The 17th annual Masters of Logistics study confirms that there are indeed two distinct groups of shippers—those that have reconfigured transportation fundamentals and those that are seeking to make this transition. And this year we find that the true Masters are only increasing their lead over the smaller, less sophisticated players.

Who are the Masters of Logistics? Last year we reported that the title of Masters of Logistics (companies with annual revenues greater than $3 billion) should only be given to those larger companies that have exhibited performance above and beyond the ordinary in the face of unprecedented challenges. As we continue to find year after year, a Master’s strategic and tactical approach to dealing with a turbulent transportation environment results in a logistics and supply chain network that is far more efficient and effective than medium- and small-sized firms.

The results of this year’s study show that the Masters continue to increase their competitive advantage over other firms as evidenced by better performance in several areas—most notably inventory turns, days sales in inventory, and average days sales outstanding (accounts receivable).

In fact, the gap that started to emerge a few short years ago is quickly becoming a deep chasm.

In addition to reporting on the overall trends and issues in North American transportation and logistics, this study provides insight into how these Masters have changed the way they manage transportation. We also expose the teachings imparted by the true Masters—lessons that are vitally important for smaller shippers to understand as they continue their fight to keep transportation and logistics costs at an acceptable level.

For the past 17 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, Capgemini, and SAP.

This year’s study solicited responses from 1,069 domestic and global shippers. Those respondents accounted for an estimated $59.9 billion in domestic transportation expenditures and nearly $42 billion in international transportation. Most respondents (33.1 percent) work for companies with less than $250 million in annual sales, and 13.3 percent of the respondent pool reported that their companies’ annual sales were $1 billion to $3 billion. The Masters of Logistics (firms with revenues greater than $3 billion annually) accounted for 29.6 percent of the study participants.

In 2007, 29.2 percent of the study participants spent more than 5 percent of revenues on domestic transportation. This year that percentage of participants has dropped to 17.6 percent. Up to this year, domestic transportation spend as a percent of sales had been increasing at a brisk rate from the previous year. In 2006, for example, 30.8 percent of firms were spending 5 percent or more of sales on domestic transportation. From 2004 to 2005, the number of firms that spent more than 5 percent of their revenues on transportation activities rose by 4.5 percentage points—or a 24 percent change.

Why did domestic transportation spend as a percentage of sales decline so dramatically over the past year? The answer involves a variety of factors, including rising prices for goods and commodities, especially in the manufacturing sector. Transportation capacity (supply) was also greater than demand. This created a very competitive environment for carriers and put pressure on them to reduce rates in order to obtain freight that was available. This situation also hampered the carriers’ ability to fully recover fuel price increases through surcharges. Another factor contributing to the shift was the intensified efforts of shippers to more efficiently and effectively manage and control domestic transportation activities.

The average length of haul for 2008 was drastically different from 2007. On average, shippers now move their goods 538.4 miles compared to 624.9 miles in 2007. The 18 percent decline from 2007 to 2008 is contrasted to the almost 12 percent increase in average length of haul from 2006 to 2007. “Regional distribution centers are playing an increasing role in distribution, resulting in shorter distances to the customer and higher levels of service and responsiveness,” says Belinda Griffin-Cryan of Capgemini.

Shorter length of haul is not the only operating difference that was noted from 2007 to 2008.

Our results find that a significant percentage of the Masters have shifted or are in the process of shifting inventory within their logistics network as compared to others. Some 61.1 percent of the Masters indicated that this action was taken to improve operating efficiency.

Over the past year the truckload (TL) sector has commanded an impressive gain in the proportion of the transportation budget they receive. In 2007 this mode accounted for 25.5 percent of domestic transportation expenditures. Over the past year the TL portion of the freight budget has increased by approximately 41 percent, earning 36 cents for every dollar spent on transportation.

The TL sector has aggressively removed capacity from the market, enabling it to keep revenue-per-mile rates at a reasonable level and deadhead miles down. A major factor in the significant increase in the TL sector’s portion of the transportation budget can be attributed to the carriers’ ability to recover some, if not all, cost increases in fuel through surcharges.

This dramatic shift in the transportation budget came at the detriment of almost every other mode. A modest amount of the TL gain came from the decline in the national LTL portion of the transportation budget. Some 58 percent of the study participants reported that they have either completed or are implementing improved shipment consolidation in an effort to effectively manage their transportation spend. This effort resulted in more freight moving in volume loads.

The most notable changes in transportation spend occurred for air freight, ocean, and private fleets. Each of these modes posted significant declines in their share of the transportation budget.

Following the decline in economic conditions from 2007 to 2008, the import container market also continued to struggle during this period. This mode, however, is uniquely positioned to take advantage of increasing fuel prices that negatively impact the domestic trucking sector. The shifting of truck freight to intermodal movements helped this mode adjust to the slowdown in imports.

As noted in this year’s study, intermodal’s share of the domestic transportation budget dropped slightly from 2007 to 2008, accounting for 3.2 percent of the total spend. Persistent anemic housing and automotive markets contributed to the decline in spending on rail transportation as this mode’s portion of the transportation budget dropped 24.6 percent from 2007 to 2008.

