A Four Step Guide to Optimizing Both Transportation Logistics and Spend in 2021 and Beyond

2020 hit hard. Beyond the tragedies of Covid-19, shippers are still feeling the impact of a year that rewrote the rules and brought unexpected, unpredictable and unprecedented challenges. Blown operational budgets, a stressed freight market with little – if any – capacity, driver shortages, surging ecommerce demand along with inflated consumer expectations for last mile delivery deadlines – and it all meant one thing: additional cost to do everything and anything. But we’ve crossed an important line, and while 2021 will undoubtedly bring further challenges and complexities, the call to take action has never been more important to do two very important things for our businesses: a) evaluate executional success: what worked, where are the hits, the misses and the opportunities for optimization, and b) understand, out of all options, which are the strategies going forward that will deliver the best service, optimize operational excellence across the board and control transportation spend to deliver the best ROI.

2021 is a watershed year (like no other) to re-evaluate and re-calibrate in order to be in the best position to mitigate both the budget impacts from the past 12 months while setting an optimal path for the year, and road, ahead. As we all look at the coming year, with its continued uncertainties, consider this four step guide to assessing and adopting appropriate strategies to optimizing logistics and transportation spend.

The Four Steps to Optimizing Logistics and Spend

Develop a Master Data Management Strategy

Could you chart a course for 2021 based on assumptions, years of experience in the industry, and a gut sense of what seemed to work and what didn’t in the past 12 months? Of course. Many smaller, less mature companies have been doing this for years, but unless you’re running a one-route operation with a single carrier, it’s not an approach that can identify optimization opportunities or truly guide transportation spend management. Especially so given the real-time market condition changes and unexpected influencers that in 2020 plagued both shippers and carriers. The reality for most of us, even in non- pandemic times, is that we’re expected to run the supply chain efficiently and for some, that involves a global, multi modal transportation network. Simply put, you can’t control or optimize what you can’t see so to effectively implement any optimization strategy, it starts with one critical first step: establishing foundational master data.

If you haven’t adopted a mature data management process for your operation, if you’ve delayed the time and monetary investment it can require, or you’ve not considered it at all, now is the time to embrace the insights and intelligence that Master Data Management (MDM) delivers. The comprehensive process of collection, curation, analysis and trend modeling of data across thousands of operational touchpoints is the key to establishing total visibility of the kinds of influencers, variables, events and operational factors that can make the biggest impacts on efficiency and your bottom line. It’s impossible to react in an intelligent or timely manner to risks and rate increases, for example, or make informed decisions on carrier performance, identify route optimization opportunities or estimate the return on potential capital investment in distribution or network changes without access to real, transparent and quality data, collected over time. If we make any resolution this month, it’s to embrace this foundational first step of MDM in order to truly adopt data-driven strategies that can help our businesses weather change and develop both resiliency and greater efficiencies. While 2021 will not bring the shattering impact of unexpected market upheaval that last year did, regardless of strained budgets, this may be the tipping point where it’s no longer practical or wise to delay MDM strategies in your operation.

Transforming Data into Valuable Information to Drive Strategy

Data driven strategies and decisions are only as good as the data collected and our ability to interpret that information correctly. In Talking Logistics, Adrian Gonzalez makes the point, in conversation with Dale McClung, Director of Design Solutions at CLX Logistics, that “being aware of performance against budget and strategic objectives, and understanding the levers to impact those, is critical for success today,” but that many companies struggle with having visibility into their own processes.

The answer starts with implementing a master data management approach and best-in-class practices that include four key principles of master data management – or governance. Each is essential to building a foundation of accurate, consistent and reliable data that can create necessary visibility across company processes and be analyzed to identify threats to current operations and profitability, as well as used to pinpoint the actions and variables that will maximize the benefit from optimization.

Aggregating Data

The more multi-channel, more global your logistics process, the more difficult it can be to bring all transportation spend data into one aggregated source for complete analysis. But it’s a critical undertaking, as part of master data management, to eliminate data silo’s wherever and whatever they may be: for example, data from diverse domestic geographical regions, overseas locations or divisions within the company, and sometimes even mode of transportation.

