Supply chain optimization is a goal with so many moving parts, it’s sometimes difficult to nail down what places to begin addressing potential changes. In this article, industry experts simplify the options and set the stage for an efficient, long-term process for freight movement.
When addressing operations efficiencies, it may seem that there are few options to mitigate the cost of shipping products. Most fuel charges that distributors incur are based on a national average, according to James Cooke, author of Protean Supply Chains. And there are no signs that the price of oil will be going down any time soon. Other factors are complicating the paths to stability.
“It’s not just fuel costs,” Cooke says. “It’s having access to carriers. They’ve talked about this for years. All the truck drivers are retiring; there just aren’t enough drivers to handle shipping loads.”
The capacity crunch is driving costs up as demand for shipping outpaces the supply of drivers to transport loads. Steve Norall, vice president of new business development at Cerasis, says that one thing contributing to this crunch are the demands on truck drivers.
“A lot of long haul drivers are finding work where they can be at home at night,” Norall says. “And the biggest thing is the hours of service. It’s hard for them to make a living at it now.”
These two problems are instigating several shifts in the supply chain, as shipping companies and their customers search for innovative ways to lower costs and increase efficiencies.
Less-than-truckload (LTL) shipping is already a critical component of the supply chain. But many distributors don’t take full advantage of it, says Paul Johnson, vice president of global solutions consulting at Descartes, a technology and consulting provider of logistics and shipping software.
“The largest opportunity is just decreasing the number of moves that you have to make,” Johnson says. “Instead of just doing an LTL, maybe I change to a different mode of shipment such as a multi-stop truckload, which many of my LTL carriers are willing to do. That’s where I basically contract the entire truck and then do three or four stops, which is an interim step between intermodal and LTL. I’m able to leverage truckload rates, decrease my cost and still maintain my service.”
Service is an issue as well, as customers are increasingly demanding more information in real time. Using technology to track that information would enable the supply chain to remove the amount of paper and transactional elements that are required between shipper and carriers, Johnson says. And that would have a huge impact on efficiency.
“In the parcel business, everyone understands that with FedEx, UPS, DHL, you order something online and when that arrives at your door, there’s a label on the box and you sign on a scanner,” Johnson says. “In the LTL and traditional B2B space, that is not the standard practice. It’s a piece of paper that flows with the product and a delivery ticket signed by the customer. So that’s the opportunity.”
For many smaller distributors, moving toward that opportunity means first having comprehensive datasets. Johnson says that a first step would be to establish shipment tracking and provide visibility to the paths shipments are taking.
“Then, start to aggregate information in a database to be able to potentially leverage making better decisions in the future,” Johnson says. “It’s just a way to facilitate, ‘This is where I’m spending my money today, and this is how my shipments are moving from point A to point B today.’ In a lot of cases, companies don’t have end-to-end visibility to be able to start doing that level of analysis.”
Jason Mathers, senior manager at the Environmental Defense Fund and author of multiple reports on innovating freight transportation models, agrees that more business intelligence will support efficiency goals to reduce costs.
Fuel prices will continue to increase over the next 20 years, according to the U.S. Energy Information Administration. Fuel emissions are also driving changes to product shipments – the U.S. Environmental Protection Agency and the Department of Transportation approved a regulation in 2011 that will require trucks to reduce fuel consumption and greenhouse gas emissions by 20 percent by 2018.
As the industry shifts to accommodate these requirements, the overall goals are also reflected in other strategic initiatives that some companies are taking.
“Many large companies are setting sustainability goals,” Mathers says. “These are increasingly extending into the supply chain.”
Unilever, Dell, IKEA and many other companies have expressed sustainability goals in their supply chain
operations, Mathers says. Caterpillar, SC Johnson and Kimberly-Clark have already implemented consolidation measures to save on freight costs.
The main idea is to increase the productivity of every move, Mathers says. Shippers can cut the overall number of trucks they need to hire to bring products to market.
“Do you have two half empty trucks going to the same place?” Mathers says. “Or do you have a system that’s able to identify that two trucks have the same destination and relatively similar delivery windows, and are you able to get those on the same truck in a way that’s going to meet the customer’s needs but also enable you to purchase one truck move as opposed to two?”
This is a differentiation option, Mathers says. Distributors will be best positioned to appeal to many companies by embracing business practices that push efficiency and reduce emissions.
But many distributors are still using paper- and spreadsheet-based methods or outdated software. Some are using newer software to identify opportunities, but they’re using a small percentage of the total capabilities that that software has to offer.
Cerasis’ Norall says that many companies that, five years ago, wouldn’t hear of changing procedures in favor of more technology, are now clamoring for the efficiencies that software can provide.
“Not only in the carrier selection, but also in managing the process,” Norall says. “Managing distribution in general through software packages is a big trend right now. It’ll bring them multiple choices, not just about cost but other important aspects of that shipment. What their limited liability is, what their transit days are, things like that so they can make good business decisions at the time of shipping.”
Norall says that the cost savings in using automated programs is in multiple areas.
“You’ll have high labor costs just having to manage the process of trying to find the right carrier,” he says. “High distribution costs, high management costs, lack of customer satisfaction tools.”
What software does is optimize freight options and places shipments in the lanes that carriers like the best, which means the distributor receives a lower rate and better service.
The fuel prices affect which lanes carriers prefer, also complicating the process for distributors in determining how to ship. Norall says that some are able to negotiate lower fuel surcharges, but in those cases the carriers will often use a lower discount or a higher rate base, so the overall cost does not change much.
But Cooke says that some tools are available that can impact how fuel rates affect shipment costs.
“Actually, there are two things you can do about that,” Cooke says. “It’s a little more complicated than just trying to restrain fuel surcharge costs.”
A company called Breakthrough Fuel makes software that can catalogue fuel prices in a state or region of the country. During contract negotiation with a trucking company, the distributor can specify that instead of paying the national fuel surcharge average, the fuel costs will be weekly and based on what the costs are per lane.
But that is only one option in the vast network of supply chain optimization opportunities.
“A smarter thing to do, if you look at the cost per mile for running a shipment, you really need to take a holistic view of your network,” Cooke says. “That means using special network optimization software.”
Cost savings can be found in strategic placement of distribution centers, he says.
“Even though you can take steps to control your fuel surcharge, make sure it’s based on actual cost rather than some national average, at the end of the day, optimizing your locations is really the only way you can reduce freight fuel surcharges,” Cooke says. “Such that you can better set your network so you have the ideal locations to travel the fewest miles.”
Capacity Crunch & Fuel Costs: Two Problems with Multiple Solutions
Two freight issues that have been around for years – and appear to be staying around – are driving up shipping costs for everyone in the supply chain. Fewer truck drivers are available to transport loads and fuel prices are expected to continue increasing over the next 20 years.
Here are four ways to begin positioning your company for efficient product movement:
- Reduce the number of shipments. Work with customers to consolidate orders and anticipate shipments. Decreasing your network mileage will in turn decrease your fuel spend.
- Analyze your network. Determine if relocating DCs is an option that would position your company to ship freight on shorter hauls.
- Renounce paying national averages. Negotiate with shipping companies to pay the actual cost per lane, if it is lower than the national average.
- Begin aggregating data about your shipments. Make a goal of using data to make more intelligent business decisions in the future about where and how to ship.