It's Time to Shift from Reacting to Planning

June 16, 2011
Companies using transportation as a competitive advantage are breaking the cycle of 'wait and react' and have shifted to proactively planning future shipping needs.

Reliable transportation is vital to good customer service and a significant investment for manufacturers. Transportation management systems (TMS) were developed at a time when trucks were easy to secure and inexpensive to use. Planners use these systems to optimize trucking routes based on the orders they have on hand, frequently planning with 48 hours or less notice. Today, costs are rising and capacity is tightening. According to the Grocery Manufacturing Association, the 2010 cost of shipping a truckload of food was $2.05 per mile. An updated index pegs the current price closer to $2.50 per mile. At the same time, over 2,000 trucking companies went out of business in the recession of 2009, expected to create a shortage of 400,000 drivers and a 40 percent decrease in over-the-road trucks by the end of 2011. Existing TMS systems are not designed for these conditions.

According to CSCMP's 2010 Annual Report on Logistics, transportation costs are almost $700 billion in the U.S., representing 8% to 10% of the cost of goods sold for consumer products companies. As demand volatility has increased -- economic crises, natural and manmade disasters, new product introductions and technological innovations have driven volatility -- transportation planning has become increasingly difficult. So, why is it that Transportation departments have not been given adequate planning tools and have to rely on informal communication of upcoming promotions and ad hoc estimates of changes in lane volume?

Without the tools and requirements visibility necessary to forecast demand by mode in the planning timeframe, shippers are caught in a constant cycle of scrambling to find trucks as orders arrive. They are forced to turn to freight brokers if capacity is not readily available from preferred carriers. If capacity is available but at the wrong location, shippers bear the additional cost of moving empty vehicles. These vehicles are only helpful if the facilities and staff are available to load them. Warehouse managers face the same cycle of constantly juggling limited dock bays and scrambling to ensure the right staff is on hand to move pallets and load shipments.

Promotional events are one primary cause of surges in freight demand. Promotions are planned months in advance, yet all too often, transportation professionals only find out about promotions when the orders cross their desk. If the product fails to arrive on time or in the right condition, the promotion fails to meet objectives, impacting customer satisfaction and revenue. Last year, reliance on promotions increased considerably and now represents more than 20% of sales volume. With capacity constrained, these unplanned surges will be more difficult to manage.

Companies using transportation as a competitive advantage are breaking the cycle of "wait and react" and have shifted to proactively planning future shipping needs. They are using transportation forecasting software to forecast freight demands much the way manufacturing uses demand planning software to forecast demand. Transportation forecasting provides shippers with accurate daily transportation forecasts by lane, mode, class and carrier. These forecasts are available well in advance of orders and are synchronized with S&OP to make sure the entire enterprise executes on the same demand plan (including promotions.)

The tactical and strategic benefits of transportation forecasting allow companies to view transportation in a new light -- not as a necessary cost center, but as a competitive weapon by:

  • Improving operational efficiency -- Visibility to promotions, seasonal variances and volume changes from shifts in the supply chain network (such as plant or distribution center configuration) will eliminate last minute surprises and increase operational efficiency. Shippers will know in advance which distribution center will be pulling more than another and can allocate resources accordingly.
  • Improving carrier collaboration -- Strategic relationships between shippers and carriers will become increasingly important as capacity tightens. Consistently providing better, more accurate plans to carriers will result in higher asset utilization and lower cost-to-serve for the carrier, increasing carrier loyalty to the manufacturer, improving customer service and reducing friction in the process.
  • Reducing spot shipments -- By identifying capacity issues before experiencing them, shippers can plan for and arrange for additional transportation, reducing frequency of spot purchases and driving down costs. While getting five more trucks may be easy, ten more will be challenging and twenty more becomes a real (and expensive) problem.
  • Switching to lower cost forms of transport -- The clear view of long-range transportation requirements opens the door for mode conversion and gives manufacturers the confidence to ship more goods on less expensive, but slower, modes of transport - downshifting from expedited to standard or converting from over-the-road truckload to a more flexible intermodal solution without impacting service levels. In addition to the financial and sustainability benefits, this helps to free up trucking capacity as the market tightens.
  • Improving sustainability initiatives -- Transportation has a significant environmental impact and is a focus area for corporate sustainability efforts. Visibility to future needs helps companies organize assets more effectively, reducing deadhead miles, partial truckloads and even helps book ahead to secure more fuel efficient (and cleaner) rigs. Shifts to intermodal or other more efficient modes of transportation also provide significant reductions in carbon footprint.
  • Measuring, managing, improving -- Creating an accurate transportation forecast enables manufacturers to better track costs and carriers versus routing guides and budgets. Today, transportation is a significant unplanned financial liability. With the ability to plan comes the ability to track and compare the plan with actual events to analyze and improve. To quote Jack Welch, former CEO of General Electric, "If you can't measure it, you can't manage it. If you can't manage it, you can't improve it."

Manufacturers who shift from reacting to Transportation needs to proactively predicting and managing demand and capacity will be the ones that deliver the right products to the right locations on-time and on budget, making their customers happy and meeting sales objectives while containing costs. Those who fail to create forward visibility risk missing entire shipments because trucks are not available when needed or paying a premium for emergency shipments, losing revenue, increasing costs and endangering long term customer relationships.

Robert F. Byrne is president and CEO of Terra Technology, a provider of supply chain solutions for consumer products companies.

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