Managing Total Cost to Serve and Delivering the WinPosted by: Steve Beda
The Pivotal Role of Transportation Spend Management in Balancing Performance and Cost
Imagine you’re an athlete about to run a race. You’ve trained hard, prepared well and feel like you can win. But as you come off the blocks you notice there are tall, brick walls between you and every other lane. You can’t see what your competition is doing, where you are in the race, or more crucially, adjust your strategy and speed to perform well, beat your personal best or win. That’s what transportation logistics looks like without data-driven visibility across your operation. And without that visibility into the myriad variables of your operation and the market influencers that impact performance, you’ll never win.
In the most constrained and supply-challenged global transportation logistics landscape the world has likely ever seen, one thing is certain: it is more essential than ever to manage performance and control cost and ultimately optimize your operation’s Total Cost to Serve.
Optimizing the delicate balance of performance versus cost across your entire operation is no longer just a worthy operational goal or a can that can be kicked into next year’s budget. It’s a strategic imperative. The good news is that while doing so: grappling with the complexities and challenges of Total Cost to Serve management seems like a huge lift for a business, the answer is already within reach of any forward thinking executive. The principles, practices and outputs of a quality, data-driven Transportation Spend Management program will enable the accurate measurement of spend, assessment of performance across all operational channels and lead to final spend optimization. TSM, when coupled with a real time event tracking solution, will give any executive charged with understanding how their business is performing, and managing the spend to do so, with the enterprise-wide visibility to make strategic, data-informed decisions that deliver success.
Let’s take a closer look at the pivotal role TSM practices play in delivering effective Total Cost to Serve management and the steps required for best-in-class implementation on the road ahead.
Understanding the flow of goods and information
In the quest to successfully manage performance and control cost across an entire enterprise-scale operation we need to understand and manage three important channels or “flows”:
1) Flow of goods – are our manufactured products reaching distribution and then retail on time, intact and was it done efficiently? What factors can interrupt this flow or make things more efficient between points A and B?
2) Flow of information – do we have real time data accessibility across the operation? Are we able to see geographical or lane complications and conduct near real-time rerouting of carriers to ensure goods reach their destination on time and on budget? Can we pinpoint excessive fuel usage or spotlight port delays to improve performance? Are we able to monitor carrier performance to inform the best partnerships?
3) Financial flow – the flow of money in terms of payments and the effective process to make them. Is all invoicing and are all payments accurate, timely and efficient?
Think of TSM as the connective tissue between data and financial flows, bringing together a detailed, data-driven understanding of both your operational and financial status at any given time. A data picture than can then be integrated seamlessly with complementary shipment tracking solutions to provide the comprehensive visibility across your operation that helps create more informed choices about carriers, routes and other operational variables needed to drive efficiency and manage cost.
TSM's role in managing supply chain stages
Beyond managing goods, data and financials across your network, in a typical supply chain there are five legs each with their own processes, challenges and costs. Different legs incur different levels of cost but all must be mitigated to continue managing the total cost to serve. The legs include:
1) Raw materials to manufacturing
2) Site to market
3) Market to trade consumer
4) Distribution center to retail or DTC
5) Reverse logistics (returns)
Each of these legs has an inbound and outbound stage as well as their own repeated processes, needs, challenges and cost drivers. Things like movement of materials and finished goods. Sorting, shipping and warehousing. And at each leg there is always a tradeoff between cost and performance. As you and your team or partners work to use TSM data and practices to improve efficiencies across each leg, to look at cost reduction, performance improvements and cost to time tradeoffs, it’s also important to understand the nuances of different legs. This is particularly crucial with the three major stages of the supply chain: inbound, outbound and reverse logistics.
With inbound it’s essential to have visibility of all shipping activity and their associated costs which can be demanding, complex and data- intensive, especially with multiple suppliers and shipments from all over the country or world. For every one of these inbound shipments from every supplier, especially if you are liable for the transportation costs, compliance is essential in terms of shipment routing and the provision of ASN’s (advance ship notices) to properly manage the process. When an inbound shipment goes wrong there is rapid escalation. Say you order products in bulk with many SKUs coming in consolidated in containers and rail cars or palettes via air. The cost to ship one SKU by ocean freight can easily represent a small fraction of the total cost or more per unit weight as compared to air freight, however, many times shippers face inventory shortages or delays that force expedited delivery timelines using a high cost mode of transportation. Cost to serve goes up every time there is disruption but having the data and visibility to predict, see and react to problems can help manage cost.
Outbound is all about standardizing and maintaining internal compliance while delivering flawlessly to customers or the internal stakeholders who rely on you for consistent performance and delivery. If a major retailer doesn’t receive your flat screen TV or in-demand plushy for Black Friday, both your orders and reputation will suffer.
