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DG&A's Transportation Consulting Blog
Dan Goodwill

Dan Goodwill

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Throughout this series of blogs, the focus has been on how Best in Class shippers ensure their freight is delivered at the right place, at the right time and intact. The beauty of freight management is that so much about transportation is measurable. Over the years we have observed how Best in Class shippers pull away from mediocre performers and industry laggards in the area of measuring performance. They tend to have better data and more robust and relevant tools and reports. These are some of the Key Performance Indicators (KPIs) and Reports that they utilize.

Macro Financial Indicators

The first set of financial ratios helps identify trends in supply chain costs and their impact on the business over time. Key ratios include:

Supply chain costs as a % of Revenue

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Success in business comes from crafting and executing effective business strategies. The attainment of strong financial performance comes from integrating and aligning the various strategies of the business into a cohesive force. A company’s supply chain strategy, of which transportation strategy is a key component, is often a critical piece of the company’s business strategy. We often observe that the freight strategies of our clients are not well aligned with their business strategies. In fact, they often inhibit these companies from achieving the bottom line results that they are so desperately seeking. Here are some of the things that we commonly observe.

A Failure to Recruit and Train Top Quality Talent

As noted in an earlier blog (http://www.dantranscon.com/index.php/blog/entry/becoming-a-best-in-class-shipper-3-organization), it takes leadership and management skill to be an effective supply chain executive. By not hiring and training top quality management talent to this position, the company receives mediocre leadership and weak performance.

Some companies don’t fully appreciate the scope of knowledge (http://www.dantranscon.com/index.php/blog/entry/becoming-a-best-in-class-shipper-2-knowledge) that is needed to be a Best in Class Transportation operation. While companies will go out and hire top notch sales and engineering professionals, they will “force fit” unqualified individuals into the role of Transportation Manager. Without the knowledge, skills and resources, the company gets what it deserves - - poor performance.

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The previous blog focused on some of the core freight management processes that are part of a company’s supply chain. For many years, prior to the age of computers and tablets, these processes were performed with manual procedures, calculators and spreadsheets. Some companies still use spreadsheets to manage a few or all of these processes. The good news is that there are some excellent technology-based tools that shippers can acquire or outsource to manage freight transportation. They include:

Transportation Management Systems (TMS)

A good TMS system can perform many of the activities outlined in the previous blog (http://www.dantranscon.com/index.php/blog?view=entry&id=202). These include shipment planning, shipment consolidations, mode and carrier selection, carrier performance management, exception reporting and a host of other functions. When linked with a strong Warehouse Management System (WMS), they provide a powerful integrated system to perform “end to end” supply chain management.

Shipment Loading

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One can view a supply chain as a series of processes. From inbound freight management, the process of picking up raw materials, to last mile delivery, freight management is a group of practices and procedures that, when performed well, are seamlessly integrated to ensure a company’s goods, arrive on time, at the right place, damage free. Best in Class shippers have tight processes that perform each of the following activities in a highly effective manner.

• Inbound Freight Management

Often overlooked and underappreciated, strong inbound freight management processes allow shippers to leverage the full volume of their shipping activities in their carrier rate negotiations. They ensure shippers treat this as effective means of expense management rather than as a profit center for their vendors. When done well, inbound freight management permits shippers to create round trips and continuous moves to improve network optimization and reduce costs. They ensure inbound materials arrive in the right qualities at the right time at the lowest cost possible.

• Shipment Planning

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In many firms, freight costs can be in the millions or tens of millions of dollars. This large expense can represent a significant percent of a company’s revenue. As a large expense item, it needs to be managed very skillfully.

The first blog in this series (http://www.dantranscon.com/index.php/blog/entry/becoming-a-best-in-class-shipper-1-freight-data-management) looked at the need for detailed, accurate, freight spend data. One of the benefits of having this type of quality data is that it allows the transportation leaders of an organization to create a quality freight budget. The budget should be tied directly to the company’s business plan and supply chain strategy. Every manufacturer or distributor must make certain assumptions about how it plans to transport its inbound raw materials and deliver its finished goods. These assumptions outline the modes and expected costs.

The budget should detail on at least a monthly basis, the projected revenues and freight costs. Since many companies utilize multiple modes (e.g. small parcel, LTL , intermodal, etc.) and multiple service options (e.g. next day by 9:00 AM, regular ground, air freight etc.), it is important to capture this type of granular data since the costs will vary based on the mode and service chosen. Similarly, projections should be made concerning fuel surcharges and any other extra cost that can be a significant component of the freight budget.

The company should also produce a monthly transportation expense variance report. The report should be granular and provide variances on expenses by mode and cost item. It should highlight percentage changes in modal utilization and carrier collaboration.

