By Richard Koch | Associate Director, Logistics Operations, Chainalytics |
Here’s a perennial question for shippers doing business in Australia: Why do some companies consistently enjoy higher service levels and lower freight costs that reduce their procurement spend and supply chain costs, while others don’t?
Excellence in financial management, efficient operations and supply chain superiority all play important roles. But here’s an underlying and more compelling reason:
A well-defined transport strategy makes a big difference in your financial and operational results.
Almost 30 years of working with corporate clients in a variety of industries has shown me that a clear transport strategy–or lack thereof–is one of the most significant factors influencing freight costs.
A successful transport strategy is not based on playing one carrier off against another to get the best rate. It is a pivotal part of your logistics and supply chain–a way to proactively manage your business dynamics and meet customer and supplier demands. An unfocused transport approach can actually introduce supply chain costs and reduce customer service levels. But a clear strategy can pay off in millions of dollars of annual savings, without service sacrifices.
So what are the key issues involved in developing such a strategy? And why shouldn’t you leave this to your carriers/transport partners?
Whether you ship to domestic or international customers, consider the following when developing a transport strategy:
- Do you need to treat all customers equally? Many shippers struggle to align their service offering with customer requirements. It sounds relatively straightforward: A customer orders today and the delivery is picked and shipped the following day, right? But the next thing we know, our “best” customer orders and receives a delivery four or five days each week. Certainly we all aim to keep our customers happy. But finding the right balance between cost and service is key. And in Australia, what if our customer is located outside a metropolitan area, where delivery costs are much higher? Should they also receive four or five deliveries each week? And what is the value of each order? Most importantly, do we know what our customers’ delivery expectations are? One thing is certain: This approach is more expensive. And, with the utmost respect for the role that your sales team plays in the business, leaving this decision to them almost always leads to unwarranted additional costs.So ask yourself some probing questions about customer requirements: Do they demand next-day service? Should all customers receive the same service level? How frequently should customers receive shipments? And is shipment frequency aligned to minimum order quantities? Many businesses do not fully understand the impact of minimum order quantities on freight costs. This is a great place to start when looking for cost savings.
- What exactly does your customer mean when they say they want “timely delivery?” Customers demand their shipments are delivered as they require – on the date needed, by the carrier preferred, in the proper shipping packaging method, complete and in good order.Notwithstanding the competitive nature of certain industries, most customers would prefer reliable, consistent, damage-free deliveries to more frequent service. The overwhelming response to surveys we’ve conducted is that customers in regional areas of Australia, for example, would be satisfied with two weekly deliveries, so long as the service is consistent and orders are complete. (These same customers have told us that they will place a daily order to ensure they receive most of what they ordered, due to the unreliable nature of carriers’ service levels and capacity. This unreliability is a hallmark of regional areas, where carriers rarely deliver daily, but often hold and consolidate orders instead, often unbeknownst to customers.) Understanding carriers’ capability to execute on service level promises and provide timely information on details of each shipment is vital. As many shippers have found, carriers’ service levels are not equal.
- Which mode will you choose to move your product? Road, rail, sea and/or air? And what role do transit times play in your supply chain? How will you measure the inventory and service impacts compared to freight charges?
- How do you balance the number and quality of carriers to ensure the best results and business relationships? Shipper volume ensures carrier/forwarder attention. Even if you have no strategy, the number of carriers seeking your business will make you develop one. But there is a downside to all this carrier attention, as many companies have found: Dividing your business among too many carriers does not work:
- You fracture your business and compromise your negotiating position or leverage.
- It can be more difficult to develop carrier alliances, which you need to meet your supply chain service requirements.
- How well are you measuring or benchmarking your results? To understand how well your strategy and your carriers are performing, you’ll need to take two approaches:
- Measure or compare your performance to standards. What is the actual delivery to customer performance, on macro, carrier and customer-by-customer bases? A macro measure alone can hide problems in a specific region or with a key customer, for example, even if your overall measurement is good. And for supply chain management purposes, you should be measuring each customer and delivery location to fully understand the cost to serve. For many companies, the results are often surprising when reported at this level.
- Measure costs to make sure they are under control. Where are you spending your transport dollars and how well? Shipment cost data tied to sales makes a great database for budgeting and managing costs. It provides data for carrier negotiations and enables in-depth analysis for better understanding and decision making.
- Are you getting the most recent market intelligence? Carriers come and go, so it’s important to understand what is happening within each relevant transport mode and align your strategy with carriers who will still be viable in five years and with whom you have built solid relationships. A great strategy with a carrier who is acquired by a larger carrier or 3PL that then changes rates or a carrier that goes out of business is suddenly not a good strategy: It forces you to develop a business relationship with another carrier, which takes time.
- Are you ready to address inevitable changes? It is not a question of whether or not change happens, but rather how quickly. Your strategy has to be ready to change. New customers. New products. New businesses. New suppliers. New corporate emphasis. Each of these can dramatically change your strategy. Keep an open ear and mind to other modes and carriers.
As you can see, selecting the right transport strategy and transport partners to execute that strategy is not a straightforward exercise, but rather one fraught with complexity and subject to constant change. As is often the case, your best approach is to remain flexible and adaptable–and turn to professionals who can help you to navigate change.
Richard Koch is associate director for Chainalytics’ Logistics Operations competency, where he supports the firm’s continued growth in the Asia-Pacific region. Richard has over 25 years of supply chain consulting experience, including facility design and engineering, outsourcing and third-party logistics and supply chain network optimisation. He is also highly experienced with software evaluation and selection as well as operations management, with particular emphasis on freight and transport optimisation.
Read more about how Chainalytics supports transportation and logistics excellence:
- (BLOG) Who Wins and Who Loses in Australia’s Fuel Shell Game?
- (BLOG) Are You Using Accurate Freight Rates to Model Your Supply Chain Network?