2009 best practices in transportation part 1

© Copyright 2009 Chainalytics, LLC.

Empowering Fact-Based Decisions Across Your Supply Chain

1

Best Practices in Transportation Procurement

Dr. Chris CapliceExecutive Director, MIT-CTL

Gary GirottiVice President, Chainalytics LLC

March 3, 2009



2

Who is Chainalytics?

• Chainalytics formed in 2001

– HQ in Atlanta, GA, with second office in Bangalore, India

– 50 FTEs in US and India

• Two Practice Areas:

– Supply Chain Strategy

– Transportation Planning

• Recent Accolades

– “Great Supply Chain Partner” Global Logistics and Supply

Chain Strategies

– Named for five years running: 2004-2008

– “10 Coolest Supply Chain Boutiques” ARC Advisory Group in July, 2007

– “Top 100 Innovations” Supply and Demand Chain Executive

– 2006 Award for Model-Based Benchmarking

– “Pros to Know” Supply and Demand Chain Executive

– Gary Girotti (2007), Jeff Metersky (2006), Michael Kilgore (2005)

ContinuousAnalysis

Realize

2



3

Agenda

• How should shippers procure transportation?

• What impact do policies and practices have on rates?

• How should a shipper handle fuel volatility?



4

Guiding Principals –Procuring Transportation Services

• Transportation is not a commodity – it is a service

• A transportation procurement event is as much a relationship management process as a pricing event

• Going to market, or market testing your rates, should be a healthy part of the relationship management process



5

Procurement Best Practices:Procurement Life Cycle

Data

But these areas have the biggest impact on actual savings realized

These areas get all the focus



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Procurement Best Practices:Getting Ready – Benchmarking Report Example

Origin State

Origin Region

Dest State Dest Region

Distance (miles)

