The document discusses strategies for reducing transportation costs in supply chain management, emphasizing the importance of lean management and Six Sigma techniques. It outlines a two-phase approach: understanding baseline operations and identifying cost reduction opportunities, highlighting factors like compliance with contracted prices and customer ordering behaviors. Additionally, it notes the impact of the COVID-19 pandemic on supply chains, calling for resilience and agility in post-pandemic supply chain strategies.

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Mark Bridges
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Transportation Cost Reduction in Supply Chain
Management
Mark Bridges 2 days ago · 5 min read
Companies looking to improve efficiency and reduce costs can gain significant ground in
the Supply Chain Management function by incorporating Lean Management and Six
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Sigma techniques.
Reason this area has gone under the radar is that companies do not consider Supply
Chain to be their core competency.
Not only Warehousing but Transportation also has almost the same potential in terms of
opportunities for Cost Reduction and Process Improvement. The approach to
Transportation Costs Reduction, though, is different to that of Supply Chain Cost
Reduction in Warehousing. This is in part due to the complexity in Transportation Costs,
as the costs come from numerous widely distributed individual operations every year.
The approach to Supply Chain Cost Reduction in Transportation encompasses 2 phases:
1. Understand the Baseline
2. Identify and Implement Opportunities

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Let us delve a little deeper into the 2 phases.
1. Understand the Baseline
Improvement in Transportation operations is hindered, in most cases, by enormous
variability in operations, diverse service levels being demanded by various customers,
and a multitude of transport providers delivering services in a variety of ways.
Transportation Costs of between 20–30% can be saved by compiling a complete
perspective of the overall Transportation operations of an organization. The evaluation
will also reveal essential service categories that have a skewed effect on Cost.
2. Identify and Implement Opportunities
Identification of the Cost Drivers is imperative for the companies to develop a systematic
approach to Transportation Cost Reduction. This systematic approach involves
observing 4 main levers of Cost Optimization opportunities:
1. Compliance with Contracted Price
2. Negotiated Price
3. Contract Terms
4. Customer Breakpoints and Behavioral Changes
The 4 levers of Cost Reductions help in countering the issues impacting Transportation
Costs and enabling significant savings.
Significant Cost Reductions can be gained by identifying mutual benefits and risks for
both companies and suppliers in addition to understanding customer breakpoints that
enable Customer Centric Design.
Let us consider a few instances where Cost Reduction can have a quick impact.
Companies, often, have to pay substantial fuel surcharges for waiting time or late
payments — caused by variance in actual delivery patterns and the delivery pattern
specified in the contract.

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Suppliers usually charge a higher rate to compensate for inefficiencies in their
operational structure. Understanding those inefficiencies helps identify significant
savings potential.
Logistics Service Providers either increase their rates or add fuel surcharges in order
to protect themselves from the effect of fluctuating fuel prices. A fixed rate benefits
the customer when fuel prices go up, but creates needless high fuel bills when prices
are down.
Ordering habits of certain customers add to the Transportation Costs. For example,
unknowingly ordering early next-day deliveries, without an absolute necessity for it,
causes significant (20% in some cases) extra cost than a delivery at noon. A 24-hour
delivery time costs even less than the noon delivery.
Interested in learning more about the phases and cost drivers of Supply Chain Cost
Reduction in Transportation? You can download an editable PowerPoint on Supply
Chain Cost Reduction: Transportation here on the Flevy documents marketplace.
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Supply Chain Management (SCM) is the design, planning, execution, control, and
monitoring of Supply Chain activities. It also captures the management of the flow of
goods and services.
In February of 2020, COVID-19 disrupted — and in many cases halted — global Supply
Chains, revealing just how fragile they have become. By April, many countries
experienced declines of over 40% in domestic and international trade.
COVID-19 has likewise changed how Supply Chain Executives approach and think about
SCM. In the pre-COVID-19 era of globalization, the objective was to be Lean and Cost-
effective. In the post-COVID-19 world, companies must now focus on making their
Supply Chains Resilient, Agile, and Smart. Additional trends include Digitization,
Sustainability, and Manufacturing Reshoring.

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Learn about our Supply Chain Management (SCM) Best Practice Frameworks here.
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Cost Reduction Customer Centricity Lean Supply Chain Warehouse

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