2009 Best Practices In Transportation Part 1

Empowering Fact-Based Decisions Across Your Supply Chain

Best Practices in Transportation
Procurement

Dr. Chris Caplice
Executive Director, MIT-CTL

Gary Girotti
Vice President, Chainalytics LLC

March 3, 2009

1 © Copyright 2009 Chainalytics, LLC.

Who is Chainalytics?

• Chainalytics formed in 2001
– HQ in Atlanta, GA, with second office in Bangalore, India Realize
– 50 FTEs in US and India

• Two Practice Areas:
Continuous
– Supply Chain Strategy Analysis
– Transportation Planning

• Recent Accolades
– “Great Supply Chain Partner” Global Logistics and Supply
Chain Strategies
– Named for five years running: 2004-2008
– “10 Coolest Supply Chain Boutiques” ARC Advisory Group in July, 2007
– “Top 100 Innovations” Supply and Demand Chain Executive
– 2006 Award for Model-Based Benchmarking
– “Pros to Know” Supply and Demand Chain Executive
– Gary Girotti (2007), Jeff Metersky (2006), Michael Kilgore (2005)


Agenda

• How should shippers procure transportation?

• What impact do policies and practices have on rates?

• How should a shipper handle fuel volatility?


Guiding Principals –
Procuring Transportation Services

• Transportation is not a commodity – it is a service

• A transportation procurement event is as much a relationship
management process as a pricing event

• Going to market, or market testing your rates, should be a
healthy part of the relationship management process


Procurement Best Practices:
Procurement Life Cycle

These
areas get
all the
focus

Data

But these
areas have the
biggest impact
on actual
savings
realized


Getting Ready – Benchmarking Report Example

Rate Benchmarking:
• Look at lanes that are both over market and below market
– Why?
• Investigate by facility
– Are inbound and outbound lanes above market?
• Estimate the saving expectations
– ‘Above market’ lanes move to ‘Market’, ‘Below market’ lanes increase ½ way to ‘Market’
Origin Origin Dest Distance Annual Service Move Contrac Actual Actual Actual Est. Est. Annual Diff.
State Region State Dest Region (miles) Volume Type ment t Type RPM CPL Annual Cost RPM Est. CPL Cost Diff. CPL Percent Status
FL FL_TAM GA GA_ATL 474 12 S OB CC $ 0.71 $ 336 $ 4,032 $ 0.77 $ 367 $ 4,399 ($31) -8% BELOW
FL FL_TAM NC NC_RAL 662 8 S OB CC $ 0.83 $ 549 $ 4,390 $ 0.93 $ 617 $ 4,935 ($68) -11% BELOW
MO MO_SPR MN MN_RCH 566 6 S OB CC $ 1.39 $ 786 $ 4,717 $ 1.44 $ 813 $ 4,879 ($27) -3% BELOW
OK OK_TUL TX TX_HOU 485 6 S OB CC $ 1.85 $ 899 $ 5,396 $ 1.58 $ 765 $ 4,587 $135 18% ABOVE
OK OK_TUL IA IA_DES 462 8 S OB CC $ 1.47 $ 680 $ 5,443 $ 1.36 $ 629 $ 5,028 $52 8% ABOVE
IN IN_IND MI MI_RAP 299 11 S OB CC $ 1.80 $ 538 $ 5,914 $ 1.79 $ 534 $ 5,878 $3 1% AT
OK OK_TUL MO MO_STL 403 13 S OB CC $ 1.53 $ 616 $ 8,008 $ 1.44 $ 580 $ 7,542 $36 6% ABOVE
OK OK_TUL IL IL_CHI 701 8 S OB CC $ 1.46 $1,023 $ 8,184 $ 1.28 $ 894 $ 7,152 $129 14% ABOVE
MO MO_SPR TX TX_HOU 660 8 S OB CC $ 1.65 $1,088 $ 8,700 $ 1.57 $ 1,038 $ 8,304 $50 5% ABOVE
FL FL_TAM TN TN_MEM 823 16 S OB CC $ 0.78 $ 644 $ 10,304 $ 0.86 $ 711 $ 11,370 ($67) -9% BELOW
CA CA_SAC CA CA_SDI 542 17 S OB CC $ 1.22 $ 660 $ 11,220 $ 1.43 $ 774 $ 13,162 ($114) -15% BELOW
CA CA_SAC AZ AZ_TUC 918 8 S OB CC $ 1.58 $1,450 $ 11,603 $ 1.50 $ 1,374 $ 10,990 $77 6% ABOVE
IN IN_IND OH OH_CLE 321 21 S OB CC $ 1.78 $ 571 $ 11,995 $ 1.81 $ 580 $ 12,178 ($9) -2% AT
MO MO_SPR CO CO_DEN 759 8 S OB CC $ 2.04 $1,550 $ 12,404 $ 1.85 $ 1,404 $ 11,234 $146 10% ABOVE
CA CA_SAC NV NV_VEG 613 13 S OB CC $ 1.61 $ 989 $ 12,856 $ 1.75 $ 1,072 $ 13,932 ($83) -8% BELOW
FL FL_TAM AL AL_BIR 608 30 S OB CC $ 0.72 $ 440 $ 13,200 $ 0.83 $ 507 $ 15,203 ($67) -13% BELOW
FL FL_TAM LA LA_ALE 823 19 S OB CC $ 0.91 $ 750 $ 14,258 $ 0.93 $ 764 $ 14,507 ($13) -2% AT
IN IN_IND MN MN_RCH 617 19 S OB CC $ 1.29 $ 799 $ 15,173 $ 1.31 $ 808 $ 15,356 ($10) -1% AT
OK OK_TUL TX TX_ANT 426 19 S OB CC $ 1.99 $ 849 $ 16,124 $ 1.76 $ 748 $ 14,207 $101 13% ABOVE
CA CA_BAK OR OR_POR 978 10 S OB CC $ 1.76 $1,723 $ 17,233 $ 1.61 $ 1,579 $ 15,791 $144 9% ABOVE
PA PA_HAR WI WI_MIL 817 21 S OB CC $ 1.03 $ 842 $ 17,687 $ 0.99 $ 805 $ 16,912 $37 5% ABOVE
CA CA_SAC UT UT_SLC 683 11 S OB CC $ 2.37 $1,621 $ 17,829 $ 1.72 $ 1,177 $ 12,949 $444 38% ABOVE
OK OK_TUL CA CA_SAC 1,825 8 S OB CC $ 1.31 $2,390 $ 19,118 $ 1.19 $ 2,172 $ 17,380 $217 10% ABOVE
CA CA_SAC AZ AZ_FLA 813 13 S OB CC $ 1.84 $1,494 $ 19,427 $ 1.58 $ 1,286 $ 16,724 $208 16% ABOVE
PA PA_PHI NC NC_RAL 456 40 S OB CC $ 1.09 $ 496 $ 19,860 $ 1.16 $ 529 $ 21,146 ($32) -6% BELOW
MO MO_SPR IL IL_CHI 512 30 S OB CC $ 1.41 $ 722 $ 21,672 $ 1.50 $ 767 $ 23,020 ($45) -6% BELOW
CA CA_BAK UT UT_SLC 751 17 S OB CC $ 1.84 $1,383 $ 23,514 $ 1.81 $ 1,356 $ 23,054 $27 2% AT


