In the Transportation Procurement business, “boom times” are relatively easy to manage and fun. “Bust times” are relatively easy to manage and not fun. The time in between these two periods is when true value can be created. Today, more so than at any time in the past decade, forces ranging from macroeconomic trends to technology innovations are demanding transportation procurement practitioners to be part subject matter expert, part diplomat and part visionary to accomplish value creation. Given this all-encompassing role and our current economic times, here are five top trends and related tips in transportation procurement.
The uneven recovery of the U.S. and global economies is creating cost and service opportunities
Capacity levels in the U.S. and, to a lesser extent, the global marketplace are historically more volatile today than at any time before the most recent recession. Traditionally static capacity channels supporting industries such as defense are experiencing pronounced reductions, while others supporting energy production are experiencing shortages and constraints. Accordingly, transportation buyers are reacting to dramatic variances in price and service offerings between regions. Buyers relying on sector-specific transportation supplier relationships will be less successful than those with multiple business partnerships. Although more complex to manage, multiple relationships are a hedge in uneven times.
Technology and tools matter
Companies that invested in transportation management technology are seeing strong return on investment compared to companies that deflected such investments. We have heard from our customers that transportation managers are praising the marketplace for improvements in vertical visibility into their own network. Those capabilities are the best they’ve ever been, but the lack of horizontal visibility into other provider networks often leaves cost-value opportunity untapped. According to Xchanging’s research, best-in-class TMS tools properly configured and managed are yielding comparatively material ROIs and likely will for the next three to five years. Our findings aren’t unique: According to a recent RedPrairie survey, the typical 12-month ROI is about 100 percent after proper implementation and configuration. The breakdown in savings looks like this:
- Less-than-truckload to truckload optimization: 5 to 20 percent.
- International transportation and logistics processing: 8 to 12 percent.
- Use of a load control carrier program: 3 to 5 percent.
- Continuous moves: 4 to 8 percent.
- Optimized carrier assignment: 3 to 6 percent.
- Freight settlement: 1 to 2 percent.
- Streamlined operations: 2 to 5 percent.
- Order consolidation: 5 to 10 percent.
- Improved fleet routing and scheduling: 7 to 25 percent.
It’s prime time for procurement to reap the benefits from investments in “trusted partner” stakeholder relationships
Transportation procurement professionals that invest time to cultivate stakeholder relationships are outperforming those who rely solely on transaction demand profile technology. Xchanging’s sourcing maturity data also supports the finding that procurement practitioners with regular stakeholder communication are better equipped to negotiate favorable spot opportunities in the marketplace. As stakeholders struggle to adapt to a changing marketplace, inbound and outbound transportation opportunities can be exploited to create awareness, scale, leverage and visibility.
Incumbent provider governance activities should focus on and invest in two main areas:
- Aligning supplier service level agreements with your business. Supplier SLAs traditionally target quality, service and cost. Depending on the tenure of the service provider relationship, things can become routine with both sides happy with the value proposition. This “textbook” model works well for boom-and-bust economic environments but in unstable, evolving economic times, SLAs should align closely to opportunity. We recommend customers transition some “at risk” SLAs away from traditional measures, and more toward those demanding flexibility and adaptability. For example: scorecard accountabilities measuring transportation provider selection should be benchmarked against the overall market (as opposed to the service provider’s network). Blind open bids standards can be used to test the findings.
- Maximizing your incumbent value proposition. Changing times require closer collaboration between shippers and carriers/3PLs. Elements such as price/volume commitments, performance/compliance standards, gain/pain sharing and freight/network optimization must be tuned more precisely than ever. Again, companies that invested in these areas should be reaping the rewards. Those that deferred must catch up, quickly. Done well, restructuring can catch up a customer quickly, and may allow your partners to leverage their new investments into their customer’s business. In either event, now is the time to act!
Globalization is continuing and transportation procurement abounds
It’s not new or trendy to acknowledge that supply chain globalization has compounded vulnerability and risk. Transportation professionals know (and some have used procurement to help mitigate) new practicalities such as a natural disaster in one region can impact activities thousands of miles away. Recently operationalized and near-term prospective global infrastructure additions will provide a new wave of cost and service opportunities in certain geographies, and will dynamically influence the logistics capacity allocation ratio. A simple example is the Panama Canal expansion. This alone will significantly impact traffic between the Pacific Rim, Europe and throughout the Americas. (The recent spate of North American rail acquisitions and price run-ups is directly related to this one event). Procurement professionals must stay ahead of this coming disruptive reality and work closely with key, strategic global logistics partners to mitigate downside risk.
By taking into account these trends and careful planning, buyers can enjoy a bounty of opportunity and leverage in historically static markets. Despite it being a time of lean budgets, new value can be created with a savvy eye to market activities and strategic response.
Larry Ouyang is logistics category manager for Xchanging Procurement Services. His background includes global logistics sourcing, planning and operations responsibilities in major Fortune 500 programs spanning the services and manufacturing sectors.