In a world of high fuel costs and increasing supply chain complexity, being smart about transportation costs provides more than just a competitive advantage—it can be essential to business success.
Logistics is a major spend for manufacturers. Even though transportation accounts for roughly 5 to 15 percent of cost of goods sold, freight planning is terribly inefficient. In the past few years, almost every large cost center in supply chain has benefited from sophisticated software planning systems. Why then is transportation still being planned by spreadsheet? The silver lining is that rethinking transportation planning remains one of the few untapped levers for manufacturers to make significant cuts in operating expenses, boost earnings performance and create new cash flows to reinvest in the business.
The first step on the journey to rethink transportation planning starts by envisioning how transportation and warehouse operations could change if you knew how many trucks and pallets were required several weeks in advance or even just next week. Though knowing exactly how many trucks or pallets is still not possible, reliable freight predictions by lane, mode and temperature class are indeed available weeks in advance with a new technology called transportation forecasting.
Bridging the Gap for Better Service and Lower Costs
As the lubricant that keeps supply chains running smoothly, inventory has traditionally masked a myriad of inefficiencies in transportation. However, financial pressure in the wake of the economic downturn has driven retailer stock levels to record lows. Tighter inventory policies and shortened lead times create favorable cash flow for retailers, but bring unintended consequences to manufacturers by exposing transportation inefficiencies and increased financial exposure. As more customers move towards just-in-time delivery, late deliveries increasingly result in stock-outs, poor scorecard performance and lost revenue for both retailers and manufacturers alike.
Most often, when manufacturers fail to deliver on time it is because a lane with three loads a week suddenly jumps to ten. To make matters worse, these tend to be promotional or seasonal loads tied to high-profile events; so dropped loads are followed by unhappy calls from senior management. This shortcoming in traditional transportation planning methods stems from a combination of inadequate tools and isolated processes.
Transportation forecasting technology can help bridge these gaps, bringing the rigor of finished goods planning software to logistics, with new mathematics to create accurate freight forecasts by lane, mode and temperature class. Just as important, freight forecasts are synchronized with sales and operations planning (S&OP) so that the entire company executes against the same plan, including promotional activities and new product introductions. Promotions are planned weeks in advance—with transportation forecasting, there is no longer a reason why shippers will be the last to know, only finding out as orders cross their desk.
Taking Carrier Collaboration to a New Level
As part of rethinking transportation, access to accurate freight forecasts paves the way for a new level of carrier collaboration. Manufacturers establish preferred carriers because these relationships provide distinct advantages, including the best freight rates and superior customer service. Unfortunately, during a surge, exception freight not covered by contracts with preferred carriers often goes to secondary carriers with less favorable costs.
Visibility to transportation needs weeks in advance creates an opportunity to collaborate with carrier partners and proactively secure additional assets at lower, contracted rates. Likewise, less uncertainty enables carriers to make better use of assets, maximizing return on capital and cutting deadhead miles. Everyone wins. Furthermore, shipping contracts include a financial buffer for uncertainty, so establishing a track record of reliable freight forecasts positions shippers for better outcomes in future negotiations.
Manufacturers with collaborative carrier relationships are also poised to gain the distinct advantages that come with preferred shipper status, which are especially relevant as capacity tightens and coverage for challenging lanes becomes increasingly competitive. When a carrier is overbooked and forced to refuse loads, shippers that generate higher margins and are designated strategic partners have an upper hand. Preferential service means cost avoidance in terms of surcharges and lost productivity when forced to arrange alternate transportation on short notice. It also ties back to service goals. The use of secondary carriers, unfamiliar with customer expectations and practices, routinely lowers retailer scorecard performance.
Time for Change
The timing to bring certainty to a very uncertain and large cost center has never been better. Markets are simply too complex and fast-moving to continue relying on spreadsheets and historical data. In response, multinational manufacturers have started adopting a smarter way to plan transportation through freight planning tools synchronized with S&OP.
Today’s leaders in transportation forecasting began their journey to rethink what was possible by asking, “How would our transportation and warehouse operations change if we knew exactly how many trucks and pallets are required several weeks in advance?” What is your answer?
Robert F. Byrne is the CEO and co-founder of Terra Technology, a supply chain solutions company working with customers like Procter & Gamble, Unilever, Kraft Foods, Kimberly-Clark, ConAgra Foods and Campbell Soup. Terra developed a demand sensing solution that uses mathematics and downstream data to improve supply chain performance. Prior to Terra, Byrne led the supply chain consulting practices at J.D. Edwards and Numetrix, and held management positions at James River and Unilever. He has degrees from Princeton University and Carnegie Mellon.