Centralizing Data

To realize the value of data requires the combination and centralization of information from multiple sources to enable the creation of one, consistent and ultimately true view of operations and spend. By bringing together into one platform the data outputs of inventory (ERP), fulfillment (WMS), freight invoicing and billing (FAP) and the physical process of moving goods (TMS) we can more easily and accurately understand the timeline, processes and actuals to move goods through the supply chain to the customer, while better identifying opportunities for improvement and optimization.

Normalizing Data

A must with any advanced MDM strategy, normalization of data improves the value of collected data by ensuring that, to put it simply, it looks and reads the same, enabling algorithms to model it effectively. An easy example of this is fuel surcharges. There are dozens of codes for fuel surcharges, but the charges are essentially the same. The process of normalization standardizes that data so we can read all fuel surcharges across every LSP to make better, more data-informed decisions.

Normalization includes standardization of all formats, metrics and values, creating data visualization rules for effective data analysis by tools such as Tableau, enabling the creation and reporting of KPIs. Without normalization you can collect as much data as you like, but much of it will go stored and unused as it will be unreadable to analysis tools, effectively making data collection efforts and investments of significantly less value. 

Improving Data Quality

The final step in creating accurate foundational data to guide strategic decision making lies in ensuring data is as complete and accurate as it can be. De-duping multiple entries, standardizing address formats and mapping them into network locations, enforcing charge details that relate to the contracted rates, are all examples of areas that impact accuracy. Given not all data is perfect, flagging and removing occasional data exceptions that may negatively skew KPI analysis and lead to bad, or incorrect, operational decision making should also be considered.

In implementing these best-in-class master data management principles it’s important to not only have internal stakeholders aligned with the strategic vision, but to ensure your external transportation partners/carriers are in compliance. Often LSPs are the only source of certain aspects of spend analysis - such as costs related to freight invoices - and you are, in a way, at the mercy of their data standards. Here, a transportation management spend partner might be a good addition to the process, assessing data standards and managing the compliance process. 

Whoever measures compliance, there are two approaches to improve data quality with LSPs. Soft data compliance involves validation of LSP data for adherence to your required data reporting requirements and provides meaningful metrics back to the LSP, giving them time to improve. Alternatively, hard compliance can mean withholding invoice payment if a carrier falls below standard. Many of these terms and conditions should be part of your master contract for services. Either way can be effective in managing LSPs and aligning partners behind your overall MDM strategy.

Implementing Transportation Logistics Optimization Strategies

Every strategy has some form of cost, an ROI and a necessary timeline to implement and see results. Some require capital investments while others do not - and may, regardless of investment required, be higher priority for your operation based on your business goals. After reviewing the various opportunities and strategies for optimization in this section, we can review how to prioritize them into a plan for execution. Prioritization is essential so that the most potentially impactful optimization initiatives can be implemented first for rapid change, but also because it’s not always fiscally possible to do everything at once. Implementing any optimization strategy will improve efficiency and manage spend, and combining several could have a significant impact on your overall spend. 

Adopting Dynamic Routing

Shipping products under a dynamic ( or changing) set of market conditions with multiple carriers and 3PL partners requires an appropriately sophisticated approach that can enable near real-time changes based on those shifting conditions. Implementing this kind of dynamic approach to smart routing requires investment in a Transportation Management System (TMS) and/or Warehouse Management System (WMS) that can provide the technological and executional support that this advanced approach demands. The investment can be well worth it, enabling oversight and management of multiple carriers over single or multiple modes of transport (and services), and the ability to react to rate changes as well as the many variables of transportation that can include lane rejections, lane and port congestion, auction pricing and more. Estimated savings: 3-6% of spend in scope. 

Optimizing Your Network

While one of the more potentially capital-intensive strategies, making changes to your network can also reap huge rewards by optimizing and organizing inbound supply processes and outbound delivery to customers. Network optimization can mean drastic reduction in risk to the supply chain, shortening of product delivery times to customers (as demand for same day and two day delivery continues to rise) and reducing transportation costs overall. Considerations might include relocating manufacturing or supply closer to distribution centers or making network adjustments and re-alignments based on increased customer demand in geographical areas, new sales channels opening in a market or country, or anticipated shifts in marketing strategy to focus on certain product lines and categories. Estimated Savings: 5-12 percent of spend in scope. 