Getting Ready – Partner Carrier Criteria

Segment your carrier base into Partners, Core Carrier and others. This segmentation is not about
pricing leverage, its about security and risk mitigation.

“Partner carriers: the 1 – 4 carriers that you need to be successful”
Criteria Description
Categorization: Is the carrier currently providing a service that, if disrupted, could have a
significant impact on service or cost?
- Scope of Service
Example:
• Is the carrier currently handling a significant portion of freight such that a
substantial change would be an implementation risk?
• Is the carrier providing a critical service that is in or out of the scope of the
negotiation?
– Store support, customer support, dedicated support, on-site personnel
Risk Assessment: Does the carrier have the capability to support you over the long term?
- Organizational Strength • Planning, Operations, Technology

Risk Assessment: Is the carrier financially sound?
- Financial Strength
Is the carrier too financially dependent on your company?

After you release the negotiation package, meet individually with partner carriers, re-
iterate what you are trying to accomplish and get an understanding of their objectives.

Getting Ready – Capacity Problem Areas Example

4 Venders
746 Loads

55 Venders
7,054 Loads

2 Venders
1,956 Loads
57 Venders
3,712 Loads 13 Venders
4,640 Loads



Data


Collecting Rates

Rate Collection and Communication:
1. After you release the negotiation package, meet individually with
partner carriers, re-iterate what you are trying to accomplish and get an
understanding of their objectives

2. Think through the optimization scenarios you want to see before the
carriers submit their pricing
• Carrier constraints: Limits on volume to brokers, minority carriers,
Smartway carriers, etc.
• Geographic constraints: Number of carriers per region, per DC, etc.
• The objective is to understand how the cost curve will behave

3. Check, Check, and Re-check carrier inputs
• Carriers complete 100s to 1,000s of bids a year
• There is a lot of turnover in their pricing groups
• They make errors



Data


Scenario Analysis

Scenario Analysis:
1. Review initial results to get a lay of the land
• Who bid aggressively and who did not?
• Does this make sense?
• How sensitive are the results to the number of carriers, to particular
carriers, etc.

