A cost effective supply chain can be a competitive weapon.   Companies such as Wal-Mart have reaped significant financial rewards from their skills in managing their supply chain costs. Even as the economy improves, manufacturers and retailers continue to seek ways to reduce their logistics costs and increase efficiencies.

As consultants who get to work with shippers on an ongoing basis, we continue to observe companies that are over-spending on logistics costs, particularly in the area of freight transportation.   The opportunity for savings in freight costs goes undetected as a result of certain recurring patterns of behaviour or business paradigms, organization structure or a lack of knowledge of Best Practices. What are some telltale signs that may suggest the need for a transformation of the Transportation or Logistics function within an organization? Here are a few to consider:

ü  Key categories of freight spend (e.g. fuel surcharges, line haul rates, accessorial charges) are sourced once without ongoing cost reduction or supplier development strategies other than re-bidding out of contracts prior to expiration

ü  Freight costs are aggregated so that individual items (e.g. fuel surcharges) cannot be effectively tracked and analyzed over time

ü  The company does not possess accurate and detailed data on the densities of its products and on the percentage of its freight in each density category

Tight capacity is driving shippers and carriers to take a hard look at the value of freight contracts. Shippers are seeking rate stability, good service and capacity commitments.  Carriers are looking at securing the most attractive yields on their assets and consistent volumes on lanes that fit with their core competence. One method of helping both parties achieve their goals is by capturing the key elements of the business relationship in a well crafted contract. To create truly Win-Win freight agreements, there are a number of core principles that need to guide these discussions.

Pricing is one Key Element of the Total Package

Shippers are looking for competitive rates. Carriers are looking at offering rates that are competitive, so long as they produce a satisfactory return. Competitive rates are a starting point, a way of filtering and ranking potential carriers in terms of cost savings or cost containment.

One of the critical guiding principles in the carrier selection process should be to evaluate potential business partners across a broad set of variables. These requirements should include size and type of fleet, safety rating, energy efficiency, service performance, and EDI capabilities. A good contract should spell out the shipper/carrier expectations and requirements for each of these items. Rates are very important and will ultimately be a determining factor but they should be partof the total package.

The contract should spell out the length of the award and the level of rate increases in future years. All rates, accessorial charges and fuel surcharges should be spelled out in the appendices.

The improving job numbers this past week provide further confirmation that an economic recovery is under way. The drop in commodity and fuel prices is likely a brief reprieve on the way to a further upswing in business growth. With rising demand, shippers are facing abroad array of challenges in 2011. A tightening transportation equipment supply is being triggered by driver shortages, new U.S. government regulations and by a reluctance of carrier executives to add capacity. This coupled with rising freight rates and fuel surcharges, are causing shippers to revisit their freight transportation paradigms.

Informed shippers realize that there are limitations as to what they can do to offset these market driven forces. To retain their business volumes, shippers must meet the demands of their clients in terms of order sizes and transit times. As discussed in previous blogs, large retailers are seeking greater control over their inbound freight transportation. Within these parameters, shippers are exploring opportunities to blunt the impact of some of thesechanges. As I reflect on my recent conversations with shippers and my review of various published reports, here are some of the strategies and tactics they are employing or investigating.

Create Pooling Programs/Convert from LTL to Truckload

Pooling arrangements allow sister companies or competitors to consolidate small parcel or LTL shipments in specific geographic areas in order to deliver lower cost truckload shipments. This approach, where feasible, offers some unique benefits. Participants in the pooling program have access to truckload pricing since their shipments share space on a full trailerload of freight. By filling trailers faster, the freight can move faster, speeding up the supply chain. The trucker wins by having more freight to transport.

Converting freight from LTL to less-costly truckload service is part of The Home Depot Inc.'s five-year supply chain transformation plan, in both the United States and Canada. The Atlanta-based home improvement giant has created "rapid deployment centers" (RDCs) in the United States and Canada. These are flow-through facilities that enable the cross-docking of large quantities of merchandise. By leveraging the RDCs, suppliers who used to ship direct to stores using LTL service can now consolidate their shipments into truckload quantities for shipping to these facilities.

While much of the world’s attention has been focused on the “wedding of the century” in London this week, history is about to be made in one of the British Commonwealth’s largest and oldest countries, Canada. If the polls are correct, the National Democratic Party or NDP is expected to finish second, ahead of the Liberal Party (for the first time) and possibly rob the Conservatives of a majority government. We will have to wait until Monday night to see how the vote plays out.

For many years America has been the envy of the world.  Its powerful, diverse economy helped generate consistent freight growth and produce a very vibrant freight industry.  But America’s success ignited an escalation in the value of the greenback and a shift of production to lower cost sources of supply.  The current issue of Logistics Management contains some amazing statistics that capture the impact of these changes.

• The U.S. has lost approximately 42,000 factories since 2001.
• The U.S. has lost about 5.5 million manufacturing jobs since October 2000.
• Today 12 million American work in manufacturing jobs, the lowest level since 1941.
• The percentage of people working in manufacturing jobs has dropped from 28 percent in 1959 to 9 percent currently.
• The U.S. has lost 32 percent of its manufacturing jobs since 2000.

In a separate study reported on Canadian television this week, over the decade 2000 - 2009, U.S. based multinational companies have cut 2.9 million manufacturing jobs in America while they created 2.3 million jobs overseas.

During this same time frame a set other powerful forces were unleashed.  Certain countries became very proficient in manufacturing particular products (e.g. cars, television sets, smart phones, clothing etc.).  There was also the miniaturization movement that resulted in shrinking the size of so many technology based products.  Then the great recession hit in late 2008 and 2009 driving out more manufacturing jobs and causing a significant decline in freight volumes across all sectors.

An economic recovery is under way but is hitting a number of headwinds brought on by rising fuel costs, the CSA driver safety program and new (reduced) driver hours of service.  However, the good news is that as the U.S. dollar has fallen to its lowest level since August 2008, manufacturing jobs have risen for the first time since 1997.
 
According to IHS Global Insight and Moody’s Analytics, U.S. manufacturing jobs are expected to grow by 330,000 or 2.5 percent this year. Thomas Runiewicz, an economist with IHS Global Insight recently told the Wall Street Journal that the economic rebound is being driven by three factors: