Buying Transportation and 3rd Party Logistics Services-Part II


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This executive briefing will help purchasing and supply professionals better understand their transportation and 3rd party logistics needs and develop sourcing strategies to fulfill those needs. Part II of two parts.
The session will focus on three topics. First, the terminology and economic basics of transportation and 3rd party logistics will be discussed. Next, alternate transportation/3rd party logistics strategies will be discussed. This topic will include a discussion of the advantages and disadvantages of private and for-hire alternatives. The final topic will identify and discuss alternative sourcing strategies when using for-hire transportation and 3rd party logistics services.

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Buying Transportation and 3rd Party Logistics Services-Part II

  1. 1. Buying Transportation and 3rd Party Logistics Services II: How Do You Bring Purchasing Skills to the Process of Purchasing Transportation and Logistics Services For The 61st Annual Southwest Supply Management Conference Thomas L. Tanel, C.P.M., CTL, CCA, CISCM, President and CEO and Ronald D. Grossman, PMC, PCMH, CISCM, CEPP, Practice Leader CATTAN Services Group, Inc., College Station, TX 979-260-7200 © 2007 CATTAN Services Group, Inc.
  2. 2. Today’s Agenda Part II  Purchasing T & L Profile and Spend  Freight Modal Analysis and Decision Impacts  The Four ‘S’s  Define Expectations and Routing Guides  Strategies to Enhance Your T & L ‘Buy’ CATTAN Services Group, Inc. 2
  3. 3. Purchasing Transportation and 3PL Profile  This is a template that: Considers Appreciates Understands  The following: Corporate philosophy and culture Supplier and inbound requirements Internal/external customer requirements CATTAN Services Group, Inc. 3
  4. 4. Supply Chain USA 1 Returns DC Bremen •Inspection •Warehousing •Shipping Port Option 1 Ship Port Airport Airport Customs Broker Option 2 - Air Shops FL, LH DC USA •Inspection •Warehousing •Pick, Pack •Shipping Customer TD Returns Timing (days) Alt 1 A (Sea) Alt 1 B (Air) Cost / Week (US) Min Max Min 16 d 25 d 2d 2d 2d 2d Total US Order Cycle TD 2d 6d 2d 6d US per LE Alt 1 B (Air) 8 d 10.5 d Order Cycle FL/LH Alt 1 A (Sea) Available in USA Max 43,800 71,400 1.87 3.05 CATTAN Services Group, Inc. 4
  5. 5. Purchasing Transportation and 3PL Profile Con’t  Map all locations:  Company inbound/outbound locations  Plants  Warehouse/DCs      Supplier locations Customer locations Ports and major consolidation points Major traffic flow lanes Collect traffic flow data for above     Article description Alpha and numeric STCC Bulk or packaged Quantity or volume per shipment per time period CATTAN Services Group, Inc. 5
  6. 6. Facility Location Map— Example CATTAN Services Group, Inc. 6
  7. 7. Freight Traffic Flow Major Lanes— Example CATTAN Services Group, Inc. 7
  8. 8. Purchasing Transportation and 3PL Profile Con’t  Define expenditures and analyze spend: Origin/destinations Carriers and 3PLs Freight rates-both line haul and accessorial Warehouse rates-both storage and in/out Freight and sales terms Product specification/STCC/NMFC/UFC Product weight and packaging CATTAN Services Group, Inc. 8
  9. 9. Transportation Spend— Example FREIGHT Amount SUM ITEM PCT Amount SUM MISC PCT Amount SUM Sum PCT Vendor Name SNL DISTRIBUTION INC $39,345.44 6.6% $554,802.41 93.4% CARGILL $33,806.56 5.7% $559,368.12 94.1% $1,560.92 0.3% $594,735.60 AZTECA $26,993.57 7.8% $319,598.24 92.1% $396.00 0.1% $346,987.81 GENERAL MILLS $20,128.26 12.3% $143,434.59 87.7% $163,562.85 BEMIS COMPANY $11,916.56 1.0% $1,177,949.07 99.0% $1,189,865.63 ROMAN MEAL $11,607.23 14.1% $69,833.37 84.9% DANISCO USA INC $10,994.43 5.1% $204,547.20 94.9% $9,311.00 6.4% $134,867.41 92.9% SUNMAID GROWERS CATTAN Services Group, Inc. $594,147.85 $828.98 1.0% $82,269.58 $215,541.63 $967.60 9 0.7% $145,146.01