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It takes leadership and management skill to become a Best in Class shipper. One question many companies face is where should Transportation fit within the company’s organization structure? Clearly one size does not fit all since manufacturers may have freight budgets ranging from a few hundred thousand dollars to tens of millions of dollars. The Transportation leader in a small enterprise doesn’t need the skill set of an individual who manages a multi-modal, multi-division, multi-million dollar freight budget.

This is not to say that a manufacturer with a small freight spend can be managed by an individual with limited or no freight transportation expertise. In smaller enterprises, we often observe an individual in a small office in the warehouse who has been there for many years, reporting to the controller or operations manager. These people often have a rudimentary understanding of freight and have been doing things the same way for many years.

Even small manufacturers and distributors should ask the question, do their transportation managers have the data (blog 1 in this series, knowledge (blog 2 in this series) and management skill to lead this function effectively. In addition do they have the processes and technology in place to be effective? Supply chain management is rapidly changing. If your freight leaders are lacking in many of the areas outlined in these blogs, it is important for their supervisors to ensure that they are receiving the necessary training. Their lack of expertise may be costing the firm large sums of money (in missed cost saving opportunities). For companies where Transportation is not a core competence, consideration should be given to outsourcing these functions to a logistics services provider that is better equipped to manage transportation.

In larger firms, there are other issues to address. Does the leader of Transportation function have input to the strategies of the business; does the company have a well-conceived supply chain strategy and does this individual have a seat at the decision-making table? Is supply chain management one of the core functions of the company or is Transportation viewed as an end-of-the line execution process? In other words, does the company consider alternate supply chains, alternate modes and transit times, consolidating and deconsolidating freight, where financially attractive and beneficial to its customers? Alternatively, is the transportation department expected to expedite the orders made by Sales or find a way to move partial or full truckload shipments that come off the production line after the truckers have left the building? These are telltale signals that Transportation is not properly valued in the company.

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 Best in Class shippers possess an understanding of the following subjects.

 Modal options and trade-offs (e.g. Air, Road, Rail, Marine)

 Carrier selection and management in each mode of transport

 Routing guide preparation and compliance tracking

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Many manufacturers and retailers throughout North America spend millions of dollars a year on freight transportation. Freight costs can represent between 1 and 10 percent of a company’s operating revenue, one of the largest cost items.  They are often treated as a necessary evil. From time to time a shipper may try out a new mode of transport, a new carrier or conduct a freight bid. Other than that, freight programs tend to remain fairly static from year to year.

During our years of consulting with shippers all over North America, we have observed a pattern of Best Practices that elevate certain shippers and companies above their peers. Employing these Best Practices allows these companies to reduce freight costs and improve profitability. One of the best ways to find out where a company stands in the area of Freight Management is to conduct a Transportation Audit. It is our view that shippers with a freight budget in excess of $1 million should periodically conduct an independent audit of their freight programs. Just as businesses audit their accounting practices, looking for opportunities for improvement, Transportation departments should do so as well. You might be amazed at what you find.

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Final Reflections on Freight Bids

Posted by on in Freight Bids

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Freight bid projects have become one of the most commonly used methods of sourcing freight transportation services over the past two decades. They have become popular with shippers for obvious reasons. When done well, they produce good results. Manufacturers and distributors can strengthen their supply chains by selecting a dedicated group of professional transportation companies and save money on freight costs.

The carrier perspective on freight bids is often quite different from that of most shippers. They tend to dislike them for several reasons.

1. Many bids are not well done.

2. The process of responding to these bids is a lot of work and they often don’t produce any business.

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Monitoring carrier performance is an ongoing process. Some trucking companies will track performance for new shippers with a heightened level of intensity for a designated period of time and then revert back to old habits or standard service levels when the shipper’s focus is no longer there.

Every shipper should understand that there is no start or finish date to monitoring carrier performance. During the bid process, shippers need to outline the service performance that they expect and set up processes and reports to receive actual performance data on an ongoing basis. A web-based dashboard can allow shippers to monitor key KPIs (e.g. missed pick-ups, on-time deliveries) in real time. Monthly scorecards can provide the shipper with detailed reports and highlight any service failures that may have occurred. For new carriers, weekly reports and meetings may be necessary to ensure a smooth implementation.

As the carriers come up the learning and performance curves, these meetings can be cut back to monthly, quarterly or semi-annual, as needed. Success from freight bids is a result of a high level of attention to detail. Dashboards and scorecards that provide information on service, billing accuracy, missing or lost freight, are invaluable tools. These tools coupled with ongoing meetings will help keep the carriers’ “feet to the fire” and maintain the levels of savings achieved.

