By Marco Cristini, Business Analyst
While many companies are quick to acknowledge the important role transportation costs play in total spend figures, they do not realize how much they actually overspend on their freight. Why? It is difficult to track shipping costs given the complexity of logistics networks: different parties with different types of service (e.g., LSPs, brokers, etc.); multiple transportation modes with corresponding rates; inbound and outbound flows from multiple locations; and variable costs such as fuel – just to name a few!
To drive transportation costs down, companies can pursue both an internal and an external “fight.” Internally, an organization can minimize the price per service and per unit. Externally, an organization can optimize the costs for the transport execution. Interesting to note, the outcome of one “fight” sets the stage for the other. The way internal operations determine planning specifications influences the way transport is executed, and the way transportation is performed externally modifies and adapts the way internal decisions are made.
Improving cost control is crucial to achieve growth and augment the competitive position of your business. To do this, you must minimize your cost burdens. However, you cannot deploy a systematic approach to reduce these burdens if you do not know where the burdens exist and how they are best reduced.
If we analyze the business challenges within transportation, on a high level we can identify five business groups with specific targets to effectively and efficiently manage transportation both internally as well as externally:
- Sourcing professionals negotiate tariffs with carriers. Their main goal is to reduce costs by identifying the “right size” service level.
- Transport planners oversee multiple tasks necessary for efficient transport execution in a highly complex logistics environment (best customer service, delivery time windows, customer demand fluctuations, etc.)
- Carriers transport goods and face numerous challenges within the supply chain: tight lead times, zero margin for extra costs, and demand for high quality. The carriers’ main goal is to execute transportation according to plan and notify the shipper in the case of a deviation(s).
- Finance departments review multiple invoices and identify and resolve discrepancies.
- Procurement manages non-standard format data to generate reports and perform analytics activities.
These five business groups not only play a hand in the overall process of shipping goods, but their individual performance also influences the total freight cost.
A good TMS identifies the gaps between the internal and external “fight,” and builds a bridge between them. With technology that examines both the physical flow of goods as well as all of the actors in the chain, TMS considers each of the steps necessary to deliver a perfect order to the customer, adhering to internal standards and overcoming external challenges.
Is there a catch? Yes. In our opinion, to ensure shipping at the lowest cost, the process has to be managed with a global perspective, not as a series of individual processes, so that savings are retrieved through the synergy of different practices.
Optimization and Advanced Planning
From a planning perspective, it is important to analyze all possible optimization areas. Different business issues and different network configurations result in different targets for logistics professionals. These targets determine which parameters need to be factors in the equation to minimize transport costs.
Eyefreight has identified three areas that can be optimized to maximize the performance of freight movements:
- Order Allocation – Order Allocation refers to “perfect order fulfillment.” The main purpose of “Order Allocation” functionality is to define the origin of a sales order. Based on customer demands and stock levels at company locations, Order Allocation functionality evaluates whether it is worth it to move inventory from one factory location to another before goods are shipped to the final destination, or whether it is instead better to ship to the final destination from a pre-defined (e.g., closest) factory. Full load configuration drives the stock allocation process. In other words, stock transfers are created so the number of sales order deliveries increase and the loads are consolidated and placed so that trucks or containers are fully loaded.
- Load Capacity – Load Capacity refers to the way equipment capacity is utilized. Empty or partial loads are a waste of money. In a good map of the logistics network, each freight movement exists for a reason. Multi-drop shipments, FTL, and backhaul are some of the targets that ensure optimal load capacity for each shipment.
- Shipment Route – Shipment Route refers to the multiple delivery options for a shipment based on business restrictions (e.g., delivery time windows, emissions, maximum driving distance, etc.). Distance and time are considered constraints, but minimum cost becomes the objective.
So now we have identified three areas that can be optimized to allow shippers to maximize the performance of freight movements. But Eyefreight believes something more is still needed to seize control over the entire transportation process. Planning, after all, is theory, but execution is reality. The only way to compare planned versus actual transportation is by implementing a Control Tower that connects with all parties involved and receives input in real time from personnel in the field who know what is actually happening. Of note: this is not just about Track & Trace and end-to-end visibility. Track & Trace and end-to-end visibility are only the first step in knowing whether the most economical plan is actually being executed. In order to complete the cycle, proactive participation in the decision-making process is required. Shippers do not want to simply check on how well things are going. Shippers want to manage exceptions. With the right TMS, shippers can go from “late reaction” to “smart prediction.”
Cost Optimization is not only about fast and accurate invoice reconciliation. Cost optimization is also about looking at the rates of the services required for goods to be shipped with the highest level of customer service, putting this data into the planning algorithm, and then determining the cheapest way to meet customer requirements.
A well-designed TMS converts optimal shipment plans into ideal shipment instructions for carriers to proceed with distribution. When a shipment deviates from plan (e.g., failed delivery, traffic, damaged goods, etc.), the TMS creates a deviation, of which the shipper is notified via an alert. The shipper can then react accordingly.
The equation is clear: planned costs, together with approved deviations, dictate what has to be invoiced from the carrier.
The only way to optimize transportation costs is to have a clear understanding of the shipment operations. Often, this detailed knowledge is spread over numerous employees’ minds and across different departments. Implementing a TMS solution does not require adding new staff with special skills. The TMS solution simply provides the technology to facilitate and standardize the best way to derive benefits from the actual network and the existing services. The TMS solution enables shippers to evaluate what they could be doing better.
In addition, TMS solutions are available in a SaaS model, so shippers get web-based visibility for all transportation modes and network regions. A data warehouse, containing all global logistics data, allows shippers to access information quickly and easily.