21st Annual Study of Logistics and Transportation:Partnerships add value to the Masters of Logistics
September 01, 2012
Transportation is critical in value creation
Being able to rapidly respond to changing customer requirements is becoming increasingly critical for both shippers and carriers. Today, more than ever, transportation plays a key role in helping companies attain that necessary level of responsiveness.
Our study indicates that some 71.6 percent of respondents are either capable or highly capable of adjusting transportation operations in response to changing conditions—and this ability to alter and adapt is greater for transportation than for logistics operations.
According to Tony Ross, Ernst & Young’s senior manager of advisory services, transportation costs as part of cost-to-serve have not been identified to the level necessary to identify the value being created. “But as we get more granular by using ‘total delivered cost’ as the value creation metric, we can measure the cost and value in not only our ability to be adaptive and responsive, but understand if those actions were the right ones to meet customer service requirements and profit margins,” says Ross.
The need to create more value is reflected in how shippers are utilizing the various modal combinations. As shown in Figure 2, truckload (TL) still accounts for the largest share of the transportation budget. In addition to being highly responsive to changing conditions, TL enables companies to address concerns about fuel costs that ultimately impact the cost to serve and the total landed cost.
LTL accounted for 17.3 percent of the transportation budget in 2012, representing the second largest modal expenditure for firms. However, this is a decline of 2.7 percentage points from 2011. The decline in LTL was the largest change reported for any of the modes for 2012. We found that part of this decline in spending was used to boost the budget for private fleet. After a slight dip in the percent of the transportation budget in 2011, the expenditures for private fleets are almost on par with the 2010 level.
The decline in LTL was the largest change—both positive and negative—reported for any of the modes for 2012. Rail’s portion of the transportation budget remained essentially the same year-over-year while intermodal increased in 2012 accounting for 4.3 percent of total spend. In general the budget is allocated among several key modes of transportation.
“In today’s environment, shippers and manufacturers are looking to the multimodal strategy, as there is some concern about the balance of supply and demand in the transportation space,” says Tommy Barnes, president of Con-way Multimodal. “Companies, both shippers and carriers, are looking for a way to use the right capacity in the right geographical places. Using a multimodal strategy can fill that gap.”
What are shippers doing to increase the value mix? As shown in Figure 3, the top five initiatives are ones that have appeared on this list
consistently over the past few years. Of the leading actions being utilized to increase the value mix, perhaps the most promising one is the use of core or strategic carriers.
To be successful, both shippers and carriers must be fully committed to the relationship. The list of the top five initiatives also reveals that there aren’t a lot of new actions being taken to stretch the transportation dollar.
Several actions that were ranked below these top five are a mix of operations, tactics, and strategy and include items such as: differential customer service levels; intermodal shipments; use of dedicated transportation; and load planning. The efficiency initiatives suggest that shippers are making use of multiple methods to keep transportation costs in check.
“Logistics and transportation efficiencies will help create a competitive advantage for small- and large-sized shippers,” says Barnes. “The efficiencies can drive logistics and transportation productivity and eliminate risk, thus allowing organizations to focus on customer/supplier value.”
Changing the power equation
Many factors have caused shippers to change the way they manage logistics and supply chain activities. The main influences according to the results from this year’s study are:
ability to respond to changing customer requirements;
energy (fuel) prices;
cost to serve (specifically distribution);
inventory reduction; and
- total landed costs.
The results of this year’s study suggest that the nature of the relationship between carriers and shippers has fundamentally shifted. Over the years, academics and practitioners alike have advocated a balance of power as the means to achieve better performance for both factions.
The question of interest has been whether and under what conditions the competitive behavior of both groups would lead to some sort of equilibrium. By all indications that time has arrived.
Study participants are in strong agreement that being better than their competitors in terms of service would significantly improve their competitive position. There is also an awareness that while logistics and transportation service will differentiate them in the marketplace, it does not allow them to charge customers a premium price—hence the need for carriers and shippers to work together to create the former without incurring the latter.
Many of the Masters are spearheading the move to deliver value-creating service that distinguishes them in the marketplace. “Within the Masters, those that are the leaders are leveraging the best tools possible on a daily, weekly, monthly, quarterly, and annual basis,” says Ross. “This means doing a transportation procurement assessment and using collaborative optimization at least annually. It means reviewing the optimal ‘ship from’ locations bi-annually. It means analyzing asset allocation to be the best locations for maximum utilization, in addition to the regular route/lane optimization and capacity analysis. Finally, it means every mile needs to be examined for value—do not leave money in the back of the trailer.”
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