Eliminating Prepay and Add/ Rationalizing Suppliers

If your supplier or suppliers are currently managing your inbound inventory freight shipping, you are likely paying a hefty markup for the convenience without any control over, or insight into, transportation methods or carrier selection. If this is the case, investing in the processes to manage and inbound freight could, over time, translate into more control and better spend management.

Consider supplier (or supply base) rationalization too, a strategy that can mean changing or reducing the number of suppliers in your network to negotiate better terms, drive increased value, reduce overall shipping costs and implement both stronger contractual agreements and compliance to standards. It can be time intensive, but offers an opportunity to build an optimized and best-in-class supply network going forward. Estimated Savings: 8-12% of spend in scope.

Contract Optimization – Transportation RFP

Optimizing contracts with the partners best able to provide specialized and high standards of service can make a significant impact, delivering savings of as much as 15 percent of overall spend without requiring a lot of monetary investment. The process involves detailed planning, careful execution of an RFP to potential partners and the technological capabilities to interpret proposals and assess outcome scenarios. But the results can deliver an alignment of LSP partners that are experts in their modes of transportation, meticulously match your requirements and standards and are uniquely positioned to help you build a best-in-class operation. Estimated Savings: 5-15% of spend in scope.

Mitigation of Accessorial Charges & Event Management Strategies

Accessorial charges can account for up to 20% of the total cost of a shipment depending on mode of transport, contractual rates, and the type of service rendered. But putting in place the strategies and processes to monitor accessorial charges on an ongoing basis and mitigate them before assessment by an LSP can significantly reduce overall transportation spend – and just as importantly provide the data to negotiate better contract terms going forward. Eliminating charges before they are assessed requires advanced event management strategies that employ real-time event data combined with exception rules to alert the appropriate stakeholder of a problem and create an opportunity to intervene and avoid the charge. Classic examples of charges include demurrage – or fees charged when cargo exceeds allotted time at a terminal or equipment or truckers are required beyond the contractual term to unload goods. Some accessorial charges can be mitigated at the data level – by ensuring master data contains standard format shipping addresses and proper weights and dimensions to reduce the chance of incorrect execution and charges. Estimated Savings: 3-5% of spend in scope.

Ensuring Mode, Carrier and Service Compliance + Optimizing Packaging

2020 saw an explosion in e-commerce demand due to the pandemic, but the rise of online purchasing shows no sign of slowing. This means a continuation of two day or less delivery time expectations and the use of parcel services to reach at-home consumers. While using more premium services to improve customer service or respond to e-commerce demands is normal, using the proper carrier and/or service to ensure optimal execution is equally important. Typically, use of unplanned carriers or premium service options translate into higher transportation costs (higher cost per unit weight or cost per shipment). Combining optimal execution strategies (routing logic) with frequent monitoring of actual utilization is essential going forward to minimize cost variance to plan, meeting customer expectations all while staying within budget. This applies to both inbound inventory supply and across all outbound shipping, and can only be enabled by having the proper metrics and visibility to monitor performance and make necessary changes based on the data.

Along with carrier/service compliance, it’s also increasingly important to optimize packaging solutions, managing weight by dimension and optimizing the use of parcel and air freight modes to manage overall spend. Continue to negotiate the best terms possible for dimension weight with carriers, but know it’s also equally important to eliminate space by aligning packaging to shipped goods. Can poly bags replace boxes or changes be made to palletization for air freight? Both will help to control spend on packaging. You might also consider on-demand packaging solutions where the box size is dynamically fitted to the product to eliminate unused space. Estimated Savings (Compliance): 2-5% of spend in scope (compliance); 3-5% of spend in scope (packaging). 

