Daily Archives: March 21, 2008

Transportunity Identification Requires Decision Optimization

I recently discovered an archived “expert insight” on SupplyChainDigest from last summer on “Transportunities: What Kind of Results Can You Expect from Carrier Bid Optimization Projects” that was pretty good, but lacked advice on the right way to go about the more technical aspects of the project.

The article, which noted that savings in the 5% to 15% range are usually achievable, noted that there are factors that will affect the achievable savings range, namely:

  • How good have you been?
    It will be hard to generate savings if you have already captured them in a prior sourcing project. Remember, fuel costs keep rising, and with labor shortages and inflation, so do savings. You’re only going to capture savings if there are (significant) inefficiencies to be eliminated.
  • How good will you be?
    If you have been unable to capture transportation savings in the past, why will this time be any different? You need to be sure you have the knowledge, tools, and support you need before you begin the project, or you will just be wasting your time.
  • What is your freight profile?
    If you are a low-volume shipper moving light bulky freight from Hong Kong to LA … or need a “reefer” out of Florida after the citrus ripens, you can only expect to do so well or rather not so well. You need regular, high-volume shipments on the same lanes that have not been (properly) sourced in a couple of years if you want to find real opportunities.
  • What is the state of the market?
    In the midst of a capacity crunch, like we were a few years ago, you’re not going to get good rates. However, in the midst of an economic slowdown, like the one we are currently in, conditions are prime to negotiate better rates.

In other words, if you have not been stellar, have the resources at your disposal, and have an appropriate freight profile in a receptive market, then chances are you have a good shot of saving a sizeable chunk of change if you, as the article suggests, broaden the scope of the sourcing project and, most importantly, use the right tool for the job.

It’s critical to use the right tool for two reasons. The right tool enables the right process and, most importantly, the right tool makes sure you aren’t sacrificing other savings opportunities simply to get better freight rates. For example, if you over-allocate to a certain carrier, then you could lose the required volumes needed to achieve the TL rates you need for low freight costs on lanes only served by other carriers. Also, if you lock in freight lanes, then you restrict your supplier pool – and if freight is less than a quarter of your overall sourcing costs, this can be bad.

That’s why you should always source categories at a time in a sourcing project, so you can balance unit cost vs. freight cost, and do freight projects at least once, if not twice, a year where you amalgamate across needs based on expected lane-volume combinations using current contracts and most likely award scenarios.

For more information on the right way to handle freight projects, see my post on Missing the Point … or … The Right Way to Handle Freight.