  10. 10. Transportation Spend—Example CATTAN Services Group, Inc. 10
  11. 11. Transportation Spend—Example Destination Total Costs Per Truckload Mill Owner Average Cost Per Day Approximate Annual Transportation Costs Port Hudson, LA GP $ 218 $ 655 $ 229,021 Pineville, LA IP $ 330 $ 330 $ 158,217 Bogalusa, LA I $ 429 $ 1,287 $ 486,320 Monticello, MS GP $ 509 $ 2,035 $ 643,277 Vicksburg, MS IP $ 512 $ 1,024 $ 357,051 DeRidder, LA Boise $ 482 $ 965 $ 273,429 Hodge, LA S $ 527 $ 1,055 $ 344,929 Bastrop, LA IP $ 569 $ 1,138 $ 475,017 Campti, LA W $ 526 $ 1,577 $ 504,162 Mansfield, LA GP $ 571 $ 1,142 $ 298,676 West Monroe, LA R $ 568 $ 1,135 $ 476,285 Orange, TX I $ 566 $ 1,133 $ 444,378 Crossett, AR GP $ 631 $ 1,892 $ 716,182 Evadale, TX MW $ 697 $ 2,787 $ 884,308 Texarkana, TX IP $ 837 $ 2,510 $ 871,975 Pine Bluff, AR IP $ 851 $ 1,702 $ 653,819 Pine Bluff, AR Inland $ 851 $ 851 $ 185,523 Lufkin, TX A $ 821 $ 821 $ 214,614 Ashdown, AR D $ 885 $ 5,312 $ 1,697,178 $29,351 $ 9,914,359 TOTAL CATTAN Services Group, Inc. 11
  12. 12. Don’t Forget…Plan for the Future  Where is your business headed in the next 12, 24, and 36 months?  What are the major initiatives that will have an impact on what you expect from your carriers and/or third parties?  What risk and costs factors may affect your transportation and 3PL budget forecasts? CATTAN Services Group, Inc. 12
  13. 13. Purchasing Freight Modal Profile by # of Shipments— Based on Weight of Shipment and Distance Shipped Distance miles <1,000 lbs 1,0001,999 lbs 10,00029,999 lbs 30,00059,999 lbs 60,00089,999 lbs <100 100-199 200-499 500-750 750-1,000 1,000-1,499 1,500 or more CATTAN Services Group, Inc. 13 90,000-or more lbs
  14. 14. Freight Modal Shipment Volume Analysis 100% 90% 80% 70% 60% PCT PER MODE 50% 40% 30% 20% 10% 0% 1-5 lbs 70-150 lbs 10,000 lbs 40,000 lbs 60,000 lbs MODAL WEIGHT BREAKS Water Rail TL LTL Air CATTAN Services Group, Inc. Parcel 14
  15. 15. Performance Comparison for Selected Freight Modes Vehicle Capacity Truck Equivalency Barge 1500 Tons 52,500 Bushels 453,600 Gallons 57.7 (865.4 for 15 barges in tow) Hopper Car 100 Tons 3,500 Bushels 30,240 Gallons 3.8 100 Car Train Unit Semi-Trailer truck Post-Panamax containership VLCC 747-400F 10,000 Tons 350,000 Bushels 3,024,000 Gallons 26 Tons; 910 Bushels 7,865 Gallons 9,000 for a tanker truck 5,000 TEU 384.6 1 2,116 300,000 tons 2 million barrels of oil 9,330 124 tons 5 CATTAN Services Group, Inc. 15
  16. 16. Purchasing Transportation Profile— Affect Modal Decisions  Rail generally competes with truck on freight movements of more than 750 miles.  About 15-25% of rail movement business is truck competitive.  Rail transit times for most bulk and break-bulk cargo are roughly equal to barge transit times within 750 miles and are days shorter beyond 1000 miles.  High-value goods and time-sensitive goods are likely to move through faster, more expensive modes of transportation like air. CATTAN Services Group, Inc. 16
  17. 17. Purchasing Transportation Profile— Affect Modal Decisions  Potential to convert TL to intermodal when distance in excess of 1,000 miles and not time sensitive.  Competition for long-haul highway shipments in particular are becoming noticeably more intermodal as trucking companies have shifted line haul movement legs to railroad TOFC or COFC movements.  About 90% of intermodal container traffic is potentially rail vs. truck competitive  Much of the international intermodal business through the ports lends itself more practically to rail moves and possibly barge. CATTAN Services Group, Inc. 17
