LOGISTICS AND TRANSPORTATION MANAGEMENT

Transportation, like inventory, is a necessary activity within logistics. In fact, it is fundamental to allow us to make product in one place and consume it in another, closing the distance of geographic separation. Fast, efficient transportation explains a great deal about why cities develop where they do. See the U.S. western expansion for a history lesson on the pivotal role of transportation in economic development. Can you name the largest U.S. city not located along a river, lake, or ocean?*

Transportation represents the biggest single cost in logistics. About $600 billion is spent each year on transportation in the United States alone. That is just over 5 percent of U.S. gross domestic product or five cents out of every dollar spent in the United States. The vast majority (almost 83 percent) of those dollars spent on transportation are directed toward motor transportation (i.e., trucking) services.** The rest is consumed by rail, maritime, air, and pipeline services, with each mode catering to shipping customers’ specific needs for speed, timeliness, reliability, flexibility, availability, safety, capacity, and cost efficiency. Companies dedicate about half of total logistics cost to transporting materials and goods in support of these objectives. Trucking excels relative to the other modes in flexibility, reliability, and availability, which explains why it represents the shippers’ preferred mode.

Not only is transportation a big cost consideration, but the time that goods find themselves in transit represents a big component of order lead time and can be a major contributor to variance in order cycle time. Again, in the absence of “teleportation” or the Star Trek beam, it takes time to move product from one place to another. And as alluded to in our discussion of why we hold buffer inventories, there is a host of reasons why shipments can be delayed: late pickups, equipment failure, driver failure, inclement weather, and traffic congestion, among endless possibilities. Despite these mounting challenges, there is decidedly less patience for failure and inability to meet on-time delivery commitments today.

The goal of a Six Sigma initiative in transportation might be to minimize the average time to move the goods and to minimize the variation around that average. Figure 4.1 shows that the average time should decrease, as should the frequency of occurrences around this new average. It should also be noted that the distribution curves in the figure are not perfectly normal, or bell-shaped, curves. Rather, they have a definite minimum (one day) and an open-ended right tail. In particular, we should concern ourselves with the right tail of the frequency distribution, or the events in which transit time exceeds the average. We should be particularly concerned about those observations that have very long transits in excess of the average (some apparently never reach the destination), as depicted by the first curve. It is in these instances that we miss delivery windows and cause our customers to lose faith in our ability to serve them, leading to more inventory to buffer against our unreliability.

Figure 4.1. Faster, More Reliable Transportation Is the Goal.

So while transportation is necessary to support our ability to make product in one place and sell it in another, there is inherent waste in the way most companies deploy and employ transportation assets. Waste is found in having many more assets required to cover transportation demand and in using the existing assets unproductively.

TRANSPORTATION AND LOGISTICS TRADE-OFFS

As indicated, transportation consumes well over half of a company’s total logistics costs. Given that it is such a “big-ticket” cost, many companies try to minimize it with little or no regard to other related costs. This inclination is also pushed along by the fact that transportation cost is among the easier costs to tabulate, especially if a company hires out for most or all of its transportation services. One must only add up the freight bills over the course of the year to determine the annual freight expenditure. So, the cost is very big and very visible. In addition, transportation is often viewed as a nonvalue-added activity, a necessary evil associated with making here and selling there. And that is why so many companies place the mandate on the traffic manager to reduce the freight expense year after year.

Unfortunately, when the traffic manager is not accountable for other logistics-related costs, it is easy to cut costs in transportation only to see other expenses spring like leaks in a dam. Lower cost carriers might be lower cost carriers for good reason — outdated equipment, poorly trained drivers, underinsured provisions. And these reasons often lead to unreliable service and the late deliveries characteristic of transportation variance. In the wake of these issues, you have unsatisfied (if not irate) customers and cost recourses in inventory, warehousing, and administration as you try to correct all the ill will created by service failures and unfulfilled promises. Yet these costs are not as visible and, therefore, are less easily managed. So, the mandate comes down to the traffic manager yet again: Cut another 3 percent from last year’s transportation expenditure. And the unfortunate cycle continues.

