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3
Transportation Management
The transportation function is not a standalone activity, as it should be derived from the logistics strategy, which itself is based on the business strategy. It is broken down into a strategy per commodity, which is a set of services with similar characteristics and can be purchased as one package.
Transportation commodities are parcel and express, airfreight, road and sea freight, train, and intermodal. Each commodity strategy is translated into business, customer, process, and people requirements. These are used as input for the carrier selection and review processes. The outcomes of the carrier selection process, such as carrier allocations and rates, are uploaded in a TMS. In the carrier review process, the agreed carrier KPIs are measured, analyzed, and improved. This information is useful as input for the carrier selection process. Figure 3.1 illustrates the carrier management cycle, which will be discussed in the following paragraphs.
Company strategy Logistics strategyMarket researchRFIRFPRFQEvaluate quotationsAudit & pilot suppliersNegotiateContract Transportation strategyCommodity strategyRequirements Supplier rankingCounter measuresCauseConcernMeasure KPIs Carrier review processCarrier selection process TMS FIGURE 3.1 Carrier management cycle.
Different ways and tools are used to develop a commodity strategy. The following strategy development process, as applied to the transporta- tion management specific processes, is based on the five-step approach of Dr. Robert Monczka Ph.D. and his co-authors as described in their book
“Purchasing and Supply Chain Management” (6th edition, page 208 and further) and is elaborated as follows:
1. Build the team and the project charter.
2. Conduct market intelligence research on suppliers.
3. Strategy development.
4. Contract negotiation.
5. Supplier relationship management.
3.1.1 Build the Team and the Project Charter
In this process the typical project management activities, such as creating a project charter, team, stakeholder analysis, communication plan, scoping document, and project plan, are worked out. These activities are not discussed in this book, as they are widely known and educated skills.
3.1.2 Conduct Market Intelligence Research on Suppliers
The objective of this phase is to understand the transportation market in terms of pricing, capacity, number of players, and trends and review the current strategy. This review is done by comparing the actual with the planned performance of the sourcing objectives such as delivery reliability, quality, cost, IT capability, customer service, contract terms and conditions, validity period, and contract coverage. Contract coverage means at what level the shipper managed to adhere to the agreed carrier and volume allocation. A high coverage encourages carriers to invest in sharp rates and account management team set-ups. It gives a signal of commitment to invest in the partnership and it stimulates ownership to solve problems. Both parties respect the agreed allocation unless the carrier is structurally underperforming or lacking capacity. The most important elements of delivery performance are transit times and their reliability.
Carriers provide KPI reports on regular basis and share the performance details. Non-performance is analyzed and exception codes are used to group the root causes. Carrier uncontrollable factors and customer-related issues are excluded from the “net” carrier performance measurement.
Typical quality issues are under- or over-deliveries, losses, damages, and billing errors. However, customers feel the gross performance, which includes all carrier- and non-carrier-related misses. Shippers and carriers need to work together to improve this gross performance and meet the targets. A Cost Price Indicator (CPI) measures the price performance by dividing the new rates by the old ones. The comparison is based on all-in rates and includes all surcharges, such as FSC, Security Surcharge (SSC) and Peak Season Surcharge (PSS), for an easy understanding. FSC fluctuates with the oil price and SSC depends on the international security environment. FSC varies by airline, origin, and destination and can be based on volumetric or actual weight. PSS is paid by the shipper to the carrier to guarantee transportation capacity during peak season. As the demand is higher that the supply in this period, airlines and the ground infrastructure experience high pressure due to space limitations in cross- dock locations, shortage of warehouse personnel, lack of trucks and parking space and limited number of slots leading to congestions at ports.
Each relatively small operational issue results in service disruptions as the supply chain is planned without any buffer. Airlines try to sell the available capacity as an Express service against higher rates and prioritize big loyal customers. SSC is paid to finance the activities to secure the cargo. Shippers and carriers agree on surcharge mechanisms as the surcharge amounts change overtime. IT capabilities to provide better supply chain visibility are key. There is a growing need for EDI communication and it is becoming a standard requirement. Carriers are requested to provide messages such as the confirmation of pick-up, ASN, on board confirmation, arrival at destination, Confirmation of Delivery (COD), and POD. A dedicated account management team is necessary to support a long-term relationship and provide support to the business.
There are global, regional, and country account managers to drive improvements and schedule ABRs, QBRs, and MBRs. The responsiveness of the account management team and the customer service desk are key for timely problem solving and ongoing relationship building. A SLA is created to write down terms and conditions regarding payment terms, liabilities, sustainability, and security agreements. It is important to standardize these pre-defined terms and conditions for all carriers to prevent discussions during contract negotiations and implementations.
Accepting these, together with other requirements, can be used as a pre-requisite for tender participation and can be communicated in
the RFI phase. They can be managed as non-negotiable items in the tendering process. It is good to have an idea about the optimal number of carriers and leveraged volume is key to achieve competitive pricing.
To support the conclusions regarding the current strategy it is important gather data. Relevant data of the current situation can be:
• Customer feedback
• Performance and reliability level per trade lane
• Proactive problem solving by carriers
• Track and trace availability per carrier
• Contract coverage of endorsed carriers. Carrier status: strategic, niche, commercial, or preferred
• Current carriers and their performance per trade lane
• Scope of services per carrier
• Effectiveness of carrier account management structure and relation- ship management
• Carrier strategy: laid-back or aggressive rating
• Number of shipments, weight, spend, and rate level per carrier
• Market information such as imbalance in trade lanes and its impact on rates
3.1.3 Strategy Development
In this phase, the new business requirements and related goals are defined.
