Oracle
Speaks Transportation Spend Management Mini Series: Inbound Transportation -
Freight Term Optimization (FTO)
(Scene: 1)
Moderator:
The Oracle Speaks is brought to you by enVista, a leading
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to consumption. Visit enVista at www.envistacorp.com.
isaac Edwards:
My name is Isaac Edwards. I am the Director of Supply Chain
for a U.S. based Sporting Goods Retailer. My team and I just completed
implementing a Labor
Performance Management system in our Ontario, CA distribution center.
The
results have exceeded my expectations and we increased our efficiencies by 18%
across all functional departments. The
efficiency gains are producing a 11% net labor cost reduction, which is
approximately $440K per year for this facility. We are now rolling out the
performance program to
our remaining three distribution centers.
You would think that my boss, Mr.
Boswick, would be excited about the cost reductions that we are going to
deliver in the next year. However, he is getting pressure from our CEO and
Board Members to
reduce additional operating cost in our Supply Chain.
Over the last three years,
we have re- engineered our distribution network, implemented a tier-1 WMS to
support our forward and reverse logistics strategies, and implemented a labor
management system to
drive additional waste and cost out of our operations. Four years ago we
completed a logistics network analysis as part of a merger and acquisition of
one of our major competitors. We identified that we had three major cost
drivers: fixed and variable warehousing cost, transportation costs, and
inventory
working capital
to support our multi-channel retail environment.
Over the last three years my
entire focus has been reducing our fixed and variable warehousing cost. We have
spent very little time understanding the impact of transportation cost to
service our stores. It is time to call the Oracle to discuss where we may find
some transportation savings.
SOUND: Ring Ring
ORACLE:
Oracle Speaking
ISAAC EDWARDS:
Oracle, it is Isaac Edwards. Thanks for taking my call.
I know you are busy and probably glad to be back in the U.S. for a while.
ORACLE:
Thanks Issac, it is always good to hear from you, and yes, it
it nice
to sleep in my own bed for a change. How can I help you?
ISAAC EDWARDS:
Oracle, do you remember when we completed our Network
Analysis we decided to focus on distribution and inventory cost
reduction, and at that time we made the strategic decision NOT to focus on
Transportation cost reduction?
ORACLE:
Absolutely. I remember presenting the ROI for each of the
major cost drivers, and the time line and priority list with Bob Bozzwick and
your
Board of Directors. However there were and
most likely still are significant opportunities to improve both your inbound
and
outbound transportation cost.
ISAAC EDWARDS:
Well my BOSS, has now rolled transportation under my direct
line of responsibility. I now have responsibility for both inbound and
outbound transportation. I believe we spend close to $60m in total freight, but
I
am actually not sure. The $60m represents mainly outbound to our stores, parcel
for our direct to consumer, and
what we pay our freight forwarder for inbound containers into Long Beach and
Tacoma. It
has become apparently painful that we don't have a good handle our total
transportation spend and far as I can tell, our transportation costs have been
trending
in the wrong direction in terms of transportation cost as a % of sales. I
believe we have a lot of room for improvement and I want to discuss where
should we start.
ORACLE:
Well, first I like to develop a simple transportation spend diagram that outlines the mode for both inbound and outbound. This would include: Ocean, Inter-Modal, FTL, LTL and Parcel. The transportation spend diagram should include the number of shipments, Bill of Lading Count, Carrier Name and spend by carrier by lane. It is a simple one-page Powerpoint diagram, but getting the data and accurate information can take a while.
ISAAC EDWARDS:
Tell me about it. It took me three weeks working with our
finance
team to pull what I believe are our transportation cost by carrier. How about
for the freight we don't pay for? We have a lot of freight that is pre-paid. In
this instance, I
am not sure who the carrier is. You're not going to believe this, but we don't
force the carriers to make appointments. They show up at will!
ORACLE:
Yes, you want to capture the PPA vendors because I am going
to have you complete a PPA to Freight Collect lane and conversion analysis, or
what I call Freight Term Optimization (FTO).
ISAAC EDWARDS:
FTO?
ORACLE:
Yes FTO. Isaac you know consultants love acronyms. In my
experience, one of the largest areas for a retailer is to gain control of their
inbound freight from the time buyer places a PO to the time it hits your
distribution dock door or customer hands. In addition, there is an opportunity
to reduce your
COGS, improve visibility, and possibly reduce your inventory levels.
Freight Term Optimization (FTO) ensures that the shipper or
consignee can move
the freight in the least expensive manner. An FTO analysis identifies the
cost at which one entity can move the freight less expensively versus another.
The analysis would include:
- The ability to consolidate shipments by
adjusting order dates so
as to consolidate the same origin and/or destinations
- The ability to consolidate shipments with nearby origins or
destinations through multi-stop TL or pool consolidation and distribution
- The ability to manage the shipment within pickup and delivery
windows that accommodate load shifts to inter-modal modes
- One entity or the other having freight patterns that enable one
or more carriers to move the volumes at lower cost than the other entity,
typically because volumes and directions fit well with their network and other
moves. You want to balance lanes, complete triangle moves, and increase
line-haul
moves if all possible
- Or, because one entity or the other simply has the market power
to force carriers to accept lower margins. Are you completing in back-haul
moves?