Pool Distribution/Parcel Zone Skipping

Pool distribution (non-parcel) and zone skipping strategies (parcel) can also be an effective method to lower your overall cost per shipment/cost per unit weight where appropriate density and network alignment with LSP terminals make sense. Many shippers using direct LTL (less than truckload) have the opportunity to shift to a combination of multi-stop FTL (first leg) and short haul LTL (second leg) within their network. Moving from LTL to a full truck load (FTL) for first leg shipping and then localized LTL delivery to final destination can have a significant impact on overall transportation spend in many cases. Similarly, parcel zone skipping can reduce transportation costs, where goods are consolidated on a full truckload shipment, transported to a centralized in-market distribution point or hub and then shipped by national or regional parcel providers within a short zone distance. The key to deciding whether this strategy would benefit your network and shipping profile is having the historical data to build a predictive model to create a hypothetical scenario that reflects the cost and time in transit impacts of the shifts and determines if the overall density into a specific area makes sense to consider it as a candidate for zone shifting. If the data indicates potential ROI, it is important to ensure you have the operational ability to execute the strategy and find the right LSPs to implement the strategy. Estimated Savings: 2-3% of spend in scope.

Creating a Plan To Execute

The final step in optimizing your operations and managing spend going into 2021 and beyond is the employment of an ROI strategy – the prioritization of optimization initiatives to deliver the best ROI, and then monitoring of performance against this strategy or plan on an ongoing basis. To determine priorities and build an executional plan, take 12 months of annualized transportation spend and then assess the opportunity attainable by implementing each of your optimization initiatives. This can be done by either creating a benchmark for each based on anecdotal observations, or by using a set of data and predictive analytics to enable a more data-driven estimate of the outcome of each implemented initiative or project. Consider then, the necessary investment of money, labor and resources to implement the change and how quickly you will realize cost reduction savings – immediately, a one-time saving or a multi-year cost reduction. Prioritize the biggest savings for the least investment in order to build a prioritization plan and determine if anything can be improved or accelerated by bringing in a third party expert to assist with strategic planning or execution.

KPIs are one of the best methods for assessing attainment of cost reduction and making any changes to priorities going forward. Establish the set of KPIs to be measured at the beginning of your optimization program and measure during and after implementation to measure and quantify success. Measure cost per shipment, cost per unit weight, cost per unit shipped and the influencers that affect each both favorable and unfavorable. For instance a typical average cost per unit weight for air freight will be influenced not only by contract or spot rate changes but also by the kind of service used, assessorial charges, dimension weight and your choice of LSP. By reviewing KPIs on a weekly and monthly basis rather than quarterly it’s possible to both identify the most impactful actions, strategies and initiatives and, just as critically, make course corrections in a timely fashion. This, of course, requires access to appropriate analytics, and possibly the partnership of outside resources, to build the most comprehensive picture of how effective your optimization and transportation spend management initiatives have been. 

The Road Ahead

As we work to optimize operations going into 2021, to mitigate the budget overages of the past, unprecedented year, the decision making process will continue to be complex. Nobody can implement all optimization strategies at one time, so while prioritization is important, having access to the pure, organized data, the analytical technology and the specialist, third party partners you may require to enable data-driven decisions, will be more essential than any other year.

Steve Beda

About the AuthorSteve Beda

With a long history of supply chain automation and transportation logistics experience, Mr. Beda works closely with numerous Trax clients across the globe to aid in their success enabled by maximizing the use of services offered by Trax. Additionally, Mr. Beda heads the Advisory practice at Trax. While with Trax, Mr. Beda has been instrumental in assisting global clients with improving their spend management programs for both inbound and outbound supply chains as well as assisting in aligning contracts with changing shipping dynamics. Mr. Beda has been recognized as one of the “Pros to Know” by the Supply & Demand Chain Executive editorial committee for two years running and is a regular speaker at the Parcel Forum.

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The Client & the Challenge

A high-end retailer experienced challenges with third-party parcel delivery companies during the holiday season. With a record number of orders, the capacity of parcel integrators became a bottleneck. Many customers were negatively impacted by the long delays at the worst possible time.

The retailer set out to resolve the problem by working closely with the parcel companies and Trax to gain early visibility to delivery performance during peak holiday shipping activity.