Chapter 12
Shipper Strategy
INTRODUCTION
Both shippers and carriers utilize strategies to manage their respective networks. The shipper strategy is focused on purchasing and managing transportation services to meet the needs of their external and internal customers. Carrier strategy is focused on the efficient use of resources to provide the economical and efficient service the shipping public desires. Carriers also try to maximize return on deployed assets.
This chapter presents many of the techniques used by shippers to effectively manage their transportation networks. The first part of the chapter deals with shipper strategies and transportation management, while the latter part is concerned with the development of relationships between shippers and third-party logistics providers (3PLs).
TRANSPORTATION MANAGEMENT
Transportation management is currently the term applied to the purchase and control of transportation services in some organizations.
Transportation Management as a Procurement Function
Transportation management is a special form of procurement and purchasing. Procurement is a term that applies to a wide range of activities that basically consists of obtaining goods and services for the firm.
Procurement includes analysis and activities in the following areas: 1) quality, 2) pricing, 3) specifications, 4) supply source, 5) negotiations, 6) inspection and assurance of quality, 7) timing, 8) conducting value analysis of alternative methods and sources, 9) capital analysis, 10) make or buy decisions, 11) legal and regulatory constraints, and 12) general management. All of these factors provide the firm with a system to obtain the physical goods and special services it requires.
Transportation management performs all of these specific activities in its acquisition and control of transportation services for the firm. Traditionally, a minimum transportation cost goal was employed for this function. In most firms, this was replaced by a goal of minimum total logistics expense. Today many companies first establish a customer service goal and then evaluate transportation and logistics in terms of minimized total logistics costs while attaining the service goal.
Because transportation is usually the single largest variable cost in logistics and because cycle times to customers are being reduced, transportation managers are having a greater impact on the strategic goals of the organization.
SHIPPER TRANSPORTATION STRATEGIES
Transportation decisions must be made to benefit the total logistics process and the firm, not merely the transportation department.
As an example, slow but low-cost transportation can have an adverse impact on customer service and inventory levels. Although such methods might minimize transportation cost, inventory levels might need to be much higher to accommodate longer transit times. These higher stocking levels, with the resultant increase in inventory-carrying costs, might be more than any saving in freight charges.
As Figure 12.1 indicates, transportation strategy is concerned with the purchase and control of transportation services. Transportation purchasing decisions include modal selection, consolidation, private transportation, intermediaries, and contracting. The resources, organization, and trade-terms decisions are concerned with controlling transportation. The strategies in guiding the transportation decision maker are discussed below.
General Strategy
As Figure 12.1 indicates, transportation strategies have been separated into those that apply to all types of shipments, including small and bulk shipments.
Proactive Management
Modern management philosophy emphasizes finding solutions to company transportation problems. The transportation manager relies on basic management techniques to seek innovative transportation systems that will provide the company with a competitive price or service advantage in the marketplace.
The thrust of the proactive management strategy is problem solving. Today the transportation manager must rely on his or her ability and creativity to design a transportation system that permits product differentiation and a competitive advantage.
Improve Information
To effectively manage the transportation function, accurate and current information is a necessity. Without information, the manager is unable to plan and control the transportation activities or make sound decisions. Transportation costs, shipment volume, and carrier performance are the typical data collected. These data are essential to carrier negotiation, freight consolidation, contracting, and private motor carrier decisions.
A major source of transportation information is the bill of lading (discussed in Chapters 11 and 13). The bill of lading indicates the customer and shipper, the shipment volume, origin and destination, date, and carrier. The carrier’s freight bill (invoice) provides similar data as well as the transportation cost for the shipment. Other sources include the purchase order, order entry system, invoice, and internal studies.
Limit Number of Carriers Used
By reducing the number of carriers it uses, a shipper increases its market power and therefore its ability to effectively negotiate with its carriers. Each carrier has a larger share of the shipper’s volume, making each carrier more important to the shipper. This also reduces the number of relationships that have to be managed. This usually results in more effective collaboration between the shipper and its carrier base that eliminates costs, thereby reducing the shipper’s expense and increasing the carriers’ operating margin.
The disadvantage of limiting the number of carriers used is the increased dependency on the carriers that are used. If one of the major carriers ceases operation, the service disruption results in a reduced customer service level, increased managerial costs, and greater transportation costs. The greater cost and lower customer service level exist until a replacement carrier is selected and is efficiently operating.
Carrier Negotiation
Market power determines the shipper’s ability to negotiate acceptable rates and services. To increase market power as discussed above, shippers use the strategy of limiting the number of carriers, thereby concentrating more of its economic power with a carrier and increasing the carrier’s dependence on the shipper.
A shipper’s market power and negotiating strength also are determined by the characteristics of its freight. Freight that has low density, is hard to handle, is easily damaged, and moves in small volumes irregularly is undesirable freight for the carrier. Conversely, products that have high density and high value, are difficult to damage, and move in large volumes regularly are more economical for the carrier to move. Finally, the shipper’s negotiating position is improved if the freight moves in the direction of the carrier’s empty backhaul.
Contracting (contracting with for-hire carriers)
The contracts allow the shipper to realize the lower rates and necessary service levels that are not attainable from a regulated carrier. During the term of the contract, the shipper is guaranteed the contracted rate and service (most contracts are for 1 to 3 years). If properly written, the provisions of the contract take precedence over the bill of lading and transportation regulations. The transportation manager must take precautions to ensure that the contract provides desired terms such as rates, services, equipment, and liability.
