by Henk-Jan van Donkelaar, Sales Director\r\nContact: email@example.com | +31 30 69 97 022
When you ask CPOs in a Business-to-Consumer industry to identify the largest spend with which he or she is confronted, the majority will answer: “Freight Spend.” When your next question to this CPO is how he or she keeps this Spend under control, the most likely answer will be: “We manage our Freight Spend by using detailed sourcing and negotiation tactics.” In today’s volatile markets, how do you manage Freight Spend? And don’t tell me you have it under control. Fine, you might manage Freight Spend, but how many Shippers out there really optimize Freight Spend?
Freight Spend Management vs. Optimization
When can you say you are managing Freight Spend? You can only manage Freight Spend when you have transparency. Transparency in your sales order(s) destinations, your inventory levels in your Distribution Centers, the modes of transport you are using, and most important – what these elements in your Supply Chain cost. When you have this transparency, you can start to manage the performance of your Outbound Logistics based on the KPIs you want to monitor.
Recent investigation by the Aberdeen Group showed that while Freight Spend Management has expanded in the Supply Chain, its foundation is still focused on controlling spend-related operating costs. Although Spend Management has improved over time due to Process and Technology innovation, it lacks in its ability to promote freight procurement as a strategic role within the organization.
According to the Aberdeen investigation, Spend Optimization strives to expand the culture of saving to the entire organization through a combination of people, process, and technology. According to Aberdeen, Freight Spend Optimization starts where Freight Management stops.
Freight Spend Optimization
Freight Spend Optimization is nothing more and nothing less then a linear optimization calculation based on different variables. Don’t hesitate to Google “linear versus non-linear systems.” If you optimize correctly on the right variables, then the outcome of your Freight Management Optimization is the basis for your Freight Spend Management processes.
Every year at major Universities, students graduate in Operations Research. Operations Research is the science of employing techniques from other mathematical sciences including mathematical modeling, statistical analysis, and mathematical optimization. Operations Research arrives at optimal or near-optimal solutions to complex decision-making problems, such as finding the optimum in terms of Freight Spend and Service Level.
Freight Spend Optimization starts with the allocation of the sales orders, each with their destination(s) and cost(s). The costs represent the baseline – where Freight Spend Optimization starts. During allocation, the inventory positions are taken into account in the allocation strategy. This results in inventory sourcing decisions for the sales orders to optimize Freight costs. For example, during allocation, an optimum is found from which inventory position the customer will be delivered. This will result in Intercompany transport between Distribution Centers to optimize Freight Spend before the sales orders will be transported to their customers. Once the allocation is finished, for every sales order you have an inventory source and delivery destination(s) with intercompany transport orders.
The next step is planning calculations for delivery, based on all modes of transport. These calculations are based on the agreed rate cards for your major providers of transport. Planning also takes into account other variables such as traffic restrictions, shifts, routes, load capacity, CO2 or other sustainability parameters, etc. The outcome of the planning calculations is optimized Freight Spend delivery routes that represent real freight spend.
Once allocation and planning are complete, you can start to monitor your Supply Network real-time. Since the planning is accurate, this process is based on a Management by Exception principle. Event Management capabilities will alert the transport planner(s) when a delivery is not executed according to plan.
A basic rule in Operational Research is that when every element of a system performs at its local best, the system does not perform at its global best. In other words, when you have transparency across Business Units, OpCos, Product Groups, or other organizational divisions, don’t optimize within these organizational boundaries only. It is the experience of Eyefreight professionals that optimization strongly depends on how wide and deep your transparency is!