  18. 18. Purchasing Transportation Profile— Affect Modal Decisions  If you have to ship over 1,000 miles, you may want to consider a national LTL carrier over a regional LTL carrier. These firms offer the advantage of not having to interline freight traveling long distances.  Private internal fleets are expanding to take on shorter distance LTL or TL moves.  Don’t assume that air means “you hear the roar of jet engines” ; if the carrier can move your freight on what it calls an ‘expedited truck’ and get it to your destination in the timeframe you specified---it may never see the tarmac. Also don’t expect any great cost savings to result. CATTAN Services Group, Inc. 18
  19. 19. Modal Decisions Translate to Carrier Options Shipping Modes Orders Carrier Options • LTL/FTL • Parcel • Ocean • Rail CATTAN Services Group, Inc. 19
  20. 20. Purchasing Transportation Profile— Affect Modal Decisions  Review your shipping profile statistics and understand where the economic shift points are in your: Parcel or Air/LTL mix LTL/TL mix TL/Rail mix Air/Ocean mix  Over 90% of all organizations are either receiving and/or shipping internationally CATTAN Services Group, Inc. 20
  21. 21. Comparison of Distribution Costs and Time from National Warehouses— Example CATTAN Services Group, Inc. 21
  22. 22. Thoughts About Choices Bottom Line: A company should define a lane, process, operation, or function that can be improved, then make these carriers and 3PL providers compete for it. CATTAN Services Group, Inc. 22
  23. 23. The Four S’s Source Solicit Select Secure CATTAN Services Group, Inc. 23
  24. 24. The Four S’s: Source  Identify Logistics and Transportation requirements:  Review and clarify req’mts  Obtain feedback on 3PLs and carriers  Review KPIs, KRAs, and analyze gaps  Establish which gaps are most critical CATTAN Services Group, Inc. 24
  25. 25. Material Flow DC USA—Daily 4 Month Average Supply Chain Alternatives 0.8 Trucks/day 21 Pal/day (Euro) 5 Pal/day Goods In 17 Pal/day (Euro) Division Shop, Concessions 4 Pal/day (Euro) Division T-Direct 2,060 Picks/day 5 Pal/day Returns Others 640 Picks/day Pick / Pack 172 Cartons/day 172 Cartons/day 183 Cartons/day 5 Pal/day Goods Out Shop, Concession 14 Pal/day 1.5 Trucks/day Direct 5 Pal/day Others 5 Pal/day 0.5 Truck/day CATTAN Services Group, Inc. 0.5 Trucks/day 25
  26. 26. The Four S’s: Source  Gather data and manipulate information: Compile or obtain 6-12 months of history/activity req’mts Obtain details: inbound and outbound; origins and destinations; weight, cube and # of pieces; traffic lanes, supply chain streams, and demand chain streams; types of equipment; volatility and performance req’mts CATTAN Services Group, Inc. 26
  27. 27. The Four S’s: Source  Create a RFI:  Review 3PLs’ and carriers’ company and public profiles  Invite both current and new sources  Get: completed profile questionnaires, financials, insurance and safety certificates, authority or operating documents, and references • Perform site visit when applicable. Talk with local management. CATTAN Services Group, Inc. 27
  28. 28. Trucker RFI Compilation and Status—Example Company Name Interest Level Own Pneumatics 24/7 Service Rate Flexibility Own Terminals Full Time Drivers Sub-Contractors Act as 3PL Regional Exp National Exp © 2003 CATTAN Services Group, Inc. Blue Flash High Yes Yes Yes Yes Yes Yes Option Yes Yes Dupre High No Yes Yes Yes Yes Yes Option Yes No Savage High Yes Yes Yes Yes Yes Yes Must Yes Yes CATTAN Services Group, Inc. Omni Medium No Yes Yes No No Only Must No Yes 28
  29. 29. The Four S’s: Solicit  Develop a RFB/RFP: Decide which 3PLs and carriers receive solicitation based on RFI results Determine your preferred pricing and contract formats Specify whether bid/proposal by lane allocation, region or complete scope Include TCA/NITL Voluntary Guidelines to Good Business Relations CATTAN Services Group, Inc. 29