Review Private Motor Carrier Transportation
The decision to use or discontinue the use of private motor carriage is a continual strategic issue for the transportation manager. In today’s dynamic transportation market, competitive pressures have forced for-hire motor carrier rates below the cost of many private fleet operations. Through the use of contracting, the service level of for-hire carriers is equivalent to that provided by private motor carriage. However, many shippers still desire to provide strict control over their freight movement because of customer requirements. Also, some shippers manage their private fleets as profit centers, arranging backhauls as common or contract carriers for other shippers or to pick up inbound materials to their facilities.
Small Shipment Strategy
As Figure 12.1 indicates, the small shipment strategies consist of freight consolidation, using drop-off carriers and pooling services, and avoiding the use of private motor carriage. The strategic thrust for small shipments is to reduce the inherently high transportation costs associated with small-sized shipments. By increasing the size of the shipments, the shipper can take advantage of the carrier’s low rates for heavier shipments. Rate discounts from 30 percent to 50 percent or more are possible for heavier loads.
A shipper consolidates its freight by using its order entry system. As customer orders arrive, a computer uses a three-digit zip code to match shipments going to the same general area (this is also called transportation requirements planning, discussed in Chapter 11).
If the consolidated load consists of many shipments going to different consignees in a general area, the shipper might use the pooling service offered by for-hire carriers. The pooling service charges the shipper the lower volume rate from one origin to one destination. Because the consolidated load contains shipments for many consignees at different destinations, a warehouse or drayage firm is used to separate and deliver the individual shipments, and an added cost is incurred for this additional break-bulk and delivery service.
Another small shipment strategy is the use of stopping-in-transit (SIT) service provided by motor carriers. SIT permits the shipper to load a number of shipments on a vehicle and stop along the way to unload the individual shipments. Conversely, SIT can be used for inbound shipments by having the carrier stop along the way to load additional shipments and deliver a consolidated raw material shipment to the plant, warehouse, or retail store.
Finally, the use of private motor carriage for small shipments is normally not cost effective. The small shipment size prevents full use of the private motor carrier equipment, with the result that costs are higher than the charges assessed by for-hire carriers. For-hire carriers are in a position to consolidate small shipments from many shippers to make the operation economical.
Bulk Shipment Strategy
The primary strategy used in the transportation of bulk commodities is contracting. Most bulk raw materials are moved under long-term contracts with rail, water, and motor carriers. The large volume of product moved gives the shipper the requisite negotiating and market power to realize lower rates and guaranteed service levels.
The sheer volume of transportation involved has caused both shippers and carriers to realize their mutual dependency. If the carrier ceases operation, the shipper experiences serious disruptions in service, higher costs, and possibly a short-run closing of production because alternative transportation is not available. Likewise, the carrier is aware of the large percentage of its business that is accounted for by one shipper.
Given this mutual dependency, a shipper attempts to provide the carrier with a balanced load, that is, a load into the facility and one out of the facility. A balanced load eliminates the empty backhaul costs that the carrier must account for in the initial loaded move and enables the carrier to spread this round-trip cost over two commodity moves instead of one.
Inbound Transportation Strategy
In the past, the purchase order items would stipulate “FOB, Delivered” or “ship the best way.” These terms of sale give the supplier control over the purchaser’s inbound transportation and assume that the supplier has the ability and desire to use the transportation carrier that minimizes the purchaser’s costs.
By modifying the shipping terms to “FOB, Origin,” the buyer takes on the inbound transportation responsibility and authority and can apply the transportation strategies identified above to achieve lower rates and improved service. Limiting the number of inbound carriers used builds market power, provides balanced loads to carriers, and results in lower inbound transportation costs.
Another approach is to use the “FOB, Delivered” term in the purchase order but request that the supplier use one of the carriers from a list of carriers approved by the buyer. This strategy concentrates the purchaser’s inbound freight into a limited number of carriers but permits the supplier to select an acceptable carrier from the approved list. A more detailed discussion of FOB terms is found in Chapter 13.
In addition to increased attention to inbound shipments, reverse logistics is a new area requiring significant transportation activity and, in some cases, extreme control. Reverse logistics can cover everything from the return of repairable items and parts for rebuilding to the recall of food or pharmaceuticals. In some cases, this is really a continuous cycle. An example would be the return of an expended copier toner cartridge after it is replaced with a new one. Often, such items come in packaging materials that allow the round trip. The packaging might even contain a preaddressed label and prepaid shipping. In another situation, pallets, and baskets are returned from a retail store to the distribution centre for reuse or recycling.
The strategies discussed above provide the guidelines for the transportation manager to follow in carrying out the transportation function. The next section examines some of the typical functions assigned to a transportation manager.
LINE ASPECTS OF TRANSPORTATION MANAGEMENT
The daily activities of transportation management are numerous. The typical transportation management process is as follows:
· Shipment planning
· Carrier selection
· Ordering service
· Expediting/tracing
· Pre-auditing/rating
· Auditing/paying the freight bill
· Detention/demurrage processes
· Claims, if any
· Other—private car or motor carrier fleet management, transportation budget management
Shipment Planning
Inbound and outbound shipping schedules should be coordinated with purchasing and distribution or production. A continuous flow of product should be maintained, unhindered by the unavailability of transportation (no equipment or service). Further, physical loading and unloading must be planned according to the efficient use of docks and labour.
Carrier Selection
This task involves selecting the actual carrier that will move the shipment.
Ordering Service
To order transportation service, the transportation manager might contact a railroad car distributor who will arrange empty car delivery or call a motor carrier’s local dispatcher. Electronic methods are becoming more common, and the use of the Internet is accelerating this trend
The transportation manager needs to inform the carrier personnel of the shipper’s name and pickup point, weight, commodity, destination, and sometimes the cube measurement of the shipment. Upon vehicle arrival, the equipment is loaded according to plans established in the first step (shipment planning). They include crew assignment, loading arrangement, bracing, dunnage, documentation, and any other special needs.
Expediting/Tracing