Are you using the Private Fleet for any back-haul opportunities?
ISAAC EDWARDS:
Yes, but it is opportunistic, and we don't have a TMS solution that can plan and manage the flow of Purchase Orders and that synchronizes our Private Fleet with potential inbound back-hauls. Quite frankly, it does not matter anyway because our suppliers are paying for the freight.
ORACLE:
Ok, so I want you to complete an FTO analysis, which is
basically evaluating the current transportation lanes and determining which
lanes make sense to convert from PPA to Freight Collect. Historically, the
majority of inbound (IB) freight is Prepaid or “delivered” (arranged and paid
for by the supplier). It is important to understand the reason for
this. For most consignees, managing inbound freight on a collect basis
has been really hard. Consignees often had little visibility into their
own company’s purchase orders and even less visibility into real numbers and
sizes of shipments (pallets or cartons) that the order would require, or the
ready date for those shipments. And with delivery dates tied to
production runs or retail sales, it was often easier and safer to leave the
freight terms Prepaid and give the vendor a delivery date they had to
meet. The problem for consignees with the appropriate networks and
volumes is that they can incur unacceptably high costs.
ISAAC EDWARDS:
Great, but where I do I start.
ORACLE:
First, you're going to capture one year of purchase order
history and you are going to determine where that freight originated from, the
cost of good sold for that freight, the category of freight, freight class and
how much weight was shipped by vendor to your four distribution centers.
ISAAC EDWARDS:
Sounds easier said than done. We don't know where the freight
was
shipped from and we have vendors that have multiple Purchase Orders.
ORACLE:
You need to work with your suppliers and buyers to get the
information. Don't you receive ASNs?
ISAAC EDWARDS:
Yes, but not for all our suppliers. Our big vendors, like
Rawlings, K2, Columbia Sportswear and Nike send us ASNs.
ORACLE:
Perfect, because a standard ASN has the BOL Number and where
the freight originated from. Plus, you said something very important. Your big
vendors - I assume what you mean by big vendor is the suppliers that ship the
most volume to you,
correct?
ISAAC EDWARDS:
Yes, ok I get it. Now that I think about it, we can determine
the origin point and destination point. Plus, we have exceptional item master
data information which includes dimensions and weight. I am pretty sure that I
can build an inbound lane file. But before I go on this goose chase I have to
get our buyers aligned to negotiate the freight out of our COGS and figure out
if if it is less expensive for us to do it. These vendors are big and they are
not
going to just roll over for a $1 billion dollar retailer, especially if they
are making money on freight.
ORACLE:
Isaac, we have retailers with revenue that are less than $250m that manage their own inbound freight or use a 3rd party freight management company.
ISAAC EDWARDS:
Ok, I am sold and I will dedicate the resources to complete the analysis. But, help me understand the big picture of FTO. Knowing you, you have developed a process or methodology.
ORACLE:
You're right, the fundamental process is as follows:
- The first element of the FTO effort is the transportation
cost analysis.
If a
potential prepaid-to-collect conversion vendor is relatively small, the
analysis
can be as simple as understanding the shipment profile (typical shipment sizes
and frequencies) and applying static transportation rates for those shipments.
On the other hand, your spend is significant and hence an optimization using a
leading TMS that incorporates shipment consolidation, pool point and multi-stop
analysis will increase the accuracy of the transportation cost savings
estimates. A mature transportation management organization using a
leading TMS may be receiving 856 information so as to provide visibility to
prepaid as well as collect shipments; in this case getting actual shipment
information on prepaid vendor activity is easy. Otherwise, the analysis
effort typically includes accumulation of prepaid shipments information from
Receiving, Purchasing/Procurement, or even from the supplier.
- The second element of an FTO effort is the vendor
negotiation. While Purchasing/Procurement will typically drive this
portion of the effort, they often need support from transportation to address
supplier objections and evaluate supplier pricing offers. It is not
uncommon for initial cost reduction offers to be unrealistically low, so it is
important for organizational incentives to be aligned so that
Purchasing/Procurement
is rewarded for pursuing these negotiations and including Transportation where
appropriate.
- The third and last element of the FTO effort is the implementation. As mentioned earlier, implementation will differ depending on whether a company’s transportation operations are enabled by a TMS and whether their IB management program is static or dynamic. TMS-enabled IB management should generate more savings and in some ways be easier to implement, but regardless of whether the IB program is static or dynamic, it is important 1) for the operational conversion process to be well documented and able to be executed without disrupting freight flows and 2) for the transportation costs to be tracked for the converted vendor so that they can be compared with the estimates and the decision can be validated (and the savings can be calculated and taken credit for!).
ISAAC EDWARDS:
Oracle, as always, you have given me more to think about than I have time for. But I believe we can reduce our transportation cost. I will need the support of our merchandising and buying team.
Oracle:
Absolutely, and remember the savings can be as much as 10% to 15%, so this is a project worth gaining internal alignment on. Feel free to call me if you have any further questions or need further assistance.
ISAAC EDWARDS:
Don't miss the next podcast when I consult the Oracle about carrier analysis and negotiations.
