Our 16th annual Masters of Logistics study discovers that a specific group of logistics and supply chain managers are actually managing the current turbulent transportation environment quite differently than their counterparts. Their strategic and tactical approaches dealing with rising and volatile fuel costs, driver shortages, and transportation infrastructure issues results in a logistics and supply chain network far more efficient and effective than other, less sophisticated operations.

For example, Masters are significantly more likely to use “best of breed” transportation software solutions to ship products from regional warehouses to customers. And, despite having more warehouses, they had the least amount of obsolete inventory write-offs. These are only two of many differences found between the Masters (firms with revenues greater than $3 billion annually) and non-Masters. This year we found that the gap that started to emerge a few short years ago between the two is quickly becoming a deep chasm.

Looking back to the early 1990s, everyone wanted to know what the big spenders were doing to manage their supply chains. Much of what the Masters were doing then moved from “best practice” to “expected practice” in a just a few short years. During this time, the distinctions between the two groups started to fade, as new tools and technologies were widely adopted and the non-Masters began to streamline their operations.

However, 9/11 changed the game. What quickly followed was an economic slowdown, increased global competition, amplified security issues, and rising transportation costs—just to name a few. All of a sudden there was no more “business as usual.” Faced with these conditions, the Masters began to devise new strategies and tactics to navigate the seemingly chaotic transportation environment. The savviest have developed a new playbook in the past two years, and this playbook has enabled them to be significantly more responsive and leaner than their counterparts. But most importantly: The true Masters have been effective in integrating all critical supply chain processes.

For the past 16 years, the Masters study has identified emerging trends in the field of logistics and provided benchmarking data on transportation and distribution. As has been the case in the past, Logistics Management conducted the study along with Georgia Southern University, the University of Tennessee, and the consulting firm, Capgemini.

This year's study solicited responses from 1,326 domestic and global shippers. Those respondents accounted for an estimated $32.5 billion in transportation expenditures, and nearly $14 billion in international transportation. Thirty-seven percent of respondents work for companies with less than $250 million in annual sales, and 13.7 percent of the respondent pool reported that their companies' annual sales were $1-$3 billion. The Masters consist of firms with annual revenues greater than $3 billion. This year, they represented 22.8 percent of participants.

More than fourteen industry sectors from energy/chemical/mining to retailing participated in this year's study (Figure 5). As in past years, the core group of participants came from the manufacturing sector—50.3 percent of respondents. This group included sectors such as general manufacturing, high tech, consumer products, and automotive.

All supply chain members are represented in the study. Some 25 percent of respondents told us that their primary customer was a manufacturer, 24 percent ship to a distributor or wholesaler, 29 percent ship to an end consumer, while the remaining 22 percent ship to retailers.

When it comes to domestic transportation expenditures, the majority of the study participants (29.2 percent) reported that their companies spent more than 5 percent of sales on transportation services (Figure 6). This suggests that many of the largest shippers (as defined by transportation spend as a percent of sales) were able to “hold the line” on costs in this area.

Another 14 percent indicated that their companies spent between 4 and 5 percent of sales on domestic transportation. The biggest change from 2006 to 2007 was the percentage of companies that said they spent between 2 to 3 percent of sales on domestic transportation (20.2 percent). When compared to 2006, it is apparent that many firms at the low end of transportation spending as a percent of sales (<1 percent) have incurred substantial increases in transportation costs over the past year.

In addition to the domestic side, study participants were asked to provide details on their international transportation expenditures. As a percentage of sales, international transportation expenditures somewhat mirrored the domestic spend. More than 20 percent of respondents reported spending more than 5 percent of sales on international transportation. Another 7.4 percent of companies spent 4-5 percent of sales in this area.

The biggest difference between domestic and international transportation spending is at the low end (<1 percent of sales). For international transportation, this category accounted for 22.3 percent of respondents and only 9.7 percent for domestic transportation. An analysis of the data revealed that the Masters of Logistics spent significantly more on international transportation than others. Fifteen percent of this group had international transportation expenditures greater than $750 million.

Some parts of the logistics network remained the same over the past year, but other operational elements changed significantly. One of the elements that remained mostly the same is origination of customer orders. The majority of customer orders originated from a plant or a warehouse at a plant location (40.6 percent of all customer orders), with the majority of this volume being shipped direct to the customer (43.7 percent).

On average, shippers moved their goods 624.9 miles with a mean shipment size of 12,806 lbs. From 2006 to 2007 the average length of haul increased by 11.6 percent and the average shipment size grew by a modest 3.6 percent. “Regional distribution of partial loads continues to dominate the market. Thus, there continues to be opportunities for optimization and collaboration” says Peter Moore, vice president of Capgemini Consulting and co-author of the study.

The majority of study participants reported that customer orders are fulfilled at whatever DC has the shortest delivery time (44.9 percent of respondents). This policy supports a driving factor in logistics—shorter customer lead times. Study participants ranked shorter lead times as the top reason for increasing the number of facilities holding inventory. In 2006, a little more than 32 percent of companies shipped directly to the customer—this percentage has grown to 44 percent in 2007.

The past year has brought some relief to shippers in the form of more capacity. A declining import container market was a major contributor to a negative growth year for domestic intermodal freight. Combined with a weak housing and automotive market, the railroads found themselves in competition with truckload (TL) carriers for freight. The data in Figure 1 show that intermodal continued to win this competition as shippers moved more of their long-haul freight via this mode. Unrelenting high fuel prices and highway congestion were contributing factors to the increased use of intermodal domestically; while study participants cited freight costs and transit time as the two most important factors in making modal decisions.