Annual Volume

Service Type

Movement

Contract Type

Actual RPM

Actual CPL

Actual Annual Cost

Est. RPM Est. CPL

Est. Annual Cost Diff. CPL

Diff. Percent Status

FL FL_TAM GA GA_ATL 474 12 S OB CC 0.71$ 336$ 4,032$ 0.77$ 367$ 4,399$ ($31) -8% BELOW

FL FL_TAM NC NC_RAL 662 8 S OB CC 0.83$ 549$ 4,390$ 0.93$ 617$ 4,935$ ($68) -11% BELOW

MO MO_SPR MN MN_RCH 566 6 S OB CC 1.39$ 786$ 4,717$ 1.44$ 813$ 4,879$ ($27) -3% BELOW

OK OK_TUL TX TX_HOU 485 6 S OB CC 1.85$ 899$ 5,396$ 1.58$ 765$ 4,587$ $135 18% ABOVE

OK OK_TUL IA IA_DES 462 8 S OB CC 1.47$ 680$ 5,443$ 1.36$ 629$ 5,028$ $52 8% ABOVE

IN IN_IND MI MI_RAP 299 11 S OB CC 1.80$ 538$ 5,914$ 1.79$ 534$ 5,878$ $3 1% AT

OK OK_TUL MO MO_STL 403 13 S OB CC 1.53$ 616$ 8,008$ 1.44$ 580$ 7,542$ $36 6% ABOVE

OK OK_TUL IL IL_CHI 701 8 S OB CC 1.46$ 1,023$ 8,184$ 1.28$ 894$ 7,152$ $129 14% ABOVE

MO MO_SPR TX TX_HOU 660 8 S OB CC 1.65$ 1,088$ 8,700$ 1.57$ 1,038$ 8,304$ $50 5% ABOVE

FL FL_TAM TN TN_MEM 823 16 S OB CC 0.78$ 644$ 10,304$ 0.86$ 711$ 11,370$ ($67) -9% BELOW

CA CA_SAC CA CA_SDI 542 17 S OB CC 1.22$ 660$ 11,220$ 1.43$ 774$ 13,162$ ($114) -15% BELOW

CA CA_SAC AZ AZ_TUC 918 8 S OB CC 1.58$ 1,450$ 11,603$ 1.50$ 1,374$ 10,990$ $77 6% ABOVE

IN IN_IND OH OH_CLE 321 21 S OB CC 1.78$ 571$ 11,995$ 1.81$ 580$ 12,178$ ($9) -2% AT

MO MO_SPR CO CO_DEN 759 8 S OB CC 2.04$ 1,550$ 12,404$ 1.85$ 1,404$ 11,234$ $146 10% ABOVE

CA CA_SAC NV NV_VEG 613 13 S OB CC 1.61$ 989$ 12,856$ 1.75$ 1,072$ 13,932$ ($83) -8% BELOW

FL FL_TAM AL AL_BIR 608 30 S OB CC 0.72$ 440$ 13,200$ 0.83$ 507$ 15,203$ ($67) -13% BELOW

FL FL_TAM LA LA_ALE 823 19 S OB CC 0.91$ 750$ 14,258$ 0.93$ 764$ 14,507$ ($13) -2% AT

IN IN_IND MN MN_RCH 617 19 S OB CC 1.29$ 799$ 15,173$ 1.31$ 808$ 15,356$ ($10) -1% AT

OK OK_TUL TX TX_ANT 426 19 S OB CC 1.99$ 849$ 16,124$ 1.76$ 748$ 14,207$ $101 13% ABOVE

CA CA_BAK OR OR_POR 978 10 S OB CC 1.76$ 1,723$ 17,233$ 1.61$ 1,579$ 15,791$ $144 9% ABOVE

PA PA_HAR WI WI_MIL 817 21 S OB CC 1.03$ 842$ 17,687$ 0.99$ 805$ 16,912$ $37 5% ABOVE

CA CA_SAC UT UT_SLC 683 11 S OB CC 2.37$ 1,621$ 17,829$ 1.72$ 1,177$ 12,949$ $444 38% ABOVE

OK OK_TUL CA CA_SAC 1,825 8 S OB CC 1.31$ 2,390$ 19,118$ 1.19$ 2,172$ 17,380$ $217 10% ABOVE

CA CA_SAC AZ AZ_FLA 813 13 S OB CC 1.84$ 1,494$ 19,427$ 1.58$ 1,286$ 16,724$ $208 16% ABOVE

PA PA_PHI NC NC_RAL 456 40 S OB CC 1.09$ 496$ 19,860$ 1.16$ 529$ 21,146$ ($32) -6% BELOW

MO MO_SPR IL IL_CHI 512 30 S OB CC 1.41$ 722$ 21,672$ 1.50$ 767$ 23,020$ ($45) -6% BELOW

CA CA_BAK UT UT_SLC 751 17 S OB CC 1.84$ 1,383$ 23,514$ 1.81$ 1,356$ 23,054$ $27 2% AT

Rate Benchmarking:• Look at lanes that are both over market and below market

– Why?

• Investigate by facility

– Are inbound and outbound lanes above market?

• Estimate the saving expectations

– ‘Above market’ lanes move to ‘Market’, ‘Below market’ lanes increase ½ way to ‘Market’



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Procurement Best Practices:Getting Ready – Partner Carrier Criteria

Criteria Description

Categorization:

- Scope of Service

Is the carrier currently providing a service that, if disrupted, could have a significant impact on service or cost?

Example:

• Is the carrier currently handling a significant portion of freight such that a substantial change would be an implementation risk?

• Is the carrier providing a critical service that is in or out of the scope of the negotiation?

– Store support, customer support, dedicated support, on-site personnel

Risk Assessment:

- Organizational Strength

Does the carrier have the capability to support you over the long term?

• Planning, Operations, Technology

Risk Assessment:

- Financial Strength

Is the carrier financially sound?

Is the carrier too financially dependent on your company?

“Partner carriers: the 1 – 4 carriers that you need to be successful”

After you release the negotiation package, meet individually with partner carriers, re-iterate what you are trying to accomplish and get an understanding of their objectives.

Segment your carrier base into Partners, Core Carrier and others. This segmentation is not about pricing leverage, its about security and risk mitigation.



8

57 Venders3,712 Loads


4 Venders746 Loads



Procurement Best Practices:Getting Ready – Capacity Problem Areas Example



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Data



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Procurement Best Practices:Collecting Rates

Rate Collection and Communication:

1. After you release the negotiation package, meet individually with partner carriers, re-iterate what you are trying to accomplish and get an understanding of their objectives

2. Think through the optimization scenarios you want to see before the carriers submit their pricing• Carrier constraints: Limits on volume to brokers, minority carriers,

Smartway carriers, etc.

• Geographic constraints: Number of carriers per region, per DC, etc.

• The objective is to understand how the cost curve will behave

3. Check, Check, and Re-check carrier inputs• Carriers complete 100s to 1,000s of bids a year

• There is a lot of turnover in their pricing groups

• They make errors



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Data



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Procurement Best Practices:Scenario Analysis

Scenario Analysis:

1. Review initial results to get a lay of the land• Who bid aggressively and who did not?

• Does this make sense?

