The 2012 “Masters in Logistics” Study highlights how Larger Shippers are using Transportation Strategy as a Competitive Weapon

For over two decades the University of Tennessee has been conducting its Masters in Logistics research study.  This year the study was undertaken in partnership with Con-way Inc., Ernst & Young, and Logistics Management.  The U.S. based participants accounted for an estimated $30.1 billion in domestic transportation expenditures and over $20.5 billion in international transportation.  Some 1,370 domestic and global logistics, transportation, and supply chain management professionals participated in the study.  A summary of the report appears in the current issue of Logistics Management and is the basis of this blog.

The Masters of Logistics, those companies with annual freight spend in excess of $3 billion, represented 27.8 percent of the study participants. Medium-sized firms, with between $500 million and $3 billion in annual revenue, were 20.6 percent of respondents. The majority of respondents (51.6 percent) were smaller firms with reported annual revenue less than $500 million.  The study participants came from a broad array of industries.

 The results identify the emergence of an idea advocated for over a decade, and one which is being put into place by the Masters of Logistics: Use logistics and transportation services to differentiate yourself in the marketplace. As the study suggests, being able to deliver differentiated service is not possible without a value-creating partnership between the shipper and its strategic carriers; in turn, this has created a unique balance of power between the two parties.

Overall transportation spending as a percent of sales increased from 2011 to 2012. The data showed that companies that spent more than 5 percent of sales on domestic transportation increased year-over-year, rising from 21.2 percent to 26.7 percent in 2012.  The key reason is the change in strategic direction for many companies. Following several years of intense cost cutting, particularly in transportation spending, the 2012 study results point towards companies shifting some of their focus to maximizing profitability and asset utilization. In the meantime, the percentage of respondents who reported that their primary objective is reducing costs has shrunk each of the past three years—findings that reveal that shippers again believe that you have to “spend money to make money”.

Being able to rapidly respond to changing customer requirements is becoming increasingly critical for both shippers and carriers. Today, more than ever, transportation plays a key role in helping companies attain that necessary level of responsiveness. The study indicates that some 71.6 percent of respondents are either capable or highly capable of adjusting transportation operations in response to changing conditions—and this ability to alter and adapt is greater for transportation than for logistics operations.  ‘Total Delivered Cost” is becoming the value creation metric and competitive differentiator among carriers.

The need to create more value is reflected in how shippers are utilizing the various modal combinations.  Truckload transportation still accounts for the largest share of the transportation budget. In addition to being highly responsive to changing conditions, it enables companies to address concerns about fuel costs that ultimately impact the cost to serve and the total landed cost. LTL accounted for 17.3 percent of the transportation budget in 2012, representing the second largest modal expenditure for firms.  However, this is a decline of 2.7 percentage points from 2011. The decline in LTL was the largest change reported for any of the modes for 2012. The study found that part of this decline in spending was used to boost the budget for private fleet. After a slight dip in the percent of the transportation budget in 2011, the expenditures for private fleets are almost on par with the 2010 level. Rail’s portion of the transportation budget remained essentially the same year-over-year while intermodal increased in 2012 accounting for 4.3 percent of total spend.

In the current shipping environment where supply and demand are in fairly close balance, there is a requirement to have a capacity strategy.  Tommy Barnes, president of Con-way Multimodal mentioned that “companies, both shippers and carriers, are looking for a way to use the right capacity in the right geographical places. Using a multimodal strategy can fill that gap.”

Shippers are taking five actions to improve transportation efficiency.

• Shipment consolidation
• Core (strategic) carriers
• “Spot” bidding for freight
• Route planning
• Carrier tracking

 Of the five, the study suggests that the most promising one is the use of core or strategic carriers. To be successful, both shippers and carriers must be fully committed to the relationship. The efficiency initiatives suggest that shippers are making use of multiple methods to keep transportation costs in check. “Logistics and transportation efficiencies will help create a competitive advantage for small- and large-sized shippers,” says Barnes. “The efficiencies can drive logistics and transportation productivity and eliminate risk, thus allowing organizations to focus on customer/supplier value.”

Many factors have caused shippers to change the way they manage logistics and supply chain activities. The main influences according to the results from this year’s study are: 

• ability to respond to changing customer requirements;

• energy (fuel) prices;

• cost to serve (specifically distribution);

• inventory reduction;

• and total landed costs.

The results of this year’s study suggest that the nature of the relationship between carriers and shippers has fundamentally shifted.  Study participants are in strong agreement that being better than their competitors in terms of service would significantly improve their competitive position. There is also an awareness that while logistics and transportation service will differentiate them in the marketplace, it does not allow them to charge customers a premium price—hence the need for carriers and shippers to work together to create the former without incurring the latter.

The study results show an emerging trend by the Masters of Logistics to set themselves apart from their competitors through differentiated service. Transportation plays a critical role in enabling the firm to deliver differentiated service of which a prominent feature is being able to respond to changing conditions. As such, it positions transportation as a vital part of value creation.  For more on the study, pick up the latest issue of Logistics Management