Table 3.1 shows an overview of the current, competition, and best-in-class performance and the targets for the coming years.
Tools to define the future strategy are the Strengths Weaknesses Opportunities Threats (SWOT), the service portfolio, and the suppliers TABLE 3.1
Goal Setting Sourcing
Objectives Current
Performance Competition
Performance Best-in-Class Performance Target
2018 Target 2019 Target
2020 Delivery
reliability (%) 95 98 99 96 97 98
Costs ($/m3) 250 260 200 230 200 190
Number of
carriers (#) 15 15 5 10 7 5
view analyses. A SWOT analysis evaluates the organizational strengths and weaknesses and the market threats and opportunities. Figure 3.2 shows an example of a SWOT analysis.
In the service portfolio analysis, the service types based on the supply risk and related costs are defined: strategic, leverage, or routine service. Each type of service requires a different purchasing strategy. Figure 3.3 provides an example of a service portfolio analysis.
The supplier view analysis gives an idea about how a supplier sees the shipper based on the shipper attractiveness and spend. The four categories are “core,” “exploitable,” “development,” or “nuisance” customer. Each of these qualifications requires a different purchasing and negotiation strategy. Figure 3.4 provides an example of a supplier’s view analysis.
High
Relative cost
Low
Leverage
Parcel & express Strategic
Air
Road Intermodal
Train
Routine Sea
Low Supply/Risk High
FIGURE 3.3
Service portfolio analysis.
Internal
Strengths Weaknesses
Increasing volumes Strong brand image Financial stability Purchasing expertise Market knowledge
No volume commitments Complex organization Multiple decision makers Challenging requirements Price focused
External
Opportunities Threats
EDIBuyers’ market Logistics market places TMS
Increasing fuel prices Road taxes
Limited number of suppliers Shortage of drivers
Strategy: capitalize Strategy: risk management FIGURE 3.2
SWOT analysis.
Creating the future strategy is defining the way to realize the newly agreed sourcing objectives. Typical elements of a strategy are:
• Services: which modalities, rate structures, and performance targets to use.
• Carrier base: who will be the allocated suppliers and back-up suppliers and what is the supplier reduction target?
• Purchasing: agree on single, dual, or multiple sourcing and tender road maps.
• Contracting: define the contract duration, terms and conditions, and spot quote strategy.
• Carrier development: set out quality improvement plans, audits, and efficiency improvement plans.
Example commodity strategies are:
Parcel and express:
• Minimize the usage.
• Cherry pick (choose the cheapest option with any carrier to any destination).
• Include regional players.
• Better manage the breakeven point: the weight or volume at when airfreight becomes cheaper than parcel and express.
• Simplify rate structures.
• Contract period is one year.
• No volume commitment.
High Relative
value
Low
Exploitable customer Carrier y
Core customer Carrier z Carrier x
Nuisance Development customer
Low Company attractiveness High
FIGURE 3.4
Supplier’s view analysis.
Airfreight:
• Use only forwarders, which can deliver any shipment to any destina- tion (global coverage).
• Spot quote rates for shipments >3,000 kg.
• Allocate volume per trade lane.
• Do not accept any surcharge.
• Limit the use of niche players.
• Improve contract coverage.
• Agree on a variable fuel surcharge mechanism.
Sea freight:
• Use only shipping lines (no forwarders).
• Reduce carrier base.
• Allocate two carriers per trade lane.
• Safeguard sufficient capacity for the high season.
• Minimize volume commitments.
• Purchase as a group of sites.
• Improve pick-up and delivery performance.
3.1.4 Contract Negotiation
The objective of this phase is to sign a contract. Before doing so, it is possible to negotiate the terms and conditions with the carriers, based on a negotiation plan. A good knowledge of the transportation industry and specific carriers’
capabilities, and weaknesses, are pre-requisites for successful negotiations.
Also benchmarking rates is a good habit, but acting tough is not always a good approach; instead, the parties need to be prepared to move towards a mutually beneficial relationship.
3.1.5 Supplier Relationship Management
The final phase is to measure the carrier performance, create a carrier development plan, and continuously improve processes to realize the targets. Suppliers should be treated as equal partners and as part of the supply chain. Without their contribution, it is impossible to satisfy customers. Especially in tough times, it is not recommended to squeeze suppliers and lower their margins. Show that the shipper trusts the supplier
by not telling them what to do and how much to contribute. Instead, both parties need to collaborate to remove waste from the whole supply chain leading to a win-win situation. It is important to explain the potentially bad situation of the shipper to suppliers and ask them for help by brainstorming on improvement opportunities. The best way to do this is on one-on-one basis as the suppliers are more open to share ideas, even it is tempting to call and bring in all the suppliers in one room and ask them the same questions as this perceived to be “faster” and “more efficient.” Although the plan phase is faster, the act phase will take longer as suppliers will not easily share their thoughts and ideas with competition being in the same room.
In Lean philosophy, it is preferred to plan slowly and act fast.