Three Principles of Transportation Optimization

Three Principles of Transportation Optimization

Companies are increasingly considering their transportation and logistics operations to be a competitive differentiator. That has triggered an increase in demand for advanced transportation management systems.

According to the Gartner research firm, the transportation management system market should see double-digit growth this year and a five-year compound annual growth rate of 9.4 percent.

With pressure on businesses to contain costs that hasn’t relented since the downturn, along with the growing need to address capacity constraints, lower their carbon footprints and streamline movements, a flexible, agile and functionally rich transportation management system can help support service goals.

Yet for some companies, pinpointing the optimal solution can be nearly as complex as getting the right products to the right places at the right time and at the lowest cost. One factor adding confusion to the search is the manner in which vendors use — or overuse — the term optimization.

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For more than 15 years, transportation software vendors have been touting the optimization power their tools deliver to support more sophisticated planning, execution and settlement processes. Indeed, optimization techniques are proved to drive the vast majority of the business value realized from the use of transportation management solutions.

However, not all optimization strategies are created equal, and that’s where the confusion lies. Vendors too often focus on just one function to optimize, which can lead to more harm than good.

A simplified optimization approach may prompt a shipper to pick one carrier over another simply based on cost. A comprehensive approach may reveal the selected carrier doesn’t have enough trucks or docks available to support the load in the first place.

With the transportation management system market expanding, the time has come to clarify misperceptions and outline the best practices in optimization. Shippers today must optimize beyond carrier selection and rates to address myriad constraints and detailed functions that apply these three key principles:

Principle 1: One Size Does Not Fit All

With so many constraints and variables, transportation issues can’t be solved with deterministic approaches because the problem gets too large too quickly.

For the best possible answer in the shortest amount of time, companies must apply both heuristic and deterministic approaches that use a series of logical and common-sense decisions along with network constraint considerations.

Transportation management systems should offer a flexible configuration that adapts to each company’s unique strategies, as well as network constraints and variables.

No solution should apply the same five steps for every transportation problem. The transportation management system should support a wide range of mathematical approaches, allowing users to view problems holistically and then constantly modify those approaches based on current needs and requirements.

Companies that follow optimization best practices constantly monitor and tune their strategies to address any changes in their networks, supply chain, market and customer demands.

Capacity, for example, tends to ebb and flow with economic changes, and shippers must be prepared to adapt their strategies to capitalize on market opportunities. Rather than letting the transportation management system’s solver run unattended, shippers must always look for ways to drive more value for their businesses.

Ensuring accuracy and visibility into all of the details of execution also confirms a company is not missing out on opportunities to get the same results at lower overall costs.

For example, in general truckload routing, a business will incur distance, mileage and stop charges, as well as fees for incidentals such as a lift gate. Upfront visibility into those requirements is essential. If a company is planning a move consisting of three orders, it is far more cost effective to spread the lift-gate charge across three stops than to plan a move with only one stop.

A company also must have visibility into the details of the load that it is moving. While pallets are straightforward enough, what if the load contains loose or oddly shaped products? Rather than making assumptions that can lead to added costs and stoppages, the company needs containerization capabilities to model the load at a finer, more granular level.

Principle 2: The Details Matter

Intertwining planning and execution processes makes transportation functions unique among other supply chain functions.

Shippers don’t have the luxury of planning and forecasting months in advance and then balancing any variances as the shipment gets closer. Transportation lead times could be weeks, days or even hours, making planning and execution essentially one and the same. That’s why it’s so critical that all of the details — from network and dock scheduling to asset capacity and granularly defined rates — are expertly modeled. The more upfront work that the engine does, the better a company’s plan will be.

With no second chances, shippers must make the best decisions the first time in order to efficiently execute and maximize value.

Shippers must rely on an optimization engine that considers all elements of the problem — strategies, details and levels of granularity — at the same time in order to produce the best answer. Engines that break up the problem or handle requirements in a sequence will not deliver optimal results and could even lead to costly problems.

When the shipper moves to step two, it could be rating and finding the lowest-cost carrier of a bad load. The right approach in this scenario is to consider rating concurrently as the optimization engine is running through its routing strategies. A best-practices transportation management system can consider all aspects of the problem concurrently, including rating, routing, scheduling and capacity constraints.

Principle 3: Concurrency Is King

Another optimization best practice is to take an iterative approach across moving time. As shippers receive new information and orders, they should use that knowledge to incrementally improve the plan each day.

Although a company may receive and optimize 1,000 orders on a particular day, only a portion of those orders typically needs to be executed that same day to meet customer requirements. The shipper should add the remaining orders to its planning bucket and mix them with existing and new orders.

Throughout the process of constantly adjusting and incrementally optimizing the orders to be executed, shippers must have visibility across time into already executed orders. This enables them to continually refine any network constraints or carrier commitments. It also ensures that they have the required resources to realize their service goals as efficiently and effectively as possible.

Buyers’ Checklist

Whether a company spends $10 million per year on freight or budgets millions of dollars for a multimodal, global logistics network, that organization must invest in a transportation management system that meets its existing and future needs. That means selecting a partner that delivers functional breadth and depth along with flexibility, scalability and expertise.

To set companies on the right path, here is a list of top 10 optimization capabilities to more effectively contain costs, reduce miles and increase utilization efficiency:

1. Adjust heuristics and strategies to drive value specific to the network.

2. Evaluate actual and not representative carriers’ rates, including assessorial charges.

3. Create a detailed network schedule that accounts for the varying transit measurements across modes.

4. Model dock capacity and create a detailed dock schedule.
5. Enable the concurrent modeling of private and dedicated assets with commercial freight, including domiciles, tractors and trailers.

6. Maximize loading efficiency by leveraging containerization algorithms.

7. Iteratively plan across a continuum of time.

8. Consider asset capacity and commitment constraints across multiple optimizations.

9. Support the dynamic consideration of concurrent routing strategies, including multiple hub routing, multipick and drop, as well as continuous moves.

10. Solve large-scale volumes across an entire network and over a wide time horizon within a reasonable timeframe.

During an era in which profitability and cash flow are under extreme scrutiny, companies can’t afford to settle for less than optimal returns from their transportation and logistics operations. The fact becomes even more critical if competing organizations already are relying on transportation management systems that apply the industry’s best optimization practices. The right solutions can drive significant business results and boost competitive position.

These sophisticated transportation management systems are highly configurable and flexible, can handle processes concurrently and provide upfront visibility into all relevant details. JOC

This report was adapted from the JDA Associates’ white paper “Three Principles of Transportation Optimization.” For more information, see www.jda.com.