While TL clearly dominated transportation expenditures, there were several other items of note. First, regional LTLs managed to maintain their share of the freight budget from 2007 to 2008 during an intensive fight with national LTL and TL carriers for freight in this slow economy. This can be attributed in part to the regional LTL’s service performance in on-time delivery and equipment availability which are discussed later.

The 2008 study indicates that the on-time service for TL and regional LTL carriers remained essentially unchanged from last year (Table 1). Railroads continue to improve in 2008 with an average on-time delivery performance of 88.8 percent. This level of service has not been reported for railroads since 2005.

The most impressive gain in on-time delivery performance for 2008 was noted for national LTL carriers. In 2007, they had the lowest on-time service performance for highway transportation modes at 91.0 percent. While national LTLs are still behind TL and regional LTLs for on-time delivery performance, they have closed the gap considerably in 2008 with on-time service at 94.5 percent.

The trend in equipment availability for 2008 was positive for TL, national LTL, regional LTL, and rail as well (Table 2). Shippers that use national and regional LTL’s saw the biggest improvement in equipment availability, with levels moving close to 100 percent for regional LTLs.

Invoice accuracy, which was difficult for carriers to obtain last year, improved for the selected modes in 2008—with the exception of express package. Railroads and TL carriers posted the best performance in this area at 97.6 and 96.1 percent, respectively. In addition to having the best invoice accuracy, railroads along with national LTL’s saw the largest improvement in invoice accuracy (Table 3).

Billing errors for railroads were reduced on average by 2.1 percentage points and 2.8 percentage points for national LTLs. Although this improvement is important, it should be noted that for most of the selected modes invoice accuracy has not returned to 2006 levels.

“Fuel surcharges and accessorial charges are creating more than a few problems for shippers and carriers in the invoicing process,” says SAP’s JP Wiggins.

“While freight payments technology and processes have been better integrated to ensure that charges are appropriate and correct, the continued volatility of fuel prices and the subjective nature of accessorial charges will continue to challenge the ability to improve in this area.”

When we started this study 17 years ago, large shippers (as defined by annual revenues) were managing transportation and logistics activities very differently than other companies. By 1997, however, there were very few significant differences between firms based on size. What we saw emerging was a group of shippers of different sizes who were adopting best practices in logistics and transportation. This group was labeled the “Masters of Logistics.”

It wasn’t until 2006 that we began to see differences between the Masters and others starting to re-emerge. The results of this year’s study have truly confirmed that the true Masters of Logistics are also the Giants of Shipping. Despite the current unprecedented economic conditions, the Masters are achieving performance results that exceed both medium- and smallsize firms. Our analysis indicates that the manner in which they are managing transportation and logistics is significantly different from others.

First, we’ve found that there is a significant difference between the Masters and other firms when it comes to the design of their network and facility location. The Masters tend to have the primary managerial control of this activity within the domain of supply chain, logistics, and transportation versus other internal functional areas or a service provider outside the firm.

What advantage does this create for the Masters? It enables them to perform transportation, logistics, and even supply chain analysis to determine if the current structure is the most efficient and effective one possible. While this analysis could certainly be performed by other parts of the organization or even outside the firm by others, having this type of tool within the very functional area that is making tactical and operational decisions means that it can become a key facilitator in making better decisions.

Better decisions result from analysis that is based on complex trade offs that are generally much broader in scope. Without having this capability within the province of internal supply chain, logistics, and transportation, it would not be possible to incorporate analysis in the rapidly changing business environment at the tactical and operational level—it would simply take too long.

When it comes to strategic planning within the firm, the majority of the Masters spend anywhere from 11 percent to 30 percent of their time (56.7 percent) on this effort. This in compared to 38.3 percent for medium size firms ($500 million to $3 billion in revenue) and 45.5 percent for small firms (less than $500 million in revenue).

The Masters are also significantly different from their counterparts in the time they spend in strategic planning with their service providers such as carriers and third party logistics providers. The biggest proportion of the Masters spend an average of 6 percent to 10 percent of their time engaged in strategic planning with this group; while a majority of smaller companies spend less than 5 percent of their time in strategic planning with service providers.

All of this strategic planning has been a primary driver in improving the integration of the Masters’ information systems with their external supply chain partners. The study results show that a significant majority (52.6 percent) of the Masters have either completed this task or are currently implementing this action. This is in comparison to 21.7 percent of medium-size firms and 38.7 percent of small-size firms.

The difference between the Masters of Logistics and other size firms is measurable. As shown in Table 4, the Masters have achieved considerably better results in three key areas. Inventory turns are almost 25 percent better for the Masters than medium-size firms and 60 percent better than small-size firms.

The measurable differences are not just confined to these three areas. The Masters are also statistically different than their counterparts relative to on-time delivery, freight loss and damage, and customer complaints. At 94.8 percent, 2.7 percent, and 2.2 percent, respectively, the Masters are setting the service bar for others to reach.

Last year we asked the question, “Are the Masters different from the others?” Based on the results presented from this year’s study, we believe the answer is still a resounding “Yes.”

And they are not resting on their laurels. This year’s study incorporated some questions on green/sustainability initiatives. It was not surprising to find that the Masters of Logistics are working with a host of supply chain partners in this area, including transportation companies, third party providers, and even government agencies.

The percentage of the Masters that are currently engaged in these initiatives is significantly greater than other size firms. Could it be that the Masters see this as the next critical step in reconfiguring traditional transportation management?