Logistics and distribution managers have hit a brick wall. With fuel costs escalating almost daily, they're finding they've exhausted their old cost-control tricks. They've already analyzed their shipping patterns and, where possible, grouped less-than-truckload shipments into less-expensive truckload shipments. They've shifted freight to lower-cost modes of transportation, using first- or second-day truck rather than air express delivery or intermodal instead of all-highway service. With their options drying up and costs continuing their inexorable climb, it might seem they have nowhere left to turn.
But they needn't throw up their hands in despair. There are other ways to control transportation outlays, but they require managers to look beyond just transportation and take a broader supply chain view. For example, a number of companies have found opportunities to shave transportation costs through inventory optimization initiatives—programs designed to determine optimal inventory levels and storage locations, as well as review the locations of warehouses, factories, and suppliers.
Inventory optimization would be a mind-boggling task to do with an Excel spreadsheet. Fortunately, logistics managers can take advantage of recently written software programs specific to that task. The goal here is to reduce overall supply chain outlays, not just transportation expenses, which are only a subset of supply chain costs.
Inventory optimization tools are designed to strike a balance between product demand and the amount of stock on hand. Too much buffer inventory and you're tying up working capital in product that's just sitting in a warehouse. Too little inventory, on the other hand, and you run the risk of stock-outs. Stock-outs, in turn, can result in lost sales.
Several companies that have used inventory optimization tools say the software has allowed them to minimize inventory in their distribution networks with no adverse effect on sales. John Deere's Commercial and Consumer Equipment Division, for example, used optimization software to better align its production with demand and reduce inventory. Over a four-year period, Deere cut its inventories of lawn and garden tractors and utility vehicles by about $1 billion. Although it has cut inventory in half, Deere has still been able to maintain sales levels and has actually improved customer service.
Eliminating excess inventory obviously frees up working capital, but that's not the only potential benefit. Companies may also see a reduction in their warehousing and transportation costs. Why? A company that keeps just enough stock on hand to meet its needs avoids the costs of excess warehouse storage. It may even be able to close one or more of the warehouses in its network, eliminating those costs as well.
The potential benefits don't stop there. Although inventory optimization is partly about squeezing excess inventory out of the supply chain, it's also about ensuring that a company has ample supplies of stock on hand. Adequate levels of stock allow companies to plan their transportation movements to take advantage of truckload or intermodal service. They also cut down on the need to use expensive expedited service to keep an important customer happy.
There are a number of software makers that provide this type of product—Optiant, SmartOps, SmartForecasts, and Invistics come to mind. (If I didn't mention your company, please don't take offense. Just drop me an email and I'll add you to my list.) These software programs are typically designed to take data from your company and then run simulations to determine appropriate inventory levels.
Although I would advise companies to start with inventory optimization software, the ultimate tool for reducing transportation costs involves a supply chain network redesign. That, however, is a topic I will save for next month.