  30. 30. The Four S’s: Solicit  Send bid/proposal package to qualified sources: Prepare a template with details of info gathered Provide clear instructions concerning info you want included Attach a copy of anticipated contract and T&Cs upfront Provide sample performance reports to be used as measures of agreed performance Establish what is a responsive bid/proposal and adequate submission date CATTAN Services Group, Inc. 30
  31. 31. Information Gathered Template— Example Note: BH means backhaul opportunity CATTAN Services Group, Inc. 31
  32. 32. The question is: A carrier or 3PL can perform services which an organization is either unwilling or unable to perform itself, but are they as good as advertised? First we need to determine who they are and what they offer. CATTAN Services Group, Inc. 32
  33. 33. The Seven Most Important Considerations To Include When Choosing Carriers • Financial Performance and Health • Staffing • Assets and Facilities • Internal and External Programs • Pricing Methods, Utilization, Periodic Review • Measures of Agreed Performance • Operations CATTAN Services Group, Inc. 33
  35. 35. The Four S’s: Solicit  Hold a Pre-Bid/Proposal Conference: Invite qualified bidders and proposers Discuss expectations Hold Q&A Provide feedback and answers to all: During conference After conference CATTAN Services Group, Inc. 35
  36. 36. The Four S’s: Select  Verify documentation submitted  Establish T&Cs that may require adjustment, compromise or negotiation  Analyze bid or proposal submissions  Develop selection criteria or negotiation strategy  Use analytical tools to select. Do industry comparisons for the type of customers, facilities, regional, coverage, management and cultural attitudes, cost model, etc.  Select or conduct negotiation CATTAN Services Group, Inc. 37
  37. 37. Bid or Proposal Analysis—Example   Truckload CHRW Origin Equipment Rated Per mile/ Trailer State Zip Required Miles Flat Fee Size Moncks Corner SC 29461 DRY 1101 $ 1.40 Cairo GA 31728 DRY 830 $ Lithia FL 33547 DRY 1112 Brooksville FL 34609 DRY Groveland FL 34736 Loxley AL 36551 City FSC   Extension 1/29/2007 TOTAL 48/53 $ 1,541.40 252.23 $ 1,793.63 1.15 48/53 $ 954.50 190.15 $ 1,144.65 $ 1.05 48/53 $ 1,167.60 254.75 $ 1,422.35 1074 $ 1.05 48/53 $ 1,127.70 246.04 $ 1,373.74 DRY 1069 $ 1.05 48/53 $ 1,122.45 244.90 $ 1,367.35 DRY 614 $ 1.79 48/53 $ 1,099.06 140.66 $ 1,239.72 Red indicates low bidder on traffic lane CATTAN Services Group, Inc. 38
  38. 38. Thoughts About Choices Which is a more important category to your company: Warehousing, Transportation, IT, other? Choose a firm that has its roots in that category. Do they have a local or regional office nearby your facility or headquarters. A local or regional office lends more control to you. Meet with the actual operations personnel, not just sales, to determine their personal chemistry with you and their fit with your corporate culture. Your comfort level is an important key to success. Know your costs for comparison to theirs. Remember, you are paying for their profit margin too. Agree upon measurement criteria in advance. Know when to fix things or to leave them alone. CATTAN Services Group, Inc. 39
  39. 39. The Four S’s: Secure  Provide contracts to selected providers  Emphasize L ong T erm R elationship  Monitor 3PLs’ and/or carriers’ performance, costs and commitments—use scorecard  Issue company routing guide  Seek continuous improvement and incorporate feedback to and from  Hold IPRs and provide a performance report card on a regular interval CATTAN Services Group, Inc. 40
  40. 40. Define Expectations  In the wonderful world of expectations we have a problem:  The buyers/shippers want everything  The Carriers or 3PLs want the business  The suppliers and customers want things also  In theory, everything is possible  In reality, there are constraints CATTAN Services Group, Inc. 41
