freight costs ballooning? Let some of the air out

It is no longer news that tight capacity in the motor carrier industry has driven up freight rates, making for a couple of very profitable years for at least some segments of the industry.

Nor is it a shock any longer to see diesel prices a critical component of freight costs hovering around three dollars a gallon. The average price for a gallon of diesel fuel at the end of August was a fraction below $3.03 a gallon, according to the federal Energy Information Agency. The price was $2.59 the same week a year ago, just prior to the jump in fuel prices following the hurricanes along the Gulf Coast. Since then, prices have ranged anywhere from $2.43 to $3.07. In contrast, in the prior 12 months, diesel fuel costs hovered closer to the $2.00 mark and frequently fell lower.

Shippers that move goods by less-than-truckload (LTL) carrier are accustomed to paying fuel surcharges to compensate carriers for the cost of diesel. But those soaring surcharges over the past year, along with rising base freight rates, have led shippers to look anew at ways to control their freight expenditures.

Last month, as part of its continuing series of white papers on supply chain management, ProLogis, a major developer of distribution centers, examined some of those strategies. Paul Nuzum, the author of the report, interviewed a dozen senior logistics executives on how they are managing in the current transportation climate.What he found was a mix of ideas some old and some new many of which involved ways of working more closely with carriers.

Nuzumemphasizes that the executives he interviewed were concerned about more than costs."[T]hey are all more concerned about ensuring that their companies' products are on the shelf when their customer wants to buy them," he writes."When lead times lengthen or become erratic, inventory stock-outs become more frequent, resulting in lost sales and, worse still, lost customers."

Nuzum, an adjunct professor at the University of Denver and a principal in the consulting firm Supply Chain Insights, grouped his study's conclusions into four broad categories:

• Companies are adding consolidation and deconsolidation centers to their distribution networks;
• Companies are taking responsibility for their own freight bills in order to create more efficient freight lanes, leverage transportation spending and ensure daily execution at the best negotiated rates;
• Companies are forging closer connections with their carriers;
• Companies are looking to extract greater capacity from existing fleets and facilities by improving cube utilization, reducing empty miles and extending hours of operation.

When more equals less
What may be most indicative of the state of transportation costs is the first: companies are adding new facilities to their networks in order to take better advantage of the rates for full loads. "Adding new links to the supply chain ... would appear to be antithetical to the industry's long-standing quest for simpler, less costly and more efficient supply chains," Nuzum writes. "But the new links added to companies' supply chains are not DCs per se, but freight pooling hubs." It makes sense to add such facilities, he suggests, if the resulting transportation cost savings exceed the cost of running the facilities.

In practice, he explains, shippers choose from a number of distribution network designs based on the volumes of products moving to each DC in the network.

Some companies are choosing to lease facilities, others to own, and others to use third parties, says Leonard Sahling. He is the editor of ProLogis's supply chain white paper series and first vice president of ProLogis Global Research. "It's all over the map," he says. "It is similar to the situation with DCs generally."

He terms the concept of adding these new facilities "a striking trend" that runs counter to the efforts of many companies to shed DCs over the past 15 years. Many of the facilities, he adds, are located near ports, where container loads of goods from overseas can be deconsolidated for shipment to DCs.

"Think of them as freight pooling hubs," he says. "It is a variation on an old theme."

Motor carriers and third-party logistics service providers offer variations of that type of service. One example of a consolidation and deconsolidation service: Old Dominion Freight Line, a North Carolina-based LTL carrier that provides regional services around the country, offers what it calls assembly and distribution services. That is, it will collect freight at its service centers and assemble it into truckloads, and accept truckload shipments at a center to break into LTL shipments in its region.

Chip Overbey, vice president of national accounts for Old Dominion, says, "We'll work with customers and work with their vendor patterns and pattern a program to load into one point."

Buy globally, execute locally
The concept of centralizing transportation purchasing is hardly new, but Nuzum sees the development as different in kind. Using the power to buy centrally to win the best rates is still important, of course, but it also creates the potential for better overall network design and execution. That is, concentrating the control over the freight buy enables shippers to ensure that the lane-by-lane commitments made to carriers in order to win good rates are in fact fulfilled. That, in turn, ensures that the shipper gets the best available rate.

Further, by linking transportation planning with shipping forecasts from sales and marketing, shippers can provide better advance information to carriers, helping them to plan capacity, which translates into having a truck at the dock when it is needed. "As a general rule, centralizing transportation decisions also enables a shipper to move transportation planning closer to the point of order so that it ceases to be an end-of-the-line function," Nuzum writes.

Jim Staley,president and CEO of YRC Regional Transportation, says that corporate bid packages allow carriers to develop broad price and service packages. He adds that it's important that shippers understand the precise capabilities of carriers and match that with their own needs. "The main thing is to make sure they understand what our core competencies are and where our services meet their needs." For instance, he says, carriers in the YRC group, which include New Penn Motor Express and the USF group of regional carriers, focus on overnight and second-day delivery.

