Putting the Brakes on Transportation Costs
As transportation becomes a larger portion of overall logistics costs, supply chain professionals are taking the wheel to stay on course.
Transportation costs increasingly account for a greater percentage of total logistics costs within many supply chains. Indeed, transportation costs as a percentage of total logistics costs rose from about half in 1980 to almost two-thirds by 2017, according to information from The Geography of Transport Systems (Fourth Edition) by Jean-Paul Rodrigue, professor in the Department of Global Studies and Geography at Hofstra University, New York.
The reason for this shift? Lengthening supply chains and accelerating throughput within many warehouses mean raw materials and finished goods spend less time on shelves and more in transit. "Goods spend more time on the move, and thus as part of transportation costs rather than warehousing expenses," Rodrigue says.
On top of these shifts, capacity in many transportation modes has tightened. The truck driver shortage has been among the top three critical issues facing the North American trucking industry for 12 of the past 14 years, finds a recent survey by the American Transportation Research Institute. The shortage reverberates beyond the trucking industry, as many shippers turn to other transport modes to move their goods quickly and efficiently.
But it's not all bad news. There are cost-cutting strategies that can help you focus on more effectively managing your transportation expenses across modes.
With a strong economy boosting truck shipment volumes, the term "shipper of choice" has attracted attention.
"Carriers can be selective," says Brad Stewart, president of Rockfarm Supply Chain Solutions. They will choose shippers that are easy to do business with. Indeed, some drivers go online to rate shippers, much like consumers rate restaurants. Here are some ways you can be a good partner and rein in trucking costs:
Agree on what "on time" means. Does it refer to the time when truckers come through the warehouse gate, or the time they arrive at the loading dock? A misunderstanding can mean trucks sit idle.
"If shippers want to lower trucking costs, they have to estimate how long trucks will be sitting in the yard, not making money," says Richard Stewart, Ph.D., professor, transportation and logistics management, University of Wisconsin, Superior. Then they need to minimize that time.
Carriers that face consistent delays at a particular location may decide to avoid it, forcing the shipper out into the market—and higher rates.
Identify carriers in your lane. Most carriers that already have assets on your routes can add stops at your locations more efficiently than a carrier from outside the region.
Leverage subscription services that provide anonymized data on what other companies pay for a particular lane and mode. "With all the data points, you can quickly figure out a reasonable range," says Jonathan Eaton, principal and national supply chain practice leader with accounting and consulting firm Grant Thornton. This information can put you in a better negotiating position.
Partner with your carrier. Because driver retention is so important, many carriers give preference to shippers that become strong partners. Drivers often prefer to work with shippers whose products, people, and routes they've come to know and like.
The truck driver shortage also impacts LTL shipments, so the shipper-of-choice concept applies here. Here are tips to help carriers use their time and resources efficiently, resulting in better rates:
When possible, offer multi-bill pickups, or pickups of two or more shipments. "Multi-bill pickups lower an LTL carrier's expenses because a driver picking up multiple shipments at a single shipper reduces pickup costs," Brad Stewart says. These shippers often capture better rates.
Standardize packaging as much as possible. Packages that fit easily on pallets and allow carriers to leverage their racking systems also tend to get more favorable access and pricing because they enable the LTL carrier to efficiently use the space within the trailer.
Review assessorial charges. Some shippers don't take the time to understand these charges, which carriers impose for services other than normal pickup and delivery, such as fuel and storage. Not having a handle on assessorials can backfire, as these fees can range from eight to 15 percent of total LTL costs.
Employ dynamic routing or work with carriers that do. Dynamic routing engines can help LTL routes maintain flexibility, while gaining some of the efficiency of full-truckload routes.
Supply and demand fluctuations tend to drive airfreight costs. So do jet fuel prices, which increased more than 50 percent in 2018. In addition, tightened capacity in the U.S. domestic trucking sector has prompted more shippers to use air freight more frequently: As of February 2018, airfreight rates had risen 14.2 percent year-over-year according to Cargo Facts reports. The following tactics can mitigate these increases:
Work with forwarders. They can leverage their volume to get better rates than most individual shippers can access.