Along with understanding the “big picture” cost trade-offs is the systems approach to management, with recognition of total network optimization. A company’s logistics network is composed of its inbound and outbound links. These links represent the company’s connections with suppliers and customers (see Figure 4.2). Oftentimes, companies will only concern themselves with the outbound flow of materials, leaving inbound management in the hands of suppliers or production planners in the company. Suppliers are frequently glad to provide this service and will either: (1) embed the cost of freight in the cost of materials and refer to transportation as “free” (FOB destination), (2) include transportation

Figure 4.2. Links and Nodes in a Network Map.

as a separate line item on the invoice (the supplier negotiates service and pays for it directly, or FOB destination paid and billed back), or (3) has the transportation service billed directly to the customer (FOB origin-collect).

Regardless of who pays the carrier, customers should rest assured that freight is never “free.” In fact, it can be a convenient way to embed price increases, enhancing the supplier’s margins. As a result, more companies are taking control of their inbound transportation flows and assuming the costs directly. However, the best solution is for the party that has the best contracts with carriers (probably based on volume) and the party that can best operate over a specific lane to negotiate the service. But freight should not be used as a means to cover inefficiencies in a supplier’s operations.

Another temptation that many shippers face is the urge to locate the lowest spot-market price for each and every shipment. The Internet has fostered this temptation with the emergence of electronic transportation marketplaces (ETMs). These marketplaces were the darlings of many a venture capitalist in the early 2000s and promised that transportation capacity could be traded like a share on the commodities exchange. What the ETMs failed to realize, though, was that most shippers did not view transportation as a commodity service; it is too important and exposes the shipper to too many risks when service is negotiated in a faceless transaction.* Shippers wisely search for long-term relationships rather than flip though the matchmaking dating services that characterize most public transportation exchanges. Finding the lowest priced transportation service often leads to wastes in the form of inventory and extra action required to satisfy disappointed customers.

TRANSPORTATION CARRIER RELATIONSHIPS

Shippers are realizing that carriers should be part of the solution and not a source of problems. In order to make carriers part of the solution, you cannot afford to deal with literally hundreds or even thousands of carriers. Rather, shippers select a limited number of carriers to provide for all of the company’s transportation needs. By putting the business in the hands of a few “core” carriers, the shipper earns volume discounts from the carriers. The shipper should also receive higher priority service in return for the commitment of higher volumes. It is like enjoying the benefits of frequent-flyer programs and other loyalty incentives. This concept of reduction in carrier base exemplifies the tenet of complexity reduction found in Six Sigma.*

Routing guides should be developed for all shipping locations so that shipping personnel understand the order in which they are to contact carriers in search of service. A well-monitored routing guide can minimize the misjudgment and “maverick” buying of transportation services that still exists in transportation, even today. So, not only is developing a routing guide important, but so is regular monitoring to ensure compliance.

Beyond relying on fewer carriers is the prospect of working closely with a very select few. Many shippers are finding value in partnering with carriers, identifying opportunities for mutual benefit and sharing the gains of the effort. Shippers that partner with a carrier become the preferred customer of the carrier and should receive highest priority when capacity is crunched. In addition, efforts to save the carrier money and the commitment of volume should result in favorable rate negotiations. In return, the carrier is better able to plan capacity, design efficient routes, and schedule assets and drivers more effectively. In the end, however, both parties must gain from the closer relationship. It is shortsighted for one party to win at the expense of the other and does not reflect true partnership.

