What the Carriers Don’t Want You to Know
For several years now, Symmedian has had the opportunity to work with companies large and small that without exception have not been able to truly understand their transportation cost. Therefore, they are not only leaving money on the table, they are incapable of making sound strategic decisions that will maximize business performance and profitability. While there are many factors in the design and implementation of a high-performance supply chain, this article is focused on the very misunderstood “science” of transportation. This article is intended to educate, not offend all those transportation managers out there that deep down know they are in the same boat as every one of our past and current clients. The evidence that we continue to uncover on almost a daily basis was the compelling force and reason for this article.
The Fundamental Problem:
Anyone who has spent significant time vetting and/or negotiating LTL carrier contracts knows this can be a difficult and complicated process. Carriers using varying base tariffs, tariff revisions/dates, discounts based on specific weight breaks, NMFC freight classes and reclassifications, geography and many other financial and service factors makes this task difficult for even the experienced transportation veterans. And, at the end you still are not sure if you have made the right choices and truly realized the overall low cost/high service solution. In fact, most transportation professionals (there might be a few out there) conducting these analyses do not have the proper combination of intelligence, tools and data to ensure the decisions and selections they are making are the right ones for their company.
The Cold Hard Truth:
LTL tariffs are very complex and extremely large data files containing approximately 1.8 billion rate tables (possible US zip to zip combinations) for 18 different NMFC freight classes ranging from 5o to 500. Not to mention all the exceptions, accessorial charges and fine print in the tariffs. Tariffs can be published and/or created by the carriers themselves as well as other increasingly popular third party services like SMC3 (Czarlite) and Middlewest (Mars 500). For carrier published tariffs, the carriers use their actual cost, revenue and demand data as well as decades of history to build and design their rate structures to ensure they maximize profit while balancing supply and demand. Third party services like SMC3 (a non-profit owned by the carriers themselves) and Middlewest publish what is commonly referred to as a neutral rate base tariff whereby many carriers’ tariffs are averaged and then used to supposedly “simplify” the benchmarking process for shippers.
Furthermore, there are some very technical people “behind the scenes” that continue to work their magic inside these complex tariffs while shippers and the overall public at large have no real clue what’s going on. You can’t blame the carriers, this is smart business! The harder something is to understand, Unfortunately the higher the probability that you will never figure out what is truly optimal for you and your business.
This is especially true for small to mid-sized companies that do not have the time, bandwidth and resources to conduct these analyses properly.
We continue to see most small to mid-sized companies outsource most if not all their transportation services as well as their overall management of transportation to these larger carriers that unfortunately hold all the cards, intelligence, data, trade secrets and anything else you can imagine that advantages the carriers. This decision is certainly easy and quick to implement; however, YOU are paying for it.
Neutral tariffs like Czarlite and Middlewest, while useful in simplifying the process by having all your carriers quote from the same base rate structure, the “averaging” of rates can also blindly cost the shipper unnecessarily and unknowingly. You NEED to know what’s in the “bill” before you can pass it! And that is easier said than done.
Most companies take the age-old RFP approach to leveraging and negotiating their rates and discounts and typically choose the carriers that they think can provide the required services and handle the seasonal demands of the business at the lowest possible cost. Times have changed and so has technology and the tools needed to properly conduct such exercises effectively.
I have had the privilege of spending most of my life studying and learning all I could about this business of transportation and supply chains while at the same time developing new tools, techniques and technologies designed to bring clarity and transparency to these complicated matters for shippers. Let me share just a few things I’ve learned from this experience.
First, every nuance and variable in your shipping data can and will likely effect price and your optimal plant/DC location and the answer is not likely intuitive nor will it be the answer you expected. Here are a couple of examples.
Shorter distances do not always mean transportation costs will be lower. Tariffs favor specific cities based on the supply and demand for trucks and the varying desire for carriers to get equipment and drivers to specific high demand cities verses the carriers varying desires to avoid certain areas of the country to prevent empty backhauls. These cost differences can be very substantial, not to mention the variability in service! As a recent example, our client wanted to relieve some volumes from their Seattle based DC and potentially open another new DC somewhere further south. There was a substantial amount of business and customers in the southern Oregon area, so we ran an optimization of the region using a neutral tariff and learned that even though Reno was on average 25% to 3o% further away from these customers, it was io% to 15% cheaper! Simply put, given the average size of the client’s shipments, their exact NMFC freight class of 7o, Reno has better rates into Southern OR than Seattle for this specific client. This was a surprising bonus for our client. They always thought it would cost them more to service these customers from another DC out of Reno. The interesting part was as soon as we began to increase the weight of the shipments (just as a test) it flipped. Seattle became the lower cost alternative!
So, the weight of the shipments also matters and should be evaluated thoroughly when pricing LTL shipments from various locations. Furthermore, NMFC class and the specific location of your customers can also influence your carrier quotes, cost and candidate locations for new DC placements. And one more thing, averaging weights, NMFC classes and other factors when conducting carrier negotiations or network redesign projects is dangerous and will return incorrect results that could cost you a lot of money and you won’t even know it. In summary, make sure your data is recent, accurate and complete (no averages) and make sure you have the right tools and technology to explore all possible combinations. And lastly, make sure you have a very experienced transportation professional running your projects. Otherwise, it’s a certainty you are leaving money on the table or in the case of redesigning your network, you are designing a DC/Plant network that will not be optimal and it could be for the long run.
Many of our customers want to know, where is the best place to locate their plants and DC’s that would result in the overall lowest total cost to serve? Obviously, there are a lot of other factors that can influence this decision, but we will stay focused on transportation for now. It does depend on the client, but most often we start a total cost to serve analysis with a transportation assessment and modeling exercise. For many years now, consultants perform what is referred to as a center of gravity (COG) analysis to determine the optimal locations for a given number of DC’s. The COG can be weighted on several factors such as weight, shipment frequency, cost per mile, overall cost and even custom weighted COG’s can be performed like favoring high profit customers more than low profit customers. But here is the problem. Unless the model can compute and price every possible/feasible scenario (thousands of possible combinations) based on the exact rate base tariff and actual real world shipping data, it is possible that you will not actually determine the lowest possible cost scenario using this method. We have proven this out. To make things even more complicated you will likely want to run a multiple number of DC/plant scenarios and there will likely be sourcing (inbound transportation) substitutions occurring in the network as well. Suddenly, there are what feels like an endless number of transportation possibilities to consider before you even get to labor, rent, equipment, cash flows/availability, inventory implications, taxes and other factors effecting your decision. The good news is, computers are more powerful than ever now and we have developed a way to run and price virtually “all possible/feasible” scenarios/combinations quickly and effectively and on a budget almost any small business can afford.
We’ve spent quite a bit of time, effort and money developing different algorithms and software programs specifically designed to solve this complex problem. The biggest challenge was speeding up the overall process and performance of the analyses on a budget that companies can afford.
In effort to keep this as short as possible, I will conclude by stating that the time has come when small to mid-sized businesses can out-perform the larger ones due to recent enhancements in modeling tools, technology and the cost to use these tools. Larger companies are often locked into old legacy networks that are very difficult to breakdown and replace regardless of the technology they use to improve it. For smaller companies, it is vitally important to be nimble and have the flexibility to move and adapt to the perpetual changes occurring in the market place today. We are pulling for those smaller companies that want to be better now and we are ready and capable to do something about it to help them.