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Supply Chain Cost Reduction through Improved Asset Utilization

April 8, 2014
For companies looking to reduce transportation costs, improve the supply chain and optimize performance, there are three critical priorities: • Identify opportunities for optimizing operational effectiveness • Keep track of all the moving parts • Ensure accountability throughout the organization.

A leading manufacturer moving high-volume commodities recently cut transportation costs by 25% over a single year by piloting a strategic approach within its supply chain. Historically, transportation costs made up more than 60% of this company’s total logistics spend. A significant portion of that money went towards leasing and maintaining rail equipment. Through better management of cycle times and maintenance processes, they were able to achieve a 30% reduction in dwell time, leading to a 25% savings in leasing and maintenance costs.

The organization also managed to avoid significant capital expenditures by better utilizing existing railcars, making it unnecessary to lease or purchase additional cars to keep up with demand.

How can your organization improve logistics and drastically cut costs?

First, it’s necessary to look at the entire supply chain and focus on logistics and transportation as it affects all functions. For the company described above, the goal was to create a “world class” supply chain that would be sustainable over time. That meant developing internal accountability, responsibility and organizational alignment. They also established a continuous improvement environment to ensure they could maintain optimal performance.

Actionable metrics—accurate data that leads to swift, clearly defined responses—is another key requirement. This data can be used to develop best practices and reduce variability, and can be combined with behavioral management to institute standardized processes across the organization.

Without clear data and an internal system of accountability that emphasizes sustainable improvement, companies can spend millions of dollars doing rework and fighting fires rather than preventing problems from arising in the first place. In such environments, it’s difficult to identify root causes and come up with solutions. Organizations often suffer from inconsistent performance and lack of trust.

For companies looking to reduce transportation costs, improve the supply chain and optimize performance, there are three critical priorities:

Identify opportunities for optimizing operational effectiveness. This requires having visible metrics that can quantify and prioritize opportunities based on their value to the organization. Identify any gaps in the metrics and determine how information should be used.

For this process to be effective and objective, it’s important to ask the right questions and analyze the proper data. Many times an objective, third-party resource with the right experience can be extremely helpful in quantifying opportunities and linking them to the financial benefits.

Keep track of all the moving parts… and make sure they keep moving. Once opportunities are identified and prioritized, systems and processes need to be in place to monitor what’s happening and respond appropriately. For example, if a customer in Iowa was supposed to unload a railcar in seven days and it’s still sitting there after 60 days, that’s a problem—an expensive one when compounded across the network.

Many times excess cars are created by not aggressively managing car dwell at origin and destination. This is due to a lack of communication and discipline, both internally and with customers, to drive the right behaviors.

Develop mechanisms and tools to drive performance, both in the logistics department and across related areas of the organization. Analyze your company’s culture and how consequences are delivered to ensure correct behaviors.

Without a focus on behavioral change, any improvement will be unsustainable. Discipline is required to drive consistent results by helping establish new habits through positive reinforcement while extinguishing old ones.

Ensure accountability throughout the organization. To implement lasting change and establish an environment of continuous improvement, organizations need to align logistics performance with other internal departments and external vendors.

Significant non-value added waste can be created by activities that are poorly managed or unnecessary. This is usually created due to lack of communication or lack of alignment to consistent performance metrics.

Keep the Orders Moving

The faster your organization can turn its transportation assets, the fewer assets will be needed as they will be better utilized. Keeping the customer orders moving allows the organization to keep transportation costs down even as demand increases.

When evaluating supply chain costs, it’s important to focus on the total logistics network. An internal system of accountability and an environment that emphasizes continuous improvement becomes critical to ensure that cost reductions are sustainable while maintaining optimal fleet performance.

Ed Baddour is president of Argo Inc. USA. He has over 20 years of experience in optimizing value creation by focusing on strategic operational transformation, product and plant rationalization, and business process redesign. He has a B.A. in business and marketing from the University of North Carolina. David Bilby is a senior vice president at Argo Inc. He has over 25 years of operational experience in the defense, automotive, electronics and transportation industries and seven years of operational and cultural transformation consulting experience. He holds a B.S. in industrial engineering from Eastern Kentucky University.

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