Top Ten Transportation Cost Drains!

 

Many companies are experiencing dramatic increases in transportation expenses that has turned into a major cash drain for organizations. Every Financial manager knows transportation can cost around 5% of gross sales, but lately it has increased to problematic levels!  Even a small increase in transportation expenses can quickly cut into overall profit margins.  In addition to transportation expense increases, companies are being required to find ways to improve delivery services to avoid losing business to competitors. If you are interested in identifying opportunities to solve these and associated issues, the following article will summarize some of the most prevalent problems companies are facing today.

1.  Fuel prices continue to increase, as we all know.  Oil prices are cited as the major contributing factor, but carriers address this through fuel surcharges.  It is difficult for transportation managers to know if the surcharges are fair and equitable or whether it is excessive and problematic.

 
2. Freight Rates are rising at an even faster rate than the oil prices. Could your carrier be using the price of oil to increase freight rates in order to make up for the past five years of stable prices? 
 
3. Supplier Shipping Terms are often under scrutinized because of departmental boundaries.  Is your supplier capable of generating larger freight discounts than you and is he passing this along? 
 
4. Shipment Distribution can be problematic when companies add products to their services and do not review its impact on shipments leaving the facility.
 

5. How do you treat your transportation partners? Do you try to help them control their expense or simply provide them the opportunity to haul freight?

6. What is your internal escalation process? Are all customers treated with the same high service you provide your best accounts and draining your resource pool from servicing your  top customers?

7. How are loads tendered to your carriers?
Do they have enough time to plan and schedule loads to keep their expense low?  Is it tendered electronically?
 
8. How has the driver shortage impacted your cost and service? Are carriers canceling loads, running late or delivering late? Is this monitored and measured with performance metrics?
 
9. How have the rail consolidations of the past few years impacted your business? Does your carrier tender include rail? Have you been impacted by a carrier using rail when you didn’t know or by the inability to get equipment? Is this monitored and managed as part of negotiating contracts?
 
10. If you are an international shipper/receiver you are certainly affected by Port Capacity and port issues. The recently ended work stoppage at the port of Vancouver was a major cash drain and profit penalty for many companies. Has this affected you unknowingly?


Summary

Many companies have considerable financial exposure regarding transportation both in cost, profit and customer retention.  Typically, they have difficulty addressing these challenges due to service distractions fighting fires and lack the time, resources or expertise. It is important to know there are companies who have the expertise to identify potential solutions to these problems and you may be surprised at the small relative size of the cost for these services in proportion to the costs reductions and benefits that can be gained.  In any case, I am reminded of Nike’s marketing mantra:  “Just do it!”    You’ll be glad you did.
 
For a copy of the full text of this article please contact info@avocusgroup.com and request the article by title.
 
 Bill Driscoll has been managing transportation for over 30 years.  He has worked for both large corporations as a shipper and major transportation carriers as a supplier and has a deep understanding of both perspectives.  Mr. Driscoll now works for Avocus Group LLC in the Chicago area and advises companies in transportation issues as well as performs benchmarking to help companies identify their overall transportation health and competitive capabilities. He can be reached at: Bdriscoll@AvocusGroup.com or 1-877-515-8900 (toll free).
 

 

 

OTHER INSIGHTS

Internal:

When evaluating an organizationís supply chain acumen, I typically use a framework that is easy for me and executive managers to understand.  I call it the PDQ or Performance Dynamics Quotient.  An organizationís marketplace performance is heavily dependent upon its internal capabilities to respond to demand using its extended supply chain capabilities.  The components of the PDQ are threefold:

a)       Ability to focus on its strategic imperative

b)       Alignment and synchronization across three dimensions

c)       Responsiveness to marketplace dynamics

 

The Performance Dynamics Quotient

There isnít enough space in this newsletter to fully explain this concept, but here is a brief summary on the PDQ components:

a)       An ability to focus on the strategic imperative Ė the entire organization must have a deep understanding of its strategic imperative, its components, relevance and priority.  This requires a pre-designed set of agreements and instructions that evaluates the companyís most important customers and most important products based upon contribution to profit.  Note that ďall customers may be created equal, but because of each customerís unique needs -  not all customers contribute equally to your companyís bottom lineĒ.  The same goes for products and the product offering, by market segment or channel.  A third dimension to the strategic imperative is service strategy and the capability of an organization to differentiate services by market segment, channel and customer and structuring those services by a) customerís profit contribution, b) size of contribution and c) scope of contribution.  Supply chain partnerships must ultimately be financial agreements with mutual and balanced (not necessarily equal) benefits to corresponding parties.   

b)       Alignment and synchronization are critical to performance.  Alignment focuses on supply chain component capabilities to fulfill demand while synchronization focuses on the inter-relationship of those parts to perform in unison.  These inter-relationships must be evaluated, a target for performance capabilities must be established and the scope and dependencies measured and monitored.                Measurements must be accompanied by accountability and consequences in order to instill performance discipline in the supply chain system.         

Responding to market changes in a harmonious manner allows the supply chain to take redundancies out and resulting in cost reductions.  Cost will correspondingly increase in direct proportion to any gaps in synchronous performance.  Example: demand decrease must be accompanied by corresponding forecast, production, inventory and supply changes (to mentioned only a few).  This applies to both the companyís supply chain as well as the extended supply chain.

For more information contact the author.

 

 

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From Spring 2004 Supply Chain Insights Newsletter

Strategic Renewal Ask yourself: “Is the high cost of non-conformance destroying competitive advantage?  Are you finding it tougher to keep key accounts due to service shortfalls or competitive pressures? Are your line resources supporting the strategic focus?  Do your staff and line resources make daily decisions aligned with strategic goals?  Do they have a set of guidelines by which to make those decisions?” 

I have found that many manufacturers become distracted from their strategic imperative and reason for existence: manufacturing!  It’s not that resources at the company don’t remember, but over time businesses atrophy and lose focus from their strategic intent unless they build a Strategic Renewal process into the culture. 

What can go wrong?  I’ve seen many manufacturers build inventories, expand warehouses, locations and more in order to address internal and external shortcomings of meeting market demands.  Inventory becomes the solution to fix process and communication problems.  Inventory becomes the panacea to remedy larger supply chain problems.  But inventory of finished goods is not a manufacturer's strategic goal.  (That’s what distributors are for!)  Internally, inventory is seen as a solution to demand volatility and unexpected demand; a buffer in order to provide better service. 

But inventory actually distracts from the real problems:
a) inefficient response capabilities
b) lack of communication internally as well as with the market or
c) most importantly, lack of understanding the strategic mission.  

Strategic Renewal can have a dramatic affect in energizing the entire enterprise to focus on “the few things needed to do well” and to critically evaluate a) performance b) output and c) value-added outcomes from sales, marketing, operations planning and manufacturing. 

How and why?  Following the Theory of Constraints outlined by Eliyahu Goldratt in his book “The Goal”, organizations can only perform as well as its weakest link.  Over the years, I have found this to be true.  Typically, the weakness is a lack in ability to prioritize the importance and value of individual customers and products.  For example, in the throes of daily activities, warehouse order pickers have to drive around slow moving product in order to get to the fast movers.  Another example would be changing the manufacturing schedule to accommodate an emergency need for a slow moving item which was requested by a “C” account.  Strategic Renewal builds a review and execution process into daily activities that clears away unnecessary disruptions and distractions from the primary strategic focus.

... more in the next series.