Coordinated Transportation Improves Margins for Wholesalers
Q: What are wholesale distributors hoping to achieve with transportation initiatives?
Mulqueen: Transportation initiatives are approved and funded based on their track record of delivering quick ROI through freight spend reduction. However, leading wholesalers understand that siloed transportation planning, while beneficial, has limitations. It does not take into account the impact of transportation on the warehouse, and more importantly, is ignorant of inventory costs. In some instances, the right decision may be to spend more on transportation.
Q: Isn’t that counterintuitive?
Mulqueen: Not if you look at it holistically. Inventory represents a large expense for distributors. While transportation initiatives can generate freight savings, these savings are lost if transportation decisions negatively impact inventory. Therefore, distributors can’t look at each supply chain process in isolation. An execution platform that minimizes total costs while adhering to the corporate supply chain strategy is the optimal solution.
Q: How does that work?
Mulqueen: An example would be cross-docking and flow-through distribution. Once thought of as an option only for retailers, wholesale distributors with multi-tiered networks (i.e. central DCs shipping to warehouses) can enable great inventory savings by flowing inventory through the central DCs and minimizing the amount of time inventory sits.
A good transportation system provides companies with the visibility to know what’s coming on the inbound side, and, in coordination with an available-to-promise engine, allocate that shipment for immediate distribution on the outbound side. Not taking the inbound freight into inventory allows wholesalers to positively impact both DC labor and inventory carrying costs.
Q: That makes sense for complex distribution networks. But what about companies that have flat networks?
Mulqueen: Increasing the amount of freight a wholesaler manages in the inbound network continues to be top of mind. Wholesalers need to be cautious, however, and not take a one-size-fits-all approach. Some mega-retailers’ scale, scope, and market dominance enable them to profitably manage virtually all their inbound freight, but most wholesalers will need to be more selective. Cherry-picking the most profitable suppliers for conversion is done by understanding the differences between freight allowances provided by the supplier and the estimated cost of managing the freight internally. Additionally, wholesalers need to apply a risk premium to their calculations, because transportation costs continue to be extremely volatile. A supplier that would be marginally profitable to convert today may be unprofitable tomorrow.