As we shared in a previous blog post, managing a transportation network is a lot like going to the doctor for a routine check-up. Similar to checking your heart rate, blood pressure, and cholesterol level, a transportation network requires regular monitoring and maintenance to achieve desired cost and service performance levels. As daunting as this may be with networks becoming more complex and the data becoming larger and larger, it is critical to understand the performance of a network’s core indicators.
After many years in the industry, both on the shipper and service provider sides, it has become evident to me that regardless of the commodity, business sector, industry vertical, or any other product attribute, understanding the cost or service “leakage” of a network is really the same. In other words, shipping hi-tech goods, food products, raw materials, service parts, or consumer products does not change the fundamental cost drivers or vitals of a transportation network. So what are those vitals?
Understanding Transportation Cost Drivers
Over the next couple of posts we will examine some probe points to better understanding the health of a transportation network, let’s look at the first six now.
1) Network Summary View - To begin with, you have to understand the “forest view” before you get down amongst the trees. The initial perspective of network performance each week should be one that is holistic and represents the network in its entirety. This provides a reference point for overall cost performance and trends that will set the course of focus for further investigation and problem solving. This means looking at the network’s key cost per unit measures (i.e. $/case, $/mile/, $/pound) as well as divisional views, period over period comparisons, and aggregate breakdowns by mode, miles, weight, and distribution channel (i.e. inbound, outbound, transfers, shuttles, etc.). Understanding a top-tier network view provides focus for the next level analysis.
2) Primer Carrier Tender Acceptance – This is an indicator of how well your carrier plan is being executed. Most likely, you have selected preferred carriers through a procurement process based upon variables you have deemed to be important to your business. Those are the carriers you want moving the freight as often as possible. Relying on global carriers to cover loads or having to go to the spot market consistently will lead to leakage. Low primary tender acceptance is an indication that the procured carrier solution is ineffective or inadequate in meeting the needs of the business resulting in higher costs and greater service risks.
3) Lane Variance – This is particularly useful in examining the truckload activity of a network. Lane variance is a measure that focuses on rate variance at the lane level; specifically, the variance between the executed carrier cost and a defined baseline cost. A baseline cost could be the prime carrier cost, previous year historical lane rate, budget lane rate, or a period lane run rate. Inherent in this measure is the quantification of the “spread” of rates between the prime, global and non-contracted carriers. This is a key measure to understand as you may be achieving relatively strong primary carrier tender acceptance levels, thus cost savings; however, whenever you go to a global or spot market carrier you are losing BIG! Lane variance will expose that flaw and show you the lanes to be building out a more effective carrier solution.
4) Spot Market Activity - Obtaining a spot quote or spot rate on a given lane is designed for transportation moves that occur one-time or infrequently as pursuing carrier contractual pricing on these types of lanes would not result in any advantage due to their inconsistent volumes. Spot rating the same lanes multiple times a month can increase the potential of cost “leakage” as the rates being paid are likely at a premium as compared to that of a contracted, preferred carrier. At times, spot quotes can be more competitive than a prime carrier depending on the day, geography, lane and other load characteristics. However, in the long run, it is recommended that spot market activity be less than 5% of delivered loads. Similar to prime acceptance and lane variance, out of tolerance performance in spot activity indicates a deficiency in the prescribed carrier solution.
5) Freight Brokerage Activity - In general, loads tendered to brokers tend to move at a premium cost compared to preferred, asset-based contract carriers. There are also service limitations (i.e. live load / unload only) and delivery performance risks associated with brokerage use. From a daily tactical level, brokerage is equivalent to the big red “easy” button where one phone number can be called and the load is covered. Given certain circumstances and conditions, brokerage may be the best option in securing capacity (i.e. end of month or quarter demand spikes), however, generally speaking the recommendation is to operate less than 5% brokerage activity in the network.
6) Expedite Activity – While this can be considered somewhat uncontrollable, understanding the role expedites are playing in the network can assist in explaining cost increase impacts. The most important thing is to break-down the expedite activity by key lanes, customers, origins, time of month, etc. for appropriate action to be taken or further questions to be asked based upon that data. Avoidance of expedited transportation is a fundamental principle, even though it is understood that there may be times when it is necessary. Knowing when and why it is happening, the cost impact, and the root cause for occurrence is critical to determining a corrective action or recommendation.
The vitals discussed thus far all have a common denominator: They all help to make your transportation network more effective in meeting the needs of your business. While this is a dynamic challenge in today’s business climate, this warrants transportation managers to be diligent in monitoring these vital signs through a disciplined approach at a regular cadence.
Do you know the performance of these vitals for your network? If not, it’s time for a check-up.
Stay tuned for our next post where we will discuss an additional six cost drivers along with service indicators that help you understand how well your transportation network is running.
Written by Scott W. Nemeth.
Mr. Nemeth is a Group Director of Transportation Management (TM) at Ryder. He is a logistics and operations professional with 22+ years of experience in transportation management solutions, business development, implementations, product development and account relationship management. Throughout his career Mr. Nemeth has implemented and operated numerous TM solutions for customers across a variety of industry segments.