2. Begin the process of engineering the results
• How balanced are the flows in and out of different DCs and regions?
• Meet with the partner carriers and begin pressure testing the results
– Before the meeting, run some analyses to develop an understanding of what
would and would not be costly to adjust
– Do not chase the pennies

3. Be prepared to be stick to your published schedule
• Nothing aggravates a carrier more than an awarding process that drags
out for several months


Data


Post Awarding

Post Awarding:
1. Have a documented and well supported transition plan in place
• Communicate the plan internally
• Document information flows and communication protocols with the carriers
• Be prepared to visit your sites with the carrier and introduce the operations
personnel to the local carrier reps

2. Track performance to plan
• Loads tendered to carriers other than the awarded carrier, by lane
• Carrier tender acceptance / decline rate, by lane
• Variances in volume of freight flows vs. the projection
• Loads executed in a way that resulted in a post-tender carrier change (e.g. missing
an Inter-modal cut time)

3. Establish and communicate a regular market testing schedule
• Go to market regularly
• Carrier networks change more than shippers
• A bid does not mean you have to change carriers but as a responsible procurement
manager you should test the market regularly


Bid Leakage

Procurement Events Savings Leakage

Theoretical Operational Implementation
Base Costs Carrier Failure
Savings Target Reality Failure

Historical average Bid rate result Expedites and outliner New carrier not Incorrect tendering
costs per lane prior to assuming perfect events that need to be working out or be that by mode or
procurement event execution cleaned out of the carriers not accepting carrier or lane
saving potential tenders definition, etc.

Where
Leakage
Occurs
Starting point Uncontrollable Typically a function Easy to correct but
Not real Typically 3-5% of of laps in tough to find
savings potential relationship mgmt Can be 5%-10% of
Can be 25%-50% of potential savings
potential savings

Savings “leakage” typically occurs as a result of poor carrier relationship
management or errors in new rate implementation


The PVA Story
- Accomplishments to Date

Comparison of actual post bid analysis of expected saving to real savings
Percentage "Leakage"

70.0%

58.5%
60.0%
Attributed to strong carrier
50.0% 47.5%
relationship management and
active cost vs service analysis
40.0%
during bid awards
30.0%

20.0%
Attributed to rigorous and
10.0% systematic post-bid analysis and
3.1% 2.7% 2.5% 1.6% 0.6% management
0.0%
Study #1 Study #2 M1 M2 M3 M4 M5

By month saving leakage for PVA client

• Study #1 and #2 post bid analysis shows that roughly half the potential (or
theoretic) bid savings was lost
• Through rigorous carrier management and communication during the bid
process and systematic monitoring and action planning post bid, the PVA
client retained that vast majority of the bid potential

Post Awarding – Process Overview

Cycle
Procurement Functions

Annual Network Bid

Per Event
Mini Bid Mini Bid Mini Bid
(Seasonal, etc)

Months 1 2 3 4 5 6 7 8 9 10 11 12
Integrated Carrier/Transportation Management Deliverables
Semi-Annually Benchmark Benchmark

Quarterly/
Plan Audit Plan Audit Plan Audit Plan Audit
Monthly

Monthly/ Score Score Score Score Score Score Score Score Score Score Score Score
cards cards cards cards cards cards cards cards cards cards cards cards
Weekly
Fore Fore Fore Fore Fore Fore Fore Fore Fore Fore Fore Fore
cast cast cast cast cast cast cast cast cast cast cast cast

A continuous integrated process of sourcing,
carrier management and analysis


Summary

• Transportation is not a commodity – it is a service
– The subjective aspect of the quality of the service needs to be included in the
analysis
– Shippers need to consider all costs (direct and indirect) when trading-off of
these soft aspects

• A transportation procurement event is as much a relationship
management process as pricing event
– The outcome of a typical transportation procurement event is a non-binding
agreement on both sides
§ Shippers do not contractually guarantee volume and carriers do not contractually
guarantee they will take the volume tendered
– As such, the procurement event must be looked at as part of a continual
process of relationship management with your service providers

• Going to market, or market testing your rates, should be a healthy part of
the relationship management process
– Carriers’ networks change as much, if not more than the average shippers’
– These events should be well communicated, regularly scheduled, and fair


Agenda

• How should shippers procure transportation?

• What impact do policies and practices have on rates?

• How should a shipper handle fuel volatility?


2009 Best Practices In Transportation Part 1

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