Reduce unnecessary packaging. "Air transportation is all about weight reduction," Richard Stewart says. Cut heavy packaging that isn't needed and you also cut costs.
Plan with as much accuracy as possible. When shippers can strategically plan airfreight volumes, including packaging and lot sizes, they can reduce variability in airfreight spend and schedule shipments on slower days. This both contains costs and ensures more consistent access to capacity.
Check that your shipments move onto the plane quickly. It doesn't make sense to use air freight for time-sensitive goods, only to then have the goods wait for space on a plane. When negotiating with a logistics provider, ask how they secure capacity.
Compare rates for domestic air freight against trucking. Trucking can be speedier and less expensive than air for some shipments, once you account for time spent getting to and from the airport and onto the plane.
Over the past few years, many carriers have focused on building "super ships" that can carry tens of thousands of containers. With supply outpacing demand, many shippers enjoy a reasonably strong negotiating position. That said, it's always possible to improve.
Be aware of tighter emissions standards. Starting in 2020, many ocean shippers will have to comply with regulations that reduce the percentage of sulfur in fuel oil from 3.5 to .5 percent. Shippers may see this reflected in higher charges, and should budget accordingly.
Carefully crunch the numbers before shifting production. As of Jan. 1, 2019, more goods coming from China will be subject to 25-percent tariffs. Before moving operations to other countries, consider that the traditional shipping lanes out of China are some of the cheapest because they're so heavily traveled. Shifting production to another country may boost shipping costs and eat into any savings on tariffs.
Check that you code imported goods correctly and maintain documentation to avoid costly tariffs and fines.
Some steps can rein in costs no matter the transportation mode.
Invest in systems that provide accurate information. Three things move in transportation: the goods, information, and money. "Especially in international trade, the information is as critical as the cargo itself," says Richard Stewart.
Unreliable information costs money. If, for instance, you don't know that a shipment has been damaged until it reaches its destination, you may end up expediting replacements. The systems don't need lots of bells and whistles, but they should provide accurate, up-to-date information.
Link systems when it makes sense. By connecting transportation management systems (TMS) and other supply chain systems, shippers can gain greater efficiencies. Say a TMS has multiple trucks arriving at a warehouse at various times throughout the day. Link it to a warehouse management system (WMS), which can prioritize picks to minimize staging time and handling.
Look at total cost of ownership, including transportation, when vetting suppliers. If a low-cost supplier can't consistently deliver on time, you'll likely end up expediting more goods, driving up shipping costs. "Your transportation costs can quickly eclipse any savings on the product itself," Eaton says.
Negotiate freight separately. Many companies ask suppliers to quote "total landed cost," including transportation. That allows suppliers to mark up freight rates.
Weigh transportation costs against inventory carrying costs. If reducing transportation costs increases inventory carrying or warehouse operations costs, you may not come out ahead.
Monitor internal compliance. Some shippers do a fantastic job issuing requests for proposals and getting solid transportation rates, only to find some employees are making routing and other decisions that don't follow their guidance. That reduces the savings sought in the first place.
Take an agnostic approach when analyzing transportation data. Look for solutions that best address your needs, no matter the mode or carrier.
Get executive buy-in on becoming a shipper of choice. While many shippers talk about being a shipper of choice, their goals often are thwarted by the ways in which transportation becomes a commoditized item within the organization's budget. Appointing a senior-level champion is key to overcoming this.
Establish long-term, rather than transactional partnerships. A strict focus on cost may mean paying less attention to other key elements such as compliance, visibility, and flexibility. This short-sightedness can have longer- term consequences to the bottom line.
Keeping all these factors in mind will help ensure that your transportation costs stay manageable rather than driving them off the road.