In a previous post, we compared the management of a transportation network to that of going to a doctor for a routine check-up; specifically, focusing on key vitals that determine your health. Similarly, regular monitoring and maintenance of critical performance indicators in your transportation network will drive desired cost and service performance levels. The basic premise being that regardless of commodity, business sector, industry vertical, or any other product attribute, understanding the cost or service “leakage” of a network is really the same.
Understanding Transportation Cost Drivers – The Sequel
The first 6 vitals we discussed in the previous post were: network overview, prime carrier tender acceptance, lane variance, spot market, freight brokerage and expedite activity. These all provide insight to the operational execution aspect of your business. But how is the “planned solution” performing to the expected targets?
The next set of vitals, or areas of opportunity, could be classified as being more strategic in nature, where improvement could require significant change management of associated processes together with internal and external stakeholders. Driving improvement in these areas will often impact other functional areas or groups. Let’s go through 5 vitals that can improve your transportation network:
1) Weight or Cube Utilization – it is important to keep an eye on a couple of different aspects pertaining to weight or cube and how it may or may not be impacting network costs. Fundamentally, the goal is to maximize the weight per load to reduce the number of loads, lower costs and improve carbon footprint (CO2 levels). This means working with manufacturing, production planning and shipping to determine how greater volumes can be placed on equipment. Small improvements in weight or cube per conveyance can equate to thousands of dollars in transportation savings annually.
Another weight/cube effectiveness measure to review weekly and monthly is the number of low weight truckloads (TL) or high weight less-than-truckload (LTL) loads being executed. Both scenarios could be cause for cost leakage. Each high/low weight lane identified should be reviewed and balanced with product mix, cube, expedite/hot load, back order, etc. Transportation optimization could be running ineffectively due to business rules or other constraining parameters. Collaborating with sales, customer service, purchasing, supplier management and/or manufacturing will be required to chip away at the inefficiencies in this area.
2) Mileage – Out of Region Shipping – understanding the “where” freight is shipping, the ‘to and from’ locations, is another probe point for understanding implications to network transportation costs. Oftentimes this is driven by out of region shipping due to inventory imbalances in the network. This can cause longer distance replenishment, transfer moves and customer deliveries. These are largely ‘unplanned’ moves and ones that are not optimal to the network from a transportation cost perspective. A mileage band analysis is a good approach to identify and compare period over period volume expansion into higher mileage band buckets. Creating simple mileage bands, or rings around each of your distribution points or supplier regions, and overlaying with shipment activity will provide a quick view of out of region shipping that will require further discussion with purchasing, manufacturing, , sales or customer service. There may be shifts in corporate functional strategies that could be driving these network changes. The question should be asked, “Are we shipping from the optimal point to minimize transportation costs?” And if not, do those other reasons offset the higher costs being incurred in transportation? Monitoring this area can uncover network inventory issues, non-value added “product transfer” activity, or non-compliance to the plan. It goes without saying that an increase in miles not only drives higher transportation line-haul costs ($/mile) but also correlates to higher fuel costs and higher carbon footprint levels. So the goal is to find efficiencies in your network that can reduce mileage.
3) Mode Utilization (modal shifts) – utilization of a more cost effective mode while maintaining required service levels should always be an objective of network management. This is an area that contemplates multiple variables together such as miles, weight/cube and service levels. Therefore, reviewing ‘best mode’ opportunities such as: low weight truckloads, high weight LTL loads, high mileage / high weight truckloads, multiple parcel packages with same origin / destination, expedites, etc. are all opportunity areas for reducing transportation costs. Once you have the potential opportunities identified then it’s a matter of vetting out the “reality” of implementation by considering operational constraints or business rules that may need to be relaxed or overcome within the transportation network in order to realize the benefits. From there, you can develop a modal strategy and associated target levels that will enable you to measure effectiveness.
4) Accessorial Costs – perhaps one of the largest “hidden” cost categories of any transportation network is accessorial costs. Planned costs such as fuel and stop-off charges are often known and understood but the real “leakage” point is what we call “unplanned” accessorial cost. Common unplanned charges include: truck ordered not used (TONU), detention, and loading/unloading charges. While it is a best practice to have control points in place for accessorial approval at the time of event occurrence, there remains a need to monitor what actually is invoiced. It’s critical to be able to breakdown these costs by carrier, by origin or destination, or by lane utilizing a Pareto or impact analysis methodology. This will enable you to understand what attributes and characteristics of those costs are contributing the greatest to the overall performance and where to probe. For example: what origins or destinations (suppliers or consignee) are driving most detention? Is it certain carriers? Is it certain times of the month? From there, you will have data points to develop a specific improvement or corrective action plan.
5) Benchmarking – so you may be doing all the things we’ve discussed and you feel like you have reasonable control over your transportation costs but are wondering how you compare to other like companies in your industry. A common question that many shippers are interested in understanding is “how competitive are our rates compared to the market?” Performing a benchmarking exercise once a year is a best practice that will provide you that insight and become a primary input to your annual procurement strategy. Automatically performing a carrier RFP every year without understanding your current marketplace “state of competitiveness” may very well deliver negative net results. Understanding the geographies, regions, lanes, equipment types, etc. of where your network is competitive and where it is not will enable you to be surgical in developing a procurement strategy. In addition to the benchmark perspective, supplement your strategy with transportation industry / market forecasts to determine your final approach. It could be that the benchmarking indicates you need to bid out your entire network, however, because of the tightening in the transportation marketplace, it may actually be better to hold your current position. To avoid making multiple “knee jerk” reactions and straining carrier relationships by having multiple bids per year, the recommendation is to benchmark your network holistically once a year.
The above vitals completes the transportation cost checklist that you should review on a regular weekly and monthly basis to determine the health of your network. While some of the measures may seem obvious, or in some cases may be less impactful in your network, the important takeaway is to use this guide as a blueprint for monitoring core network transportation measures to identify cost leakage and assist in developing continuous improvement plans for ongoing efficiency.
Do you know the performance of these vitals for your network? If not, it’s time for a check-up.
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.
