Transportation and shipping costs represent one of the largest spend categories for companies. Sourcing and managing this category is very complex for many reasons, including effectively managing various modes of transportation, inbound shipments from suppliers, outbound to customers, ongoing volatility in fuel costs and a dynamic supplier base, to name a few.
In order to effectively and efficiently manage transportation, sourcing, procurement and logistics professionals must focus on optimizing both the price or per unit cost of transportation services, as well as the usage to reduce total landed cost (the fully absorbed end-to-end costs of transportation).
Transportation & Shipping Overview
When managing transportation as a category, each professional must become familiar with the key modes of transportation, which include air, ground and ocean. These modes are commonly subdivided by weight of shipment (freight – typically 150 lbs or greater vs. small parcel – typically less than a 150 lbs). For ground, shipments can transported be an intermodal/rail mode, full truckload (TL) or less-than-truckload (LTL). Similarly, ocean freight is most often broken into full container load (CL) or less-than-container load (LCL). Additional variations include the types of freight being transported as well as potential needs for refrigeration to ensure perishables are not spoiled.
Optimizing Transportation Pricing
If a company is outsourcing transportation services, developing a comprehensive shipping profile is the first step. It is essential that companies have a complete understanding of all key attributes of existing shipments by "lane" or Origination/Destination pairs (O-D).
Defining the shipping lane detail will establish the baseline for current state shipping profiles and current costs for savings details. Each lane definition should include the following information at a minimum:
- Origination (O) and Destination (D) Address, Miles between O-D pair, number of stops and drops, shipment mode (LTL, TL, Rail, Ocean, Air), number of shipments and average shipment characteristics (weight, density, type of goods/materials, volume), service level requirements – this will determine the base freight costs
- Loading and unloading requirements, including special handled requirements or specialized equipment needs – this will determine the accessorial or surcharge fees
- Lastly, historical fuel costs will need to be analyzed – this is typically a fixed percentage tied to a government index (like the Department of Energy) or a flat percentage based on the base freight charges – this will determine the final component to pricing which is the fuel costs
The total base cost is equal to the sum of these three components. This total lane cost is often normalized by dividing by the number of shipments to get to a cost per pound, cost per shipment or cost per mile metric.
By developing this baseline and comprehensive view of your current shipping operation, all future sourcing/RFP events will use this basic template for bidding or tendering purposes, which allows for an apples-to-apples comparison among vendors.
The goals for each lane should be to minimize the number of vendors while meeting the required service levels, addressing business continuity requirements and mitigating overall supply assurance risk for each company and its customers. Evaluation or re-evaluation of service level is strongly recommended. Many companies that "right-size" their service levels can reduce their costs significantly. By way of example, consider changing practices or policies around the use of overnight or expedited shipping to customers.
Optimizing Transportation Usage
The other part of the total cost equation is usage. To optimize usage, internal practices and processes must be reviewed and adjusted to realize the potential benefits. Optimization areas include:
- Route optimization – this relates to optimizing the routes that trucks are taking to deliver goods. Special route optimization software can help companies analyze the most ideal routes to reduce the total miles for delivery
- Logistics network optimization – beyond route optimization, a more comprehensive, but more disruptive change includes analyzing the end-to-end flows (i.e. determining the existing inbound flows from suppliers into manufacturing and distribution centers as well as outbound flows to customers).
- Load capacity optimization – it is common that a truck will deliver freight partially empty. This loss of capacity increases costs as the cost to deliver freight with a truck half-loaded vs. fully-loaded is similar. For LTL, this is not an issue, but for TL deliveries, companies can reduce their cost per lb by consolidating the loads from multiple deliveries for routes originating from the same location.
- Backhaul – this refers to the return trip that a truck makes after it has delivered freight. This trip is often taken 'un-loaded' or without any freight onboard. When contracting for transportation services, backhaul credits or targets can be negotiated with a carrier where backhaul is achievable.
Optimizing transportation and shipping costs requires a detailed knowledge of an organization's existing shipment operations, including understanding existing pricing, lanes, service-level requirements/policies, as well as delivery processes and needs. We recently completed a project for one of our clients, a Fast Growing Consumer Packaged Goods and Retail company, using these strategies. With over $10 million is total transportation spend, comprised of air freight, LTL, TL and small parcel, we helped the company generate 35% annual savings. After reviewing the variables discussed above, an organization can become smarter and more strategic in how they allocate financial resources and utilize transportation channels, which will ultimately lead to a significant reduction in total cost of ownership for the transportation category.