Spend Matters welcomes this guest post from Griff Causey and Liz Barnett, of Alvarez & Marsal.
Companies spend an extraordinary amount of time and resources collecting and analyzing data for transportation spend. There are a myriad of sophisticated modeling tools that promise insights and results, and yet even with the available tools, many companies cannot explain the budget variances for transportation. Drawing on our extensive logistics transformation work across a number of industries and geographies, here are our insights on how your organization can use analysis of transportation spend to drive operational decision-making, change the behavior of the logistics function and create a culture of continuous improvement.
Understand Transportation Spend & Service Profile
The first, most important, step in transportation analytics is to understand your spend and service profile by analyzing data at shipment level and by speaking to your facilities to truly understand how transportation services operate at each location. If you are not analyzing shipment level detail, you are most likely missing hidden levers of value in your supply chain. If you aren’t speaking to your locations and getting their perspective, you may not know what to do with these levers of value once you find them.
In understanding spend and service profile, there are many operational, service and safety requirements that organizations need to carefully consider. Some that are particularly relevant for transportation analytics include:
- What is the service profile of each location and what are the associated operational requirements? For example, types of products shipped, types of equipment required, drop-trailers and other services, use of a dedicated fleet
- What accessorial charges are used most frequently, and what is driving their use?
- Which requirements are imposed by actual operational constraints and which are simply there because this is how the network has historically functioned?
These key questions will help your organization determine what the unique drivers of cost are that define a “true lane” in your transportation network.
A true lane is the lowest common denominator of measurement for which you expect to have a differentiated cost. For example, organizations with relatively simple transportation networks may just use the origin, destination, mode and number of miles. Other organizations may need to consider equipment type, shipment weight and specific service requirements like tarping and temperature requirements to define a true lane.
Baseline Your Spend
You must successfully anchor your spend to a clear, measurable baseline over a specific time period that also accounts for spend variance that is outside of logistics’ direct control (e.g., volume fluctuations, fuel increase/decrease, etc.). Typically, the first step is to ensure you can measure your baseline cost at the lowest common denominator of detail — the true lane.
The second most important step is to define for every true Lane what the cost metric that defines every shipment is. Common choices include cost/mile and cost/lb. Both have advantages and disadvantages depending on where your organization focuses continuous improvement activity. For example, cost/lb ignores the impact of long-haul versus short haul lanes while cost/mile ignores the impact of trailer capacity utilization (shipping less air).
Whichever cost metric(s) you choose, it’s important to also break down your cost components. For example, using only line haul cost will ignore the impact of fuel fluctuations (assuming you’re on a standardized fuel schedule). You could also create baselines for fuel costs, standard and non-standard accessorial charges.
Finally, it’s critical to pick a specific time period for your baseline to measure against. It could be as simple as the entire previous fiscal year. However, there could be situations — for example, high seasonality — where you would want to baseline by quarter or even by month to compare the current period with the same period for the previous year.
Selecting the lowest common denominator and time period to baseline against will vary by industry and network, but the logic and calculations are the same for establishing a successful spend baseline.
Using Information to Drive Decision-Making
Once you have completed your spend baseline model, the next step is to build transportation spend analytics that drive optimal, real-time buying decisions. The dispatcher booking a truck for a customer shipment (whether manual or automated through a TMS) navigates a series of complex decisions that can impact costs significantly. Should you use a common carrier or dedicated fleet? Should you send over the road or intermodal? Do you need to expedite the shipment to make it on time? The dispatcher should understand and be held accountable to the financial impact of her decision-making process in real time.
The impact of real time answers to cost accountability is huge. Logistics can transform from a “cost of doing business” to a strategic cost lever. You can now quickly build tools to evaluate the potential costs of many different options and select the one that provides the most benefit to the organization. Budget variances can be tracked and well understood at a regional, site, lane, and true lane level.
Create a Culture of Continuous Improvement
The key to driving sustainable results is creating consensus, from the executive team to the dispatchers, around the process and the value gained by establishing and tracking real-time transportation spend analytics to drive real, cost-saving decision-making.
In order to do this, you must ensure that every individual at every shipping location can internalize a personal accountability for improving the cost structure of logistics. This can include:
- Showing dispatchers the cost (and associated savings) for each of their shipments relative to the baseline you established on a daily/weekly basis
- Measuring routing guide compliance at the site level (but also clearly illustrating the financial impact of each shipment that did not comply with routing guide)
- Publicly tracking and recognizing weekly, monthly, quarterly or annual savings generated by the local logistics teams with the greater management team
Providing this kind of real-time feedback and cost transparency from the Executive team to the dispatchers creates a psychological shift in the organization that drives different behaviors and more optimal decision making from the ground up. This shift in mentality can lead to a continuous improvement mindset that we have seen take hold at many of our clients. The client logistics team starts identifying and implementing cost-cutting improvements on its own and takes accountability for its weekly and monthly savings targets.
This is when the value of transportation analytics can be felt through the organization and translated to the bottom line.