While the positive of outbound logistics of course, is that you have the benefit of having more control over how those goods are shipped, outbound logistics can still present a challenge where the supply chain is decentralized. The recipients of your goods also expect On Time and Full delivery – meaning perfect order, on time, in the right place with the right level of service and quality specified. Every time. If you don’t receive raw materials to manufacture the goods to ship your products on time, if shipments get delayed en-route, if a sales order from a customer comes in late and requires expedited shipping: all of these factors will increase Cost to Serve and lower profitability if allowed to continue over time. Outbound shipping also often requires LTL or parcel modes of transportation which means a higher cost per unit weight and increased cost to serve over all, especially if using expedited services.
This can be very difficult to predict or manage. It’s never a planned activity so managing in a timely fashion requires a hands-on response. While the data can be unclear in terms of predicting these events, having oversight on your carriers, shipments and inventory in warehouses means you can be as organized and prepared as it’s possible to be. Priorities here include creating and optimizing control over the method of how returns are processed and inventory is handled.
The need for options to improve performance
Whatever leg of the supply chain or region you are attempting to manage and optimize over time, it can’t be done without having options, or choices - especially if management of those regions and legs is decentralized . A solid plan B when market variables or events derail plan A. You can be one of the fastest growing companies in the world with an extensive supply chain operation, but it won’t shield your business from delays and missed deadlines. Similarly, regardless of the size of a business, if carrier partners don’t receive payment on time and withhold service (increasingly common in today’s market for relatively small invoices), it doesn’t matter their size, the disruption can have a significant impact on a company’s performance and cost.
For some companies with deep investment budgets and capabilities, the alternate option is moving overseas production, typically from China to the United States, where only domestic conditions can then affect manufacturing, distribution and supply chain logistics. Forbes reports that as many as 33 percent of supply chain leaders are considering the strategy including everyone from Apple to Dell. For these companies the loss of revenue from ongoing supply chain disruption is finally becoming the major factor in increasing total cost to serve.
To implement these or any other strategies requires access to data to make better, informed choices and to have real options. If your goods are on a container headed to the Suez Canal which gets blocked, are you able to identify the issue in a timely fashion and reroute by another mode? Your company may not be relocating manufacturing from the other side of the world, but wherever your goods are headed, having visibility to shipments sitting in a dock or on a truck, amassing accessorial charges, means you have the choice to act in near real time. This means ultimately that your business and shipments don’t fall completely victim to the ongoing market issues and disruption events we’ve all seen for two years.
Using TSM to manage typical global supply chain challenges
As any transportation logistics executive begins the implementation of TSM practices you should look to your strategies and processes to begin addressing the typical supply chain challenges that impact cost to serve:
- Cost Management – the decentralized and fragmented reporting possible over supply chain modes and partners leads to difficulty in identifying and managing cost to serve targets across regions. Visibility to accruals at the product and business unit level or transportation and driver costs across the globe are similarly impacted.
- Performance and Cost Visibility – global shippers particularly can lack real time shipment and event visibility across their operation and so experience an information lag time. For every hour and day of goods delayed at docks and ports, the fees impact cost to serve profitability. And building a real-time resource to manage this is resource and time intensive to say the least.
- Information, Analytics and Systems – most global shippers will experience a myriad of disparate.
- Transportation Management Systems and ESP (Event Stream Processing) systems, making data scattered, disconnected and difficult if not impossible to analyze all of which makes data-driven decision making extremely difficult. Master data management as a strategy can resolve this but it’s a relatively new concept and limited to more mature organizations at present.
- People and Processes – the larger an organization’s footprint the more regionalized teams and processes can become, leading to governance difficulties and lack of adherence to corporate policies and timeline practices. Management of transportation activities can become decentralized and disconnected. A good Transportation Management System can create and manage an ecosystem of regional teams and multiple LSP partners to create better management.
- Cost and Service Improvement – lack of visibility outside of specific lanes or regional activities makes cost management almost impossible, while decentralized management means inconsistent KPI measures, poor quality data assessment and an impact on cost to serve strategies and success.
- Scalability – siloed business units and multiple LSP partners may lack synergy with global shipping which can lead to problems scaling cost-effectively or efficiently across all legs of the supply chain.
Integrating TSM into a mature control tower ecosystem strategy
Mature transportation logistics companies are increasingly adopting best-in-class control tower strategies and processes, where all systems are interconnected and informed by a master data management protocol. TSM has an important role to play in this kind of approach or strategic ecosystem. Working within an overall Transportation Management System and alongside functions like Freight Audit and Pay (FAP), TSM is capable of improving strategic procurement of materials (best options, best prices, best deliveries); carrier management (using a scorecard system for monitoring and assessing performance against set goals); of managing invoices and payments in concert with your FAP system, sustainability, overall performance and more.
Wherever your business is on your transportation logistics maturity journey from initial launch to implementation across your global network, TSM can help. Adoption will speed the maturity of your operation, create interconnected data and financial flows and optimize performance to deliver improved cost to serve for you and improved service delivery for your customers. That’s a big win where we come from.