; detailed information on how such activities are performed (for example, process maps, standard operating procedures for specific functions, and network configurations); and data about the company’s product portfolio, number of SKUs carried, types and number of customers served, and customer service requirements. The company should send the RFP to a select group of providers that, at a high level, appear to have the size, scale, and capabilities to meet the company’s needs.
Once potential providers have responded to the RFP and the company has selected a small number of finalists, the company should work with these vendors to refine their proposals. As part of this refining stage, the company should invite the finalists to visit its facilities, which enables providers to see firsthand how things are done (and, sometimes, illuminates areas a provider may have missed in its proposal or uncover opportunities for even greater improvement than it originally thought possible). Site visits also enable company personnel to ask questions of the providers, thereby boosting their familiarity with each and clarify-ing any issues in their proposals. Follow-up interviews with the finalists can be helpful as a “debrief” of the site visit and to gather any final information from the finalists that could help the company make its decision.
Finally, the company must choose the provider it believes will deliver the best complete package of capabilities at the highest value. This decision should be based not only on whether the vendor could meet the financial and service-level targets called for in the RFP, but also on other key criteria such as its client portfolio, geographic reach, condition and types of facilities, perfor-mance track record, cultural fit with the company, and overall ability to execute. Only by considering this wide array of informa-tion and variables can companies choose a partner that will help them achieve their goals.
ogy, and seasoned talent. Yet for larger, more com-plex organizations, an advisory firm that assumes responsibility for the entire transportation function can deliver more value over the long term by imple-menting important changes to a company’s transpor-tation infrastructure, capabilities and processes.
John S. DuBiel, chief executive officer of Supply Chain Edge, is nationally recognized for his accomplishments in the supply chain indus-try, generating more than $100 million dollars in cost savings for nearly 50 Fortune 1000 companies throughout his career. DuBiel’s exper-tise has been honed during 25 years of senior management experience in the consumer goods, packaging, and industrial manufactur-ing industries, with a strong focus on global transportation, distribution, manufacturmanufactur-ing, packagmanufactur-ing, and warehousmanufactur-ing.
About The Author
Ultimately, the decision requires companies to assess their goals, capabilities, and limitations carefully. By taking into account the variables and guidelines ex-plored in this paper, companies can use this assessment to help them choose the right outsourcing approach to maximize the performance and value of transportation.
End Notes
1 Two Directions for the Prices of Natural Gas and Oil, The New York Times, February 25, 2011. 2 A Smoother Road for Less-Than-Truckload?, Morningstar Inc., June 24, 2011
3 http://letstalkshipping.wordpress.com/2009/02/23/top-challenges-facing-transportation-managers/ 4 Ibid.
5 Supply Chain Comment: Can Your Internal Value Chain Economically Handle Growth Opportunities?, Supply Chain Digest, June 22, 2011. 6 Ibid.
7 State of the Logistics Union 2011, Supply Chain Digest, June 16, 2011. 8 Ibid.
9 http://www.logisticsmgmt.com/article/tms_the_key_enabler/ 10 Ibid.
11
supply-chain-leaders-122508783.html
12 15th Annual State of Logistics Outsourcing, Capgemini and Georgia Institute of Technology, 2010.
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