Pep Boys' back-end alignment

When he took over as director of logistics for auto parts and service retailer Pep Boys in 2000, David Schneider found a transportation network in disarray. It wasn't that auto parts weren't getting from the retailer's DCs to its nearly 600 stores; they were, though service wasn't always what Pep Boys might have hoped for.What caught his attention was the amount of money being wasted at every turn, whether it was trucks sent out only partially filled, trucks returning to the facilities empty, or the staff's evident failure to optimize loads and routes.

Having worked in various engineering and distribution management positions at Pep Boys, Schneider was eager to take on this new cost-control challenge. But if he hoped to find a quick fix, he was soon disappointed. After sizing up the operation, he concluded that the transportation operation needed nothing less than a complete overhaul, a journey that could take several years. If it wouldn't be quick, it wouldn't be easy either. Though the company was spending some $28 million a year on outbound transportation, its management systems were anything but state of the art. "I soon realized we had no tools to manage our transportation," recalls Schneider. "We had an atlas, a spreadsheet and a telephone. That was about it."

But in the end, the rewards proved proportionate to the effort. Schneider reports that as a result of the overhaul, Pep Boys saved $2.5 million in the first 18 months alone.

Mapping out a plan
The decision to overhaul an entire transportation operation may strike some as drastic, but Schneider felt he had no other choice. Early on, he had decided that the core problem was a lack of central coordination. Each of the company's five DCs—which are located in New York, Georgia, California, Texas and Indiana—was managing its contract transportation independently. That meant each distribution center was using a different contract, negotiating its own deals with carriers, and making decisions based on what was best for its own operation, not the overall organization.

Seeking a fresh start, Schneider brought in new transportation managers for some of the DCs— managers who had actual experience managing transportation in their regions. Along with being responsible for their own fleets, those managers would also make up the team that would work with Schneider to revamp the entire transportation operation.

The team's first step was to focus on outbound transportation. At the time, outbound transportation from the DCs to the stores accounted for two-thirds of Pep Boys' total transportation spend, making it the obvious opportunity for savings.

The team began by addressing some lingering service issues. For example, after learning about customer service lapses at the Georgia DC, it hired a new carrier in Atlanta that would provide better service than the one it replaced. The team also added a second carrier for the California DC—a trucker that had experience serving the vast, congested metro market.

At the same time, the team began negotiating new contracts with all of the remaining carriers. These agreements represented a cultural shift for Pep Boys, one in which the automotive distributor assumed ownership of its transportation. "It forced a partnership between our carriers and Pep Boys," says Schneider. "If we did not take an active role in managing our transportation, then our costs would balloon."

Schneider reports that when writing the new contracts, the team made it a point to allow each partner to do what it does best. Carriers are proficient at managing drivers, so the new contracts gave them that responsibility. Likewise, Pep Boys managers are experts in handling their products. They are responsible for determining how their loads should be built, when they should leave the building, and how they should arrive at the stores.

New cost structure
In the meantime, the team also renegotiated fee structures with the carriers. In the past, carriers were paid according to miles driven. The new contracts, by contrast, distinguish among fixed costs, fixed variables and other variable expenses and treat them differently. Not only does this give Pep Boys more control over its costs, but it also enables managers to do a better job of budgeting and to work in incentives for carriers to reach specific service goals.

The fixed costs include expenses such as on-site personnel provided by the carrier. These costs are predetermined and predictable. Fixed variables include the trucks, trailers and tractors. Variable costs include items like mileage, unloading charges, charges for the number of stops, and fuel surcharges.

Thecontracts are written so that around two-thirds of each driver's pay is a fixed-variable cost rather than an amount based on miles driven. This gives Pep Boys more flexibility in deciding how many drivers and trucks it will use on a given day and keeps drivers from suffering financial penalties for days when they're not needed.

"Instead of contracting for 19 drivers and 19 tractors and always having them, we wanted the flexibility in how the fleet is constituted, to be able to change the size of the fleet as the business changes," explains Schneider. "If we have a driver and a truck sitting there, we need to use them, as we still have to pay for them.We now view the drivers and the trailers as assets. It is incumbent on Pep Boys to get the maximum utilization from them."

That in itself was a big change for Pep Boys, says Schneider. When contracts were based on miles alone, managers would strive only to reduce the miles driven, sometimes at the expense of other, greater savings opportunities. Now Pep Boys looks at the bigger picture to see whether it might be able to save by, say, changing a delivery schedule to eliminate the need for a truck.

Smarter routes
Next, the team turned its attention to optimizing its routing and scheduling. To streamline the process, Pep Boys bought the Outbound Shipment Intelligence software solution from Supply Chain Intelligence, which it now uses to develop outbound routes and manage its transportation operations. This software was installed in all five of the distribution centers. Managers at each facility handle their own transportation scheduling with support from Pep Boys' corporate offices. Combined, the five distribution centers ship 675 loads per week on average, with about half of the stores receiving two shipments weekly.

The new system uses sales forecasts and historical data to develop a master schedule for fleet deliveries. Stores then send orders to the distribution center. But before these orders are processed through the SSA Global warehouse management system, they are first compared against the proposed master schedule so the software can prepare a final delivery schedule that balances the picking needs at the DC with the stores' delivery requirements.

Pep Boys credits the new automated scheduling process for about 80 percent of the savings it has realized to date. As for the other 20 percent, Schneider says most of those savings are the result of daily tweaks to the master schedule to take advantage of any cost-cutting opportunities that arise. For example, instead of automatically sending a truck out twice a week with loads for two stores—whether those loads fill the trailer or not—the new system looks at how loads can be best combined. As a result, more than two stores may now share a truck and drivers may not necessarily travel the same route from one day to the next.

"We used to pair stores on a load because they were close together," says Schneider. "Now we divide the truck based on how we can cube the truck and if there is an available backhaul. Some stores may be 200 miles apart, but we would rather run an extra 50 miles to make a delivery using a full truck than run an additional truck that is half empty.

That is where the savings really come into play."

The optimization software is programmed to maximize both the weight and cube of each load, with the weight of the payload held to 44,000 system pounds and 3,900 cubic feet. Overall, the company has improved its cube utilization about 25 percent since 2002 and now averages 2,000 cubic feet of merchandise per load.

Inbound opportunities
After they finished their overhaul of the outbound operations, the team members turned their attention to inbound transportation and returns from stores.

The first thing they did was to begin changing the company's terms of sale with vendors from prepaid freight to collect. This gives Pep Boys more control over transportation methods, modes and costs to allow the company to determine how best to manage its receipts.

The team also whittled down the list of less-than-truckload (LTL) carriers used for inbound freight to two national and five regional carriers. Pep Boys requires prepaid vendors to use these preferred carriers, with which it has negotiated drop-trailer agreements.

In addition, Pep Boys invested in tools to help manage inbound freight. This past August, the company went live with Transplace, a Web-based application service provider that gives Pep Boys and its suppliers the software they need and a network to monitor and optimize their shipments.

Two days before a product is to be shipped, the vendor must log onto Transplace, where it can download the documentation needed to prepare the shipments and alert Pep Boys that the merchandise is now available. Then Pep Boys determines the best method for shipping the product—as an LTL shipment, an expedited shipment or a backhaul for one of the trucks in the contract fleet that handles outbound freight.

By managing the process, Pep Boys has been able to divert some of its receipts from LTL carriers to its contract fleet. "This provides significant savings by leveraging freight costs we are already spending and assets we already have in place," says Schneider.

Those savings are apparently adding up quickly. Schneider projects that the company will eventually save $5 million annually on inbound freight alone.

In other words, Pep Boys is now saving money both coming and going.