The percentage of transportation budgets spent on TL carriers has dropped for the fourth year in a row. Three years ago, shippers spent 29.8 percent of their transportation budget on TL shipments. Two years ago it fell to 28.9 percent, last year it dropped to 25.3 percent, and this year TL as a percent of the overall transportation budget is 23.5 percent. As the available freight started to decline in the last quarter of 2006 and continued into 2007, competition between intermodal, TL, national, and regional LTLs began to intensify. The data in Figure 1 suggest that TL has been most affected by the intense competition.

In addition to intermodal, one of the beneficiaries of a spending shift has been national LTL carriers. Both national and regional LTL's have aggressively pursued freight in the medium and long-haul markets. Last year, shippers spent 11.8 percent of their freight budget on national LTL carriers; this year, that percentage climbed to 15.2 percent.

Regional LTL carriers saw a much more modest increase in their share of the transportation budget, growing from 12.6 percent in 2006 to 12.7 percent in 2007. When study participants were asked whether they expect to increase, decrease, or use the same number of regional LTL carriers in 2007, the overall result was that they expect to use considerably fewer carriers of this type. Shippers anticipate using more national LTL and TL carriers for freight movements in 2007.

For shippers, the competitive transportation environment has brought some relief in transportation costs, as pricing has been a major factor in the competition (Figure 2). In 2006, the majority of shippers expected to pay more in every modal category. In 2007, however, the biggest cost pressures appear to be with ocean and surface parcel transportation. “What is significant here are the percentages who do not expect to pay more. In each mode, the vast majority are projecting steady pricing or even discounts. This is consistent with recent aggressive pricing reductions in the Truckload and LTL markets,” adds Moore.

For the past two years the subhead for this section has been “service woes continue” after the big meltdown in service in 2004. Since that time, carriers have struggled to get service levels back up to the 2003 levels.

The glimmer of hope this year is the small improvement in on-time delivery posted by TL and regional LTL carriers (Figure 3). Even more impressive is the service gain posted by the railroads. After reaching record service lows in on-time delivery in 2006, the results of this year's study indicate that railroads on-time delivery improved by 12 percentage points. Not since 2005 have they been able to deliver this level of service. On-time delivery for national LTL carriers remained essentially the same from 2006 to 2007.

Since we began collecting this statistic in 2003, express package carriers have led the group in terms of on-time deliveries. This year the streak is broken. While it's not a significant decline in service from the previous year, it is an indication that there isn't any transportation mode exempt from the current transportation issues.

A possible factor affecting on-time deliveries for express package carriers is equipment availability. Express package carriers posted a decline in this area from 2006 to 2007 (Figure 4). This decline happened in the same time period when all the other modes either improved equipment availability or retained 2006 service levels for this area. TL shippers saw the biggest improvement in equipment availability, moving from 90.4 to 94.2 percent from 2006, the best equipment availability for TL since this statistic was first collected in the 2003 study.

Invoice accuracy also proved difficult for shippers as carrier performance deteriorated in this area. TL shippers saw 4.8 percent of their shipments experience billing errors compared to 3.3 percent last year. Billing errors for national LTL movements went from 4.7 percent last year to 8.5 percent this year (Figure 7). This was the most significant decline for all the modes. Regional LTL carriers also struggled with invoice errors, going from 3.8 to 7.8 in 2007. “Even with several years of dealing with an abundance of fuel surcharges and accessorial surcharges, shippers and carriers aren't doing a better job with invoicing,” adds Moore. “To improve invoice accuracy and timeliness, freight payment technology and processes need to be better integrated so that charges are correct.”

The service woes for freight loss and damage continued in 2007. The percentage of TL shipments incurring freight loss and damage claims went from 1.7 percent in 2006 to 2.2 percent in 2007 (Figure 8). Likewise, the percentage of National LTL shipments with such problems increased from 2.6 percent last year to 3.0 percent this year. Shippers using rail transportation, however, reported the worst freight loss and damage.

Achieving the desired service levels depends on many factors, the most significant of which is the carriers' ability and capability to perform to expectations. Many firms have used a core carrier program to build relationships with service providers to improve both effectiveness and efficiency of service.

When transportation capacity tightened significantly back in 2004, many wondered if the core carrier concept would be sent to the back-seat in the scramble to find available capacity. Based on study results of the past two years, it appears that turbulent times have actually strengthened the core carrier concept.

When asked what actions have been taken to improve operating efficiency and effectiveness, 45.5 percent of respondents stated that they have completed implementation of a core carrier program, making this the top ranked initiative. Another 32.5 percent are in the implementation/planning stages of a core carrier program. It would appear that even with greater capacity availability in 2007, shippers are aware of the value they receive from their core carriers. Still, the data found a fair number of shippers who said they plan to use more carriers. In fact, the net increase in the number of carriers to be used resulted in gains of 14 percent gain for truckload carriers, 1.7 percent for intermodal, and 17 percent for national LTL.

The picture was quite different for regional LTL carriers. Respondents reported that they would be using far fewer carriers, with a net loss of 40.7 percent. Although shippers may want to stick with a smaller group of carriers, they are adding carriers selectively to deal with their irregular route freight moves and to provide backup service for tendered loads.