Yet another possibility is to incorporate carriers into the collaborative relationship your company might have with a supplier or customer. Too often, trading partners work closely with one another only to leave the intermediaries (like carriers and third-party logistics service providers) in the dark, forcing them to speculate about the business transpiring between the seller and buyer of the goods. A prime example comes to us from the relationships forged between consumer goods manufacturers and merchandisers in Collaborative Planning, Forecasting, and Replenishment (CPFR^®) programs. CPFR^® is a nine-step process that embodies several opportunities for the manufacturer and merchandiser to get on the same page — developing a common forecast for items of interest, scheduling promotions, and synchronizing operations.* At the end of the nine-step process, an order is generated. However, the process stops there. There is no before-the-fact coordination with the service provider. As a result, the service provider must continue to anticipate (i.e., guess) the demands of the manufacturer-merchandiser business and acquire capacity to cover the peaks of the anticipated volume, buying excess capacity — a critical waste. Collaborative transportation management promises to reduce this problem by bringing the service provider into the collaboration.**

MINIMIZING THE DAY-TO-DAY WASTES IN TRANSPORTATION

Once the logistics network and carrier arrangements are optimized, focus turns to managing the individual shipments. Inefficiencies and waste are rooted in the poor utilization of equipment, operators, and a host of other limited resources found in transportation operations. There is, in fact, a strong correlation between sound operations at the ground level and sound management of network-wide resources. Properly utilized assets will dampen the requirement for additional assets. However, many companies fail to recognize opportunities for load consolidation that can save money and improve service.

One prime example is found in shipping multiple less-than-truckload (LTL) shipments in the same direction at any point in time. Consider, for instance, the shipments shown in Figure 4.3. Let’s assume that each shipment consists of a single pallet weighing 1,200 pounds. The natural decision might be to contact an LTL carrier to handle each of the single-pallet shipments. Each shipment would be charged separately and require multiple handlings as the loads are

Figure 4.3. LTL Shipping Versus Consolidated Truckloads.

picked up and delivered to the St. Louis terminal for sorting. A line-haul vehicle might then transport each shipment to its respective destination terminal, where the shipment would be sorted yet again for local delivery. These sortings and resortings take time and introduce the potential for damage that comes with each handling of the freight.

In contrast, the three shipments could be combined and picked up by a truckload carrier. A single rate would be negotiated for line-haul service to Cincinnati (the final destination) with intermediate stops in Evansville and Louisville. Granted, stopoff charges will be allocated to the Evansville and Louisville stops and time will be consumed in getting off the interstate highway to complete these deliveries, but as long as the stops are not markedly out of route and the wait to unload is reasonable, it is likely that the Cincinnati delivery can take place sooner with the truckload carrier, with less potential for damage due to rehandling, and at a lower cost for the three combined shipments. The obvious challenge with load consolidations is the coordination of loads such that all three customers will be ready to accept the load as scheduled, and then to deliver consistent with schedule.

Transportation managers will take advantage of these opportunities for cost savings and service improvements if they are rewarded for identifying opportunities and acting on them. Unfortunately, many organizations continue to eye the big-dollar spend on transportation as an isolated entity without recognizing the trade-offs and service implications of reducing the spend. One must keep in mind that buying the cheapest freight service does not typically translate into lowest total cost; nor does reducing the total spend on transportation services necessarily lead to that outcome. For example, when lowest system cost is the metric, it may involve paying for premium service to reduce the sum of all related costs in logistics. The key is to “right-size” transportation resources for the needs of the organization. There is a whole host of time- and administration-related wastes found in transportation. These wastes will be described in subsequent chapters.

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* Answer: Lexington, Kentucky (population: 260,512, according to 2000 U.S. Census).

** Wilson, Rosalyn, 15th Annual State of Logistics Report: Globalization, Council of Logistics Management, Oak Brook, IL, 2004.

* Goldsby, Thomas J. and Eckert, James A., Electronic transportation marketplaces: a transaction cost perspective, Industrial Marketing Management, 32(3), 187–198, 2003.

* For an excellent treatment of complexity reduction in services, see George, Michael L., Lean Six Sigma: Combining Six Sigma Quality with Lean Production Speed, McGraw-Hill, New York, 2002.

* An overview of CPFR^® can be found on-line at http://www.vics.org/committees/cpfr/CPFR_Overview_US-A4.pdf.

** Sutherland, Joel, Goldsby, Thomas J., and Stank, Theodore P., Leveraging collaborative transportation management (CTM) principles to achieve superior supply chain performance, in Achieving Supply Chain Excellence Through Technology, Vol. 6, Montgomery Research, San Francisco, 2004, pp. 192–196.