Inside Logistics

The five must-dos of strategic routing models

Controlling transportation costs may be easier than you think


June 20, 2011
by David Schneider

MM&D MAGAZINE, MAY/JUNE 2011:

Of all costs involved in distributing product, the largest single component is transportation costs, followed by labour and rent.

As demand dipped in the recession, operators struggled to adjust costs. Labour as a controlled event within the four walls of a distribution centre allows some adjustment. Rent as a fixed cost allows little flexibility to change.

Transportation by far is the largest cost and offers the most flexibility. In most distribution networks transportation is at least one-third the total controllable costs of the distribution operation. In some distribution networks outbound transportation costs alone are in excess of 50 percent of the total cost.

Although transportation is the most flexible in the trinity of distribution expenses, many operators fail to harvest the potential. Leaders discover that allocating transportation expenses wisely creates greater operating cash.

Since transportation costs are so dominant, distribution and logistics managers should do everything they can to lower costs. All companies focus attention on controlling transportation costs—with varying rates of success. Unfortunately, many of these efforts are procurement-focused tactics, negotiating the lowest possible rates, and not on more fundamental strategic opportunities.

Successful effort to lower overall transportation costs must start with strategic efforts. Rate negotiation does nothing to address inefficiencies in supply chains that create waste and drive up costs. Strategic thinking and planning are required to improve the value delivered from transportation. Industry leaders deploy strategy to create cash.

The challenges facing today’s transportation fleet manager are vastly different from 20 years ago. Today, customers expect deliveries within tight time windows. There are two to three different routing options between delivery points. Sometimes the option with the most distance takes the least time due to congestion related to time of day.

Getting the truck to the ultimate delivery point is more challenging than ever. Regulations for the hours that drivers can work and trucks can operate add complexity. These are not just execution issues—they affect strategic planning.

Company sales and marketing teams task their transportation fleet managers to forecast the cost of delivering to a new customer. Intense market conditions and competition intensify pressure where a one percent difference in total cost can mean the difference between winning or losing an account, or the difference between making profit or losing money. Sales professionals turn to the transportation manager and ask for a commitment on when trucks will arrive. They hold the transportation manager responsible if the time is inaccurate.

Based on extensive experience (over 15 years) of transportation optimization and our ongoing research in the marketplace we developed five core requirements that a route optimization system must meet to be considered a strategic tool.

The five must-dos of a strategic route optimization system:

1. The system must support “what if” modelling, using production data without altering current plans or operations.

2. The system must be flexible. Changing the variables should be easy and the system should allow for multiple scenarios.

3. The system must allow rapid update and change. Customer data should be simple to enter.

4. The system must integrate with all other company systems including order management systems, warehouse management systems, GPS systems, purchase order systems, and mandated electronic on-board recorders.

5. The system must be FAST! Complex modeling solutions should take no more than a few minutes to solve. Imports and report generation should be instantaneous. The entire process of importing late orders for assignment to existing routes must take only a few minutes.

Strategic models must be far more advanced and flexible than the majority of the routing models available today. Changes in technology that allow for cloud computing and high-speed data communications have created an environment where strategic models are available at price points far below existing traditional models. Strategic models cost the same as the traditional models, but deliver value through their flexibility and speed.

David Schneider is president of David K Schneider & Company, a team of expert supply chain and logistics practitioners focused on creating operating cash flow. He can be reached at 877-674-7495 or info@dksco1.com.