2009 best practices in transportation part 2

© Copyright 2009 Chainalytics, LLC.

Empowering Fact-Based Decisions Across Your Supply Chain

1

MIT-Center for Transportation & Logistics

“Drive supply chain innovation and accelerate its adoption into practice.”

– Founded in 1973 as an interdisciplinary unit in the MIT School of Engineering– Conduct research in transportation, logistics and supply chain management– Engage over 60 faculty and research staff from 11 MIT departments & schools– Work with more than 50 companies across the world through the Global SCALE Network

• Master of Engineering in Logistics (MLOG)

• MIT-Zaragoza Program in Logistics (ZLOG)

• ESD SM in Logistics

• ESD Ph.D. in Logistics

• Executive Courses

• Three-tier partnership model

• Exchange community

• Collaborations

• Communications

• SC2020

• MIT FreightLab

• Security & Resilience

• Transportation Mgmt.

• Emerging Markets

• Energy/Carbon

• Demand Mgmt.

• SC Risk Mgmt.

• Scenario Planning

• Strategy Alignment

• Education Partners • MIT AgeLab


© Copyright 2009. Chainalytics, LLC.


2

Key Question

What factors influence transportation rates and how much?

• Various methods are available . . .

– Anecdotal

– Survey

– Econometric Modeling

• Econometric Modeling – requires lots of data

– Annual data set contains >11M shipments for $11B in spend

– 62 different companies varying in TL spend from $12M to $500M+

– Covers USA, Canada and in and out of Mexico

– Equivalent to ~ 2.5% of the total North American intercity truckload market

Consumer Products

14%

Durable Goods

14%

Other6%

Retail12%

Whlsl/ Distrib

8%

Industrial 11%

Beverages16%

Foods19%

Primary Business Sector(percent of membership)




3

Econometric Modeling

• Objective:

– Develop an equation to predict the cost per load for TL freight, given characteristics of the freight

• Technique:

– Find the ‘best-fit’ line between all of the observations using Weighted Least Squares (WLS) Regression

– Develop a “base model”

– Test various policies, practices, and processes to capture impact

• Complications:

– We never know which characteristics are important

– We can never capture ALL of the factors that influence cost

– The relationships can be very complex

– The data always have problems – some that are not easily fixed




4

Accessorial Units Min

imu

m

Fir

st

Qu

art

ile

Med

ian

Th

ird

Qu

art

ile

Maxim

um

Ran

ge 1

-3Q

Resp

on

ses

LHD LHR

Power Unit Detention $/hour 23$ 50$ 52$ 60$ 80$ 10$ 48 4$ (17)$ Drop Trailer Detention $/day 25$ 25$ 35$ 50$ 136$ 25$ 29 16$ 73$ Driver Assisted Loading $/event -$ 60$ 75$ 80$ 100$ 20$ 9 23$ XDriver Assisted Unloading $/event 60$ 75$ 75$ 93$ 125$ 18$ 16 22$ XDriver Loading Wait Time $/event 45$ 49$ 50$ 55$ 70$ 6$ 4 X XDriver Unloading Wait Time $/event -$ -$ 30$ 50$ 70$ 50$ 11 X XVehicle Ordered, Not Used $/event 100$ 150$ 238$ 250$ 300$ 100$ 40 (10)$ 64$ Layover $/event 150$ 250$ 275$ 400$ 500$ 150$ 30 14$ (3)$ Redelivery $/event 20$ 75$ 113$ 125$ 225$ 50$ 16 (9)$ (56)$ 1st Stop Off Charge $/stop 35$ 60$ 75$ 90$ 100$ 30$ 36 12$ 57$ 2nd Stop Off Charge $/stop 35$ 75$ 100$ 125$ 175$ 50$ 38 22$ 52$ 3rd Stop Off Charge $/stop 35$ 100$ 125$ 156$ 300$ 56$ 36 27$ 61$

4th Stop Off Charge $/stop 55$ 113$ 150$ 213$ 300$ 100$ 23 40$ 24$ 5th Stop Off Charge $/stop 55$ 100$ 125$ 175$ 300$ 75$ 13 X X6th Stop Off Charge $/stop 55$ 95$ 138$ 181$ 