 

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Some shippers operate under the misconception that once the bid awards have been made, the RFP process has been completed. This is not the case. There is another critical step that can “make or break” the bid process. It is absolutely essential, particularly in multi-plant companies, to have a process in place, immediately upon implementation, to monitor routing guide compliance.

There is an old adage in business that you cannot manage what you cannot measure. This fully applies to the implementation of freight bids.

Never underestimate the power of human relationships. Tickets to sporting events, golf outings, annual fishing trips or vacations at a carrier’s summer or winter residence can do wonders to dismantle the work of a freight bid. In our work we have seen companies use low ranked carriers, or even carriers not listed in the routing guide, to move their freight. To maintain certain long standing carrier relationships, some shippers can and will find reasons to make a switch back to the incumbents.

We would recommend that you not conduct a freight bid until your company is able to put in place some form of reliable compliance tracking. Even a weekly spreadsheet that displays by lane, the carriers moving the freight that week and the reasons for replacing a carrier in the routing guide, would be a helpful tool.

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If your company provides hundreds of thousands or millions of dollars in revenue to certain carriers, they are a critical part of your success, or failure and vice versa. While a rate quote may be a suitable form of agreement between shipper and carrier, for low volume service providers, it is not adequate for larger bid awards. There are several reasons for this.

First, a written agreement between the parties can spell out the nature of the business relationship (e.g. parties to the agreement, governing law of which country, state or province, services expected, etc.). Second, in this era of tight capacity, there is a requirement to obtain written commitments from transport providers on various elements of service performance (e.g. on-time pick-up, transit times, billing accuracy etc.).  These can be detailed in a set of SLAs or Service Level Agreements that can be attached to the core agreement.

Third, the full set of rates, accessorial charges and terms and conditions should be attached so there is no disputing the costs the shipper will incur over the agreed contract period.  Fourth, there should be a written understanding concerning the length of the bid award and a mechanism or formula (e.g. CPI increase) for rate increases in subsequent years. Fifth, there should be a written understanding as to what measures can be taken in the event of non-performance.

The intent is not to create legalistic, adversarial relationships with a company’s core carriers; rather signing written agreements will establish a framework for service performance and communication that can promote understanding and co-operation. In other words, the document will provide clarity with respect to expectations, performance and costs that can be quite beneficial to both parties.  

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As the freight bid process comes to conclusion, there is an urgency to award the business so the shipper can begin enjoying  the cost savings that were achieved. While this is understandable, it is important to keep several things in mind.

First, if business is being awarded to new carriers, they need to come up a learning curve before they are as experienced as the incumbents. Second, some new carriers may have over committed during the bid process and are not able to perform at the expected level. For example, they may only serve certain lanes on particular days of the week or they may not have enough head haul or back haul traffic to bring their equipment back as quickly as expected.

Sometimes the shipper is at fault by not identifying the full scope of their requirements during the bid process. The company may have forgotten to disclose or incorrectly assumed that every carrier can make an 8:00 AM pickup or delivery every day. When informed, the carrier may determine that the best they can do, with their network, is effect a 10:00 AM or 11:00 AM delivery but no earlier. This may not be satisfactory for the shipper since they may need the freight early in the morning so they can dispatch their delivery vans at 8:00 AM to provide the service demanded by their clients.

We suggest that you test market at least some of the new carriers while keeping the existing carriers in place on those blocks of business. In other words, share the freight until such time that the new carriers have demonstrated that they can meet the service requirements. Guide the new carriers through the transition in order to increase their odds of success. Remember that this will create a win/win situation. This is also a good test of the professionalism of your incumbents.

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We live in an ever-changing world. Trucking companies come and go. They are being bought, sold, merged, downsized and resized every day. Under new management, a company may flourish or deteriorate. In this era of driver shortages, carriers are being very deliberate about how they allocate their capacity. As they focus on yield management, this precious capacity is being supplied to the carriers' most profitable customers.

In addition, trucking companies are constantly adding and losing business. A trucking firm may add a new account tomorrow at a higher margin than they are receiving from your business. This may cause them to make their capacity more readily available to another client. The bottom line is that it is always prudent to prepare for a “rainy day.” In other words, there is value in having backup carriers for most of your business.

This means that it is critical during the rounds of bidding, to smooth out the variances in rates between your “low bidders” and the others who were on the short list. By doing this, it reduces the cost differential in making a switch for any of a variety of reasons (e.g. poor service, carrier goes out of business, de-markets certain lanes etc.).

It should also be kept in mind that a carrier will not be too motivated to serve your company if they are a backup carrier in name but receive no freight. To achieve success with freight bids, carefully determine your primary and secondary carriers. This should include both asset and non-asset based providers.  While the temptation is there to give all your freight to the low bidder, to maximize savings, this can be a risky strategy. Where possible, select primary and secondary carriers. Give your backup carriers a reasonable volume of freight so as to keep the primary carriers “honest” and to keep all of your transportation providers engaged in serving your company.

