Many transportation careers have recently ascended on the ability to deliver much needed funds to cash-strapped CFOs through large-scale transportation procurement efforts. However, the leverage shippers have enjoyed during this period is not sustainable. In the near future, we will either see an economic rebound or trucking capacity will find equilibrium regardless of the strength of the economy. In either case, market dynamics will drive currently reduced prices back to more traditional levels. As recently as July 2009, Transport Topics 100 reported that "the stage may be set for the mother of all bull freight markets," and major trucking firms have begun to talk more about a tighter market.
As shippers see trucking rates rise, there will be two options for transportation professionals:
- The "Run Away" option, which is characterized by a lateral organizational move to another area of supply chain with no fear of reprisal. This generally leaves a host of carrier relations issues and vengeful suppliers to work with when costs rebound.
- Face the challenge of a rapidly changing marketplace head on.
This article was written with a focus on the second option.
The Time is Now for Transportation Program Improvement
In the world of transportation, we all know excess capacity brings opportunity. The supply of trucking capacity in the current economic recession outweighs demand in record numbers. In fact, the deregulated trucking market has never seen such a sustained supply/demand imbalance.
Given this situation, lower rates are an obvious target for most shippers. Further, it is the easiest target for cost reduction in the supply chain as it requires little organizational or internal process change. However, today's abundant capacity creates an environment for shippers to improve their transportation programs beyond the singular dimension of rate reductions. When the pendulum of demand and supply swings back toward equilibrium, organizational resources will focus increasingly on critical capacity related issues. This certainly will limit the time and bandwidth available to improve operations, particularly with companies now running so lean. Given the almost certain changes on the horizon for transportation markets, now is the ideal time to make improvements.
Key Programs to Prepare for the Rebound
A number of targeted programs will benefit shippers in the current market environment in anticipation of an economic rebound.
1. Assess Current IT Infrastructure to Ensure Flexibility
Enabler or Constraint? Do not let IT catch you off guard.
- Transportation sourcing and its ultimate execution within a TMS should be finely tuned to eliminate delays in identifying and utilizing carriers. Many shippers find IT inflexible to change due to configuration effort and making contractual based system changes. The lead-time from kicking off a procurement project or obtaining a new rate from a carrier until the first load is tendered under new contracts should be in line with industry best practices. Shippers may need to manage changes among the hundreds of carriers and thousands of lanes. Shippers need to have solid procurement processes integrated with IT to efficiently manage new or augmented relationships. IT must support these dynamics because what a shipper can do with carriers in a recession will differ significantly from what can be done in a growth scenario or when supply and demand of capacity are in balance.
- Shippers must be ready to make changes on a broader scale within their logistics master data depending on where their respective markets drive them. New suppliers or customer ship points introduced into the supply chain require an IT infrastructure that is capable of adapting to a changing network to capture the benefits from carrier management.
2. Assess Business Processes to Ensure Flexibility
How shippers deal with a tighter market will affect business processes and require adaptation in a more balanced market.
- Shippers must ensure that processes are flexible enough to handle increased levels of rework during periods of limited capacity. For example, if a shipper must identify alternative sources of capacity resulting from tender rejections at a level of hundreds or thousands of times per week across a national network, the daily processes and trained resources must be in place to cover such a change in resource utilization with the appropriate rules for covering freight.
- The range of activities that capitalize on spot, dedicated or contract carriage may change as well. Spot rates in a tightening market are far more damaging to freight budgets than spot rates in a weak market. Business processes coupled with a flexible IT platform work together to handle changes in market environments efficiently, quickly and cost effectively. Knowing how these changes in activities impact processes ahead of time will lower the risk of unintended outcomes.
3. Obtain Thorough Market/Industry Intelligence
Shippers must have a clear view of the broader transportation market and should invest the time in understanding which providers have specific strengths in various markets in anticipation of balanced capacity.
- Understanding Carriers
Shippers benefit from the direct experience of who they know as well as the acquired market intelligence of who they "should" know. Carriers that are not included on a routing guide may be excellent candidates for capacity in tighter markets. By allowing promising candidates access during soft markets, shippers have the opportunity to broaden the current base of carrier relationships at little risk to business operations because there are always carriers to pick up any missed loads if a new entrant is not successful. This approach is more risky to attempt in tighter markets because a missed load could lead to a high probability of a late shipment.
Shippers also should create a carrier advisory board comprised of key carriers and their executive team to ensure the organization is in tune with the carrier base's strategic direction and the business issues that drive the market. This will allow for a more collaborative environment for these network efficiencies to be defined, vetted and implemented.
- Understanding Other Shippers
Shippers also must know how their regional competition for freight is expanding or reducing fleets, changing their business profiles or service offerings, etc. Capacity needs of the shipper and its competition will be in greater conflict. In this situation, cross-company freight flows can lead to higher truck utilization for carriers. Where the appropriate scale exists, such relationships reduce empty miles for carriers and are more resilient to market shifts.