The extent of centralization efforts can be extensive. Chuck Odom, vice president of global development for Averitt Express, a Southeastern regional LTL carrier based in Tennessee, describes a complex project undertaken for one customer. The customer decided to consolidate the freight buy for its multiple brands. ("No one is negotiating in silos," Odom says.) The result was a program in which Averitt operates a large facility for the customer, moving about 12,000 cartons a day through the facility from multiple vendors and out to outlet stores. Previously, the shipments moved through 14 distribution centers and 30 apparel suppliers. All the DCs operated independently, with their own freight spend and own rate structure, Odom says.

Sahling cautions that the sample used in the ProLogis study is too small to justify calling the centralization of transportation management a trend. But, he adds, "It makes such eminent sense. Along with centralization comes the whole effort to enhance collaboration. They really go hand in hand. It is not just an effort to beat the price down, but to get overall control and in the process find ways to economize on cost and make sure the goods actually move."

Talk to each other
Carrier executives emphasize how crucial this information is to their businesses. "Getting information from the shipper is increasingly important," Staley says. The better the advance information, he notes, the better the carrier can schedule capacity.

Overbey explains, "If we get information ahead of time, we can sit with customers and help them create load plans." Good planning can, for example, reduce the number of breakbulks LTL shipments move through and allow more shipments to move directly to destination.

He says that advance information creates a "domino effect" advance information allows building better loads and more direct loads, which in turn reduces transit time and, with less handling, reduces damage. "Our job is to be an extension of what they are doing," he says. "The sooner we are in the loop, the better the job we can do for them."

The information flow, and the forecasting of freight flows, is just one example of the ways in which shippers are working more closely with carriers. Others take place at the heart of shipping operations. Motor carriers cheer shipper efforts to improve the efficiency of dock operations. Truckers have long complained about the costs they incur while they wait to load or unload at shipper and consignee docks. As capacity tightened over the last couple of years, they have lost any reluctance they may have had to add accessorial or detention fees when shippers hold up their equipment and drivers. Furthermore, shippers that work with carriers to reduce their costs are likely to be favored when capacity is at its tightest during peak shipping seasons.

"Shippers are taking a close look at their shipping and receiving practices, searching for ways to lower their carriers' costs," writes Nuzum.

J. Edwin Conaway, vice president of sales for Con-way Freight, says, "Shippers are doing two things. They are planning their loads better, so when we come to do a pickup, we don't have a long wait. The second thing they are doing is being better prepared when we have a drop-off, so we're in and out of the dock faster."

In addition, some shippers have extended their hours of operation, Nuzum notes, essentially increasing dock door capacity. "Shipping or receiving at night and on weekends smoothes the operations of both shippers and carriers," he writes.

Fair exchange
In another bid to help carriers control costs, some shippers have agreed to stop aging their freight bills and to pay carriers promptly a significant boost to any carrier's cash flow, and an important step in becoming a preferred customer. To reduce processing time, Nuzum says, some shippers have adopted self-invoicing programs for carriers. In those programs, he explains, the carrier accepts the rate at the same time it accepts the load, and the shipper pays on delivery without a time-consuming auditing process. In return for prompt payment, shippers are likely to win lower freight rates.

The extent of collaboration among some shippers and carriers is further demonstrated by the development of two-way metrics, in which both shippers and carriers evaluate one another's performance. Nuzum cites dwell time, accuracy of count, quality of documentation, disparities between forecast and actual loads moved, and changed orders as examples of the sorts of metrics used to gauge shipper performance. The idea is that those measures will be used to identify and eliminate problems in the shipping process.

The collaboration further extends to getting more out of existing assets. Nuzum terms it "creating capacity," but it might also be described as making better use of what already exists. Carriers and shippers alike are involved in attempting to improve cube utilization. That can take several forms: better, more efficient packing by shippers and carrier equipment that allows higher stacking, for example.

Staley says, "We are trying to strike a good balance between being flexible toward customer needs and the scheduled service that we need. We work with shippers on flexible pickup and delivery times. We know for example that morning deliveries are important, so we are stressing morning delivery performance."

Another long-term bugbear for freight carriers, empty miles, is also getting greater focus from both shippers and carriers. It has historically been seen as a carrier problem, but some shippers are now helping truckers address the problem for example, by working to link their vendors with carriers on lanes where the carriers have a problem with running empty miles.

"Finding such synergies is seldom simple," Nuzum acknowledges. But he adds that it can pay off. He cites one executive who says that he is using his transportation management software to identify all his company's freight patterns to find just that sort of opportunity.

What holds true for carriers regarding asset utilization can also hold true for shippers by extending DC operating hours. "We're seeing more and more companies expanding their workweeks," Nuzum writes. Some have been forced to do so, he adds, as a result of customer demands for round-the-clock shipping capability. What those shippers discover, he asserts, is that longer hours translate into smoother flows of freight volumes, which translate into reduced overtime, improved inventory turns and faster deliveries.

Further, longer hours equate to greater shipping capacity, less dock congestion, and reduced loading and unloading times. The last is another bonus of carrier collaboration.

The pressure to keep freight moving at reasonable cost is driving much of the innovation by both carriers and shippers. "It is not just cost, but capacity," Odom says. "Customers will even consider collaborating with each other. We have an ability to explore ideas that would not have been there four or five years ago. We are definitely seeing creativity and innovation for efficiency."

The overall goal seems simple enough. Writes Nuzum: "Shippers hope that such collaborations will yield them consistent availability of carrier capacity along with minimal rate increases."