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We live in an era of impersonal communication. E mails, text messages, tweets and GoToMeetings have replaced face to face communication in many instances.

The decision to award millions or tens of millions of dollars in freight transportation to a set of carriers is a very important one. You don’t want to entrust your company’s business and reputation to poor service providers that say they will meet your needs and don’t deliver. You don’t want to commit your business to carriers that offer low pricing to secure the contract and then come back a few weeks later with a rate increase, claiming they misunderstood the bid. These situations happen all too often and they can be very disruptive and financially punitive to shippers.

It is our view that the bid evaluation and award process cannot be done effectively through automated computer programs. There is a requirement to meet “eyeball to eyeball” with companies that may be your future business partners. These meetings should have a formal agenda. In addition to pricing issues, there is value in reviewing the carriers’ operations in detail. This includes:

a) fleet size and age

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The objective of a freight bid project is to secure a range of carriers and logistics service providers that are best able to supply a shipper with the service (e.g. transit times, customer service, shipment tracking information), capacity (e.g. drivers, tractors, trailers, straight trucks) and pricing to ensure the company has a competitive advantage in the market. It takes time to do this right.

If your company has conducted a professional bidding exercise, you should be able to rank your service providers on a set of variables at the end of the first round of bidding. If the bidding process has been conducted effectively, there will likely be some significant cost savings, particularly for companies that have not gone to the market for several years.

There is a temptation on the part of some shippers to “take the money and run.” This could be a big mistake.

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There are thousands of freight carriers, load brokers and logistics service providers throughout North America. One of the important elements of an effective freight bid is to seek out those carriers that can provide the best combination of service, capacity and rates to meet the unique needs of your business.

Over the years, we have observed some companies that do freight RFP exercises but limit the carriers they contact to the same group of companies year after year. My colleagues and I will hear comments like “we used that carrier in 2002 but their service was poor” or “most carriers in that lane have the same rates” or “we know the carriers that can handle our freight effectively.” It is our view that conducting an RFP is a great time to learn more about the various players in the industry.

Times change and so do carriers. New management will strengthen some carriers while weakening others. The quality level can vary significantly from carrier to carrier.  There can be a wide disparity between carriers in their ability to serve certain geographic areas.  

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In order to conduct a freight RFP exercise, shippers need to secure historical data on their traffic volumes by type of service (e.g. small parcel, LTL, over the road truckload, intermodal etc.) and freight costs by lane (e.g. origin – destination pair). The data serves two purposes. First, by capturing and sharing shipment activity data, it guides the carriers in creating their bids by helping them understand how the freight will impact their business. Second, the freight cost data serves as a benchmark against which to compare the rates and other carrier data (e.g. transit times) that are received.

To create an accurate data base, the following key elements are required:

a) For small parcel shipments, origin and destination postal codes are essential.

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In an RFP, the carriers are being asked to bid on specific types of freight moving on specific traffic lanes. The rates they quote are based on the freight descriptions that you provide. It is essential that all aspects of the freight be documented in sufficient detail so as to ensure the quotes received are an exact match for the freight being shipped. These are some of the areas that require their input.

a) What do typical shipments look like (e.g. pallets, pieces, a combo, drums, totes etc.)?

b) What are the precise dimensions and weights of the freight?

c) How is the freight loaded and unloaded (e.g. crane, fork lift, lumper service, side loading, apartment deliveries etc.)?

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Over the past eleven years, my colleagues and I have worked on a variety of successful freight RFP or freight bid projects. During that time, we have observed a number of factors that are the keys to success. This is the first in a series of blogs that will provide tips on how to run a successful freight bid.

1. Obtain Buy-in and Participation from the Operating Divisions

In some multi-plant or multi-division companies, the RFP project is approved by the head office CFO or President. While the divisions may pay the carrier freight invoices, their participation in the RFP may be limited to reviewing the proposed carrier list or bid documents or simply being made aware that the project will be undertaken. This is not adequate.

Since the division managers are directly involved with shipping and receiving goods on a daily basis, they often have information that head office personnel don’t have. It is essential that these people be engaged at the beginning, at key milestones throughout the project and at the end to ensure a successful project. The division freight personnel should be asked to not just read status requests or respond to written requests for information; rather they should also be engaged in conference calls on specific topics (e.g. freight loading and unloading requirements, documentation of local cartage runs, pick-up and delivery requirements in specific branches etc.) so the bid documents completely and accurately reflect the shipping characteristics of your firm.

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