By John Haber, NPI (February 2010)
With 18 months of unprecedented market volatility behind us, today's corporate logistics executives are wondering what's in store for the next year. Most companies are still operating in a super-lean environment with even leaner transportation budgets. The recession-induced operational reforms that transpired in 2009 have forced a new level of efficiency that will undoubtedly become the status quo in the years ahead.
While the past few years have challenged logistics executives to learn how to simply survive the leaning process, today's challenge is quite different. How do companies - specifically the logistics department - increase profitability in the new era of lean? How do they move goods cost-effectively without sacrificing service levels from their carriers? Additionally, these teams are struggling to control inventory costs, increase inventory turns and develop solid pick and pack operations.
Today's logistics departments are under enormous, unprecedented pressure. They have a tremendous impact on overall profitability and must operate at the highest level of efficiency. They're responsible for not only ensuring the movement of goods throughout the supply chain, but for continuously developing and refining master operating plans and standard operating procedures that drive cost reductions. And, after a year and a half of cost cutting and leaning, the low hanging fruit is gone. The next round of savings opportunities is going to be much more difficult to attain.
The good news is that 2010 will present major savings opportunities for certain companies that employ a strategic view of transportation spend management. However, it will require companies to expand their definition of the term.
For the past decade, advanced transportation spend management has been synonymous with investing in software and other technologies to track shipments, establish routing guidelines and pay invoices. While this has delivered many benefits, it hasn't delivered a strategic, ongoing approach to managing and reducing shipping expenses.
Those logistics executives that wish to herald in savings in 2010 should be ready to take a step back, understand their shipping needs and acquire the market insight needed to demand higher performance and lower costs from their carriers.
The trends that will shape the shipping industry in 2010 are a mix of the old and new. Things like annual carrier rate increases, for example, are a certainty. However, what will define shipping costs in 2010 is volatility - from the compounded effects of rate increases and fuel prices to the changes in the vendor landscape.
For the past 18 months, companies have been cutting the fat. However, if you think you've done all you can do to reduce transportation spending, you may want to think again. Based on NPI's numerous surveys and client conversations, a majority of the world's largest shipping organizations still fail to enact many fundamental spend management best practices, including:
1. Negotiate any time and every 18 months. Carrier negotiations can occur at any time in the contract life cycle. Experiencing a big change in your shipping volume? Worried about financial performance? Negotiate. And, even if you're happy with your carrier(s), take your contract(s) to bid every 18 months to keep pricing and discounts fair and competitive.
2. Understand your shipping profile, and analyze based on carriers' long run marginal cost. Carriers increase profits by charging you a lot more buck for a just a little more service. For example, why pay more for your carrier to deliver to a mall location that they're already delivering to? This can be powerful leverage when asking for fairer pricing, but requires understanding your internal shipping characteristics. Here are some things to keep in mind:
3. Choose the right shipping methods. Now that you understand your unique shipping characteristics, determine whether or not you're optimizing distribution networks and choosing practical shipping methods. Even the largest logistics departments overlook this critical step. For example, many customers insist on having product shipped via next day air if they need a package delivered overnight. However, in many cases - depending on the proximity of the customer to the distribution point - the package could be delivered overnight using ground delivery and at a tremendous cost reduction. In other words, companies are paying for a service level that is identical in terms of time in transit, but at a cost that is significantly higher. If you're unsure of whether or not you're using the most efficient shipping method, consider bringing in outside shipping cost reduction experts like NPI to gauge your unique shipping profile against carrier methods and pricings. The savings can be astounding.
4. Audit every invoice, every shipment. Carriers inaccurately bill shippers at an astounding rate. Yet, many companies fail to internally audit each and every invoice. If you don't have the inhouse power to audit, contract a third-party. It's an easy way to spend five percent less on shipping.
5. Make refund recovery a priority. Companies throw away profits when they fail to claim refunds for service failures. While it can be a cumbersome process, it's well worth the effort and time. Like auditing, don't be afraid to contract an outside resource like NPI to automate and facilitate refund recovery. The ROI is guaranteed, immediate and risk-free.
6. Benchmark spending annually. Did you know that a company with your same shipping characteristics may pay up to 50 percent less than you do for the same services? Benchmark your spending annually to determine if you're paying fair market value. Third-party spend management advisors that specialize in logistics, like NPI, will give you immediate visibility into areas of overspending and pricing disparity.
7. Take non-pricing factors into consideration. Many factors in the carrier selection process, beyond rate sheets, can impact your bottom line. For example, there's a different cost to serve for union vs. non-union carriers, and that can be factored into the pricing. Also, have you looked at claims percentages? See how your carrier compares to others, and what kind of impact your claims are having on customer retention.
As mentioned earlier, transportation spending in 2010 will be shaped by market volatility, whether it's the exit of a major player like Yellow-Roadway or a continued increase in fuel prices. The variables are many and shouldn't be underestimated. What is for certain, however, is the pressure that logistics executives will be under to stabilize the volatility and reduce shipping expenses.
For too long, the reduction of transportation costs has been centered around technologies and processes that have delivered only incremental savings. NPI, through years of focused execution, has realized that the greatest opportunity of savings lies in the fundamentals, such as understanding the unique shipping profile of your company, analyzing and benchmarking carrier spending, and demanding higher performance and lower rates from your carrier mix. Combine these tactics with best practices such as refund recovery and invoice auditing, and the savings potential is immense. Companies who lack the manpower or focus to execute these recommendations should consider bringing in a third party to assist. In many cases, this investment is centered around a shared savings approach or no-risk guarantee.
In closing, expect 2010 to be another roller coaster ride of a year. Prepare for the unexpected, go back to the basics and dig deep. The savings are there for the taking.
NEED ACTIONABLE INFORMATION?Download the "Getting Rid of the Nickel & Diming in 2010" article by John Haber:
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