Reducing Supply Chain Transportation Logistics Costs
Transportation costs can be a large part of your overall supply chain spend
Transportation costs can be a significant part of a company’s overall logistics spend. With the increases in the price of fuel, the proportion allocated to transportation can be upward of fifty percent. This cost is passed on to the customer and the price of goods continues to rise.
Transportation costs are a major target for company’s to reduce and there are a number of ways in which transportation costs can be trimmed. There are a number of transportation strategies that can be used by management to help reduce costs.
With transportation costs being so high, management has to adopt strategies that will help identify transportation issues in the supply chain and develop solutions to solve those issues. The transportation manager is given the task to provide the best quality transport, at the right time, and at the right price.
In the same way that the purchasing department streamline vendors to gain better prices with higher volume, the transportation manager should adopt the same strategy when it comes to the number of carriers used.
A transport manager spends their time finding the best carrier, at the best price, but sometimes that leads to a large number of carriers being used, albeit giving excellent service. The multiple carrier approach occurs when the transport manager has negotiated the best deal for each route, but has not looked at the big picture.
By reducing the number of carriers, the amount of work offered to the remaining carriers will increase. By offering vendors a larger volume of work, the carrier should be able to offer lower rates across all routes. It may be the case that on some routes the rate is not as good as was negotiated with an another carrier, but overall the rates across all routes should be lower.
As carriers are offered more work, theoretically the negotiated rates should fall even more as the carrier wants to retain the routes they have and increase the volume of work they are receiving.
Of course, with any strategy there is also a downside. The risk associated with only using a small number of carriers is that a company can become very dependent on those carriers.
If a company uses five carriers fairly equally, and one of those carriers goes out of business then the company would quickly have to find carriers to allocate those routes to quickly, otherwise delivery delays could cause financial consequences with customers not receiving their deliveries, and equally as worse, a drop in customer satisfaction which could lead to fewer orders in the future.
If the company used one hundred carriers and one failed, then the company would only have to find carriers to cover only one percent of their deliveries, which would cause minimal problems.
If a company uses carriers for their deliveries the rate that they pay is negotiated by trip based on weight, distance and other variables.
One strategy that can be used by transportation managers is to consolidate shipments so that fewer trips are made, and the company reaps the benefit of lower rates based on larger shipments.
Consolidating shipments means that transportation managers will be moving away from LTL (less than truckload) shipments to TL (truckload) shipments. This is not always possible, but given that discounts for larger shipments are almost always available, the transportation manager will be looking at this strategy to reduce costs.
Some companies believe that the best negotiated prices can be achieved when they use a single source for all their transportation. This is fairly common for purchasing departments to use a single source for a range of products that a single vendor can provide.
The same can be achieved for transportation. By offering all transportation out to bid, via a RFQ (Request for Quotation), a company can provide carriers with a detailed explanation of what they require, which may fall outside of what is normally provided by a common carrier.
If they wanted to use a single source, a company would have to thoroughly evaluate a bidder’s ability to provide the service and whether the carrier has the stability not fall into bankruptcy within the timeline of the contract. If the winning bidder fulfills the needs of the company, and has been fully evaluated, a company could gain significant transportation savings using a single carrier.
To ensure you have an optimized supply chain, you want to make sure you're delivering what your customers want, when they want it. And you're achieving that goal by spending as little money as possible. Reducing your transportation costs can be a significant way to spend less money, without impacting customer service.
Updated by Gary Marion, Supply Chain Expert.