- Benchmarking Across Industries
Shippers are working with other industries in search of innovative approaches to managing their carrier relationships. The variety of lead times, how orders are placed and how appointments are scheduled can differ substantially, leading to varying cost profiles for similar freight. Cross-industry benchmarking leads to insights that can help shippers optimize their carrier relationships.
4. Evaluate Experience Against Adaptable Sourcing Strategies
First-time negotiators will have a false sense of strength in future markets, making sourcing strategies much different during periods of tighter capacity.
- Due to the infrequency of large scale procurement events, management must ensure that professionals who are new to carrier procurement and have been cultivated in a recessionary environment have the appropriate perspective in the future. Sourcing strategies vary depending on the experience of the shipper and the leverage both sides can yield, which can change dramatically due to macro-economic forces. When capacity is tight, management must be sure that sourcing strategies focus on carrier utilization. In past periods of tightening some shippers have been successful segmenting procurement efforts by allowing key partners first right of refusal before offering freight to the general marketplace. If a carrier management team has not experienced both up and down cycles, carriers will not be responsive to aggressive price-focused negotiations when they have more leverage with their capacity. This can result in missed opportunities to cover freight and increase the potential for higher churn among carriers -- particularly if long -- term partners balk at demands. Carriers have a low barrier to exit a shipper's business and will exercise it as the market allows them greater profit potential.
5. Evaluate Dedicated Options and Understand All Options on the Market
Hedge potential of scarce capacity through dedicated/private fleet capacity and brokerage services
- Many shippers will consider dedicated fleets to offer opportunities, particularly when one-way pricing rises and increases in service regions or volume lead to attractive dedicated options. Dedicated fleets ensure that shippers have the capacity they need when they need it -- they are much more resilient to price variability than the one-way market. Much analytical work can be done ahead of time to determine where the scope and scale of the freight composition exists to support favorable dedicated operations within a shipper's network.
- In addition, shippers should consider co-company backhaul opportunities for significant savings within their dedicated/private fleets. Experience has shown that shippers can work together to achieve significant cost savings.
- Finally, shippers must review their sourcing strategies for contract carriers to understand where brokers could add value within specific segments of their networks. Having a few key brokers within a network can offer a safety net for covering capacity.
Fleets, common carriers and brokerages play different roles at different phases of the market cycle, and shippers must understand all of these options in addressing business demands in a more balanced market.
Factors to Consider When Choosing a TMS Provider
The right TMS provider can provide a wealth of functionality to support various business processes. However, ensuring that a TMS provider has flexibility to adapt to a changing environment -- without incurring significant IT costs to do so -- is critical to obtaining the best business performance against a changing freight landscape.
While most TMS providers must have cutting-edge technological knowledge to support their products, the most important attribute in a TMS provider is its subject matter expertise in transportation. Much success using transportation technology occurs outside the technology because so much of the value is locked into a large number of carrier relationships and contract agreements. By understanding cost and service tradeoffs found within IT and business processes -- and freight market intelligence of thousands of capacity providers -- Subject Matter Experts (SMEs) can help shippers understand how to appropriately align their business operations from load planning and coordination to freight payment and, more important, marketing timing of procurement events.
What to do When an Economic Rebound is Here
Today's market has forced many organizations to become leaner by reducing costs in every corner of their organizations. Coupled with the abundance of capacity, this has created highly efficient operating environments for many shippers. However, as the abundance of capacity diminishes, shippers will require SMEs and operational leaders to ensure their transportation system is resilient enough to adapt to changes in capacity. Shippers must use this time as an opportunity to find transportation providers that are capable of expanding with market changes.
However, given the current economic environment, many CFOs are limiting investment in technology, people and training. While such cost pressure will ebb and flow with all suppliers from materials to services, now more than ever there is C-level pressure to gain more cost savings sooner. The current environment of C-level focus and the perception of greater efficiencies is a compelling reason for shippers to closely analyze their transportation providers to find the right combination of capability combined with the future technological needs and subject matter expertise to best serve the long term strategy of the organization.
Service levels will fall and transportation costs will increase for many shippers as the economy improves beyond the current national fleet capacity. Shippers are well aware that transportation is a critical function in the supply chain and a challenged transportation function impacts all intermediate points from source to consumption. Ultimately, if shipments do not come in on time, then customers will not be satisfied, and that's a problem. By reviewing their transportation programs now, shippers can ensure that they'll be resilient when the economy rebounds, which will enable them to remain effective and in synch with the market.
Matthew Harding is Vice President Consulting for Transplace, Inc., which is a non-asset based third-party logistics (3PL) provider offering manufacturers and retailers the optimal blend of logistics technology and transportation management services. http://www.transplace.com/
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