  41. 41. Why Use Routing Guides?  Are used to provide guidance and rules for any transportation and logistics scenarios  Are part of contractual obligations for suppliers and internal/external customers  Are used identify each carrier and 3PL that you dictate by price/service for use by any suppliers and customers  Are used to identify the shipment size, volume, and weight for each carrier and 3PL to be used CATTAN Services Group, Inc. 42
  42. 42. CATTAN Services Group, Inc. 43
  43. 43. Carrier Selection—Oracle Example       Rule       Criteria • Weight • Volume • Geographic Regions       Inputs Carrier Selection Process       Selection         Results Results • Carrier • Service Type • Mode • Payment Terms Rules Based  Selection Process CATTAN Services Group, Inc. 44
  44. 44. Basic Modal Routing Guide—Example CATTAN Services Group, Inc. 45
  45. 45. Domestic Ground Routing Guide— Example Shipment Weight and Transit Days 201 – 9000 pounds Origin States Small Package Transit 1 Day 2 Days 3 Days 4–6 Days Truck Load MD, DC (Local) 1 Day EXCEL EXCEL N/A N/A N/A CT, MA, MD, NH, NJ, NY, PA, RI, VT 2-3 Days New Penn New Penn N/A N/A CFI or Schneider ME 3 Days New Penn New Penn New Penn N/A CFI or Schneider AR, IA, KS, LA, MN, MS, ND, NE, OK, SD, TX 5-7 Days FedEx 1 Day FedEx 2Day FedEx 2Day Yellow Freight CFI or Schneider AZ, CA, CO, ID,MT, NM, NV, OR, UT, WA, WY 5-7 Days FedEx 1 Day FedEx 2Day FedEx 2Day Yellow Freight CFI or Schneider AK, HI N/A FedEx 1 Day FedEx 2 Day N/A N/A N/A For shipments over 9000 pounds, truck load movements, shipments requiring special handling, or shipments between suppliers, contact your buyer for special instructions. CATTAN Services Group, Inc. 46
  46. 46. International Routing Guide—Example INTERNATIONAL ROUTINGS ORIGIN COUNTRY/REGION AIR FORWARDER OCEAN FORWARDER Europe/Ukraine Expeditors Expeditors Africa Expeditors Expeditors India Expeditors Expeditors Japan Expeditors Expeditors Hong Kong Expeditors Expeditors Taiwan Expeditors Expeditors Shanghai Expeditors Expeditors Malaysia Expeditors Expeditors Singapore Expeditors Expeditors Central and S. America Expeditors Expeditors Canada and Mexico Emery/Menlo N/A All Other Origins Expeditors Expeditors Shipments in excess of 500 pounds or 227 Kg need authorization to ship via Air. CATTAN Services Group, Inc. 47
  47. 47. International Routing Guide—Example CATTAN Services Group, Inc. 48
  48. 48. Rail Routing Guide—Example CATTAN Services Group, Inc. 49
  49. 49. Air Routing Guide—Example DOMESTIC AIR SHIPMENTS Note: Second Day Service if PO delivery date permits; Overnight Air Express if PO delivery requires. 1-150 lb. < 68 kg Small package shipments requiring overnight service purchased FOB freight collect within the 50 states DHL ® Priority overnight service 150-500 lb. > 68 kg Small package shipments requiring overnight service purchased FOB freight collect within the 50 states EGL Eagle Global Logistics > 501 lb. > 1105 kg Contact Traffic Administrator, provide the weight, dimensions, freight description and PO Number (618) 7xx-1220 Phone (618) 5xx-3677 Fax CATTAN Services Group, Inc. 50
  50. 50. Truck Routing Guide—Example ST ORIGIN STATE Zip Code Less Than Truckload (LTL) LTL to TL transition (Pounds) Use 'TL' If shipment is over 1/2 the visible capacity of a 48" vehicle or exceeds pounds AL Alabama All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Prime, Priority, May AZ Arizona All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, May CA California All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, May DE Delaware All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Priority, May FL Florida All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Priority, May, Prime GA Georgia All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Prime, Priority, May IA Iowa All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Prime, Priority, May ID Idaho