• How sensitive are the results to the number of carriers, to particular carriers, etc.

2. Begin the process of engineering the results• How balanced are the flows in and out of different DCs and regions?

• Meet with the partner carriers and begin pressure testing the results– Before the meeting, run some analyses to develop an understanding of what

would and would not be costly to adjust

– Do not chase the pennies

3. Be prepared to be stick to your published schedule• Nothing aggravates a carrier more than an awarding process that drags

out for several months



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Data



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Procurement Best Practices:Post Awarding

Post Awarding:1. Have a documented and well supported transition plan in place

• Communicate the plan internally• Document information flows and communication protocols with the carriers• Be prepared to visit your sites with the carrier and introduce the operations

personnel to the local carrier reps

2. Track performance to plan• Loads tendered to carriers other than the awarded carrier, by lane• Carrier tender acceptance / decline rate, by lane• Variances in volume of freight flows vs. the projection• Loads executed in a way that resulted in a post-tender carrier change (e.g. missing

an Inter-modal cut time)

3. Establish and communicate a regular market testing schedule• Go to market regularly• Carrier networks change more than shippers• A bid does not mean you have to change carriers but as a responsible procurement

manager you should test the market regularly



1515

Bid Leakage

Theoretical Savings Target

Carrier FailureImplementation

Failure

Bid rate result assuming perfect execution

New carrier not working out or carriers not accepting tenders

Incorrect tendering be that by mode or carrier or lane definition, etc.

Base Costs

Historical average costs per lane prior to procurement event

Procurement Events Savings Leakage

UncontrollableTypically 3-5% of savings potential

Typically a function of laps in

relationship mgmtCan be 25%-50% of potential savings

Where Leakage Occurs

Savings “leakage” typically occurs as a result of poor carrier relationship management or errors in new rate implementation

Operational Reality

Expedites and outliner events that need to be cleaned out of the saving potential

Starting pointNot real

Easy to correct but tough to find

Can be 5%-10% of potential savings



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The PVA Story- Accomplishments to Date

Comparison of actual post bid analysis of expected saving to real savings

• Study #1 and #2 post bid analysis shows that roughly half the potential (or theoretic) bid savings was lost

• Through rigorous carrier management and communication during the bid process and systematic monitoring and action planning post bid, the PVA client retained that vast majority of the bid potential

47.5%

58.5%

3.1% 2.7% 2.5% 1.6% 0.6%0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Study #1 Study #2 M1 M2 M3 M4 M5

Percentage "Leakage"

Attributed to strong carrier relationship management and active cost vs service analysis during bid awards

Attributed to rigorous and systematic post-bid analysis and management

By month saving leakage for PVA client



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Integrated Carrier/Transportation Management Deliverables

Procurement Best Practices:Post Awarding – Process Overview

Network Bid

Mini Bid Mini Bid Mini Bid

Plan Audit Plan Audit

Score cards

Cycle

Annual

Per Event (Seasonal, etc)

Quarterly/ Monthly

Monthly/Weekly

Procurement Functions

Score cards

Score cards

Score cards

Score cards

Score cards

Score cards

Score cards

Score cards

Score cards

Score cards

Score cards

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

Fore cast

A continuous integrated process of sourcing, carrier management and analysis

BenchmarkBenchmark

Plan Audit Plan Audit

Semi-Annually

Months 2 3 4 5 6 7 8 9 10 11 121



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Summary

• Transportation is not a commodity – it is a service– The subjective aspect of the quality of the service needs to be included in the

analysis– Shippers need to consider all costs (direct and indirect) when trading-off of

these soft aspects

• A transportation procurement event is as much a relationship management process as pricing event– The outcome of a typical transportation procurement event is a non-binding

agreement on both sides§ Shippers do not contractually guarantee volume and carriers do not contractually

guarantee they will take the volume tendered

– As such, the procurement event must be looked at as part of a continual process of relationship management with your service providers

• Going to market, or market testing your rates, should be a healthy part of the relationship management process– Carriers’ networks change as much, if not more than the average shippers’– These events should be well communicated, regularly scheduled, and fair



19

Agenda

• How should shippers procure transportation?

• What impact do policies and practices have on rates?

• How should a shipper handle fuel volatility?

2009 best practices in transportation part 1

Documents

supply chain chainalytics

supply chain transportation

supply chain strategies

supply chainsegment

supply chain rate benchmarking

innovations supply

supply chainbest practices

market lanes