All FedEx Freight 10 Pallets or 10,000 Lbs May, Navajo, Prime KS Kansas All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, M. Bruenger, Prime KY Kentucky All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Prime, Priority, May LA Louisiana All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Prime, Priority, May MD Maryland All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Priority, May ME Maine All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Priority, May MI Michigan All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Prime, Priority, May MN Minnesota All FedEx Freight 10 Pallets or 10,000 Lbs Navajo, Prime, Priority CATTAN Services Group, Inc. 51
  51. 51. Truck Routing Guide—Example LTL Common Carrier LTL (Less Than Truckload) Routing Shipments under 10,000 lbs. In Order of Preference State Preferred Carrier 2nd Preferred Carrier Alabama Yellow Freight UPS Freight Arizona UPS Freight Yellow Freight Arkansas UPS Freight Yellow Freight California UPS Freight Yellow Freight Colorado Yellow Freight UPS Freight Connecticut UPS Freight Yellow Freight Delaware Yellow Freight UPS Freight Washington D.C. UPS Freight Yellow Freight CATTAN Services Group, Inc. 52
  52. 52. Strategies to Enhance Your Transportation and Logistics ‘Buy’  Extend the processes beyond the walls of purchasing, traffic, and logistics  Create strategies to buffer yourself against: Capacity Shortages Reliability Issues Rate or Price Hikes  Possible strategies for consideration follow CATTAN Services Group, Inc. 53
  53. 53. Strategies to Create Greater Capacity  Adding consolidation/de-consolidation centers to global distribution networks so freight gets moved as FCL and FTL  Looking for ways to extract more capacity from private fleets and facilities by:      Improving cube utilization of fleet equipment Improving facility cube and storage capacity Eliminating empty truck miles and ‘dead heads’ Consolidating orders to same destination or customer Using a carrier appointment scheduling or “order notify” system  Rethinking your transportation and logistics network design and inbound/outbound flow of shipments  Making your freight traffic or warehouse operations attractive to the service providers CATTAN Services Group, Inc. 54
  54. 54. Strategies to Create Greater Reliability  Forging close collaborative ties with their carriers and 3PL providers  Establishing preferred customer status or dedicated contract carriage and/or contract warehousing  Consolidating multiple carrier and 3PL provider relationships by traffic lane, region, or geographic area  Increasing volume with premium operators where service is a differentiating factor---not the low price or discounted carriers/providers  Treat carriers and 3PLs as partners in the commitment to 100% on-time performance  Identifying root causes of service failures and cost overruns by using scorecards and measures of agreed perofrmance 55 CATTAN Services Group, Inc.
  55. 55. Strategies to Create Greater Price Stability  Update the granularity and accuracy of your systems to: Create efficient freight lanes and facility networks  Leverage aggregated spend to negotiate better prices, rates, and charges on a contract basis  Know when to bundle or unbundle goods and transportation costs for freight auditing purposes and checking supplier costs  Help calculate costs per supplier, per customer, per product or SKU, per geographic area or business unit, per facility or site, etc.   Employ total delivered or landed cost analysis and optimization  Use shipment optimization and electronic tendering software  Monitor sources of transportation and logistics data for trends and forecasts  Enforce compliance with your routing guide to avoid transportation and logistics exceptions CATTAN Services Group, Inc. 56
  56. 56. Thank You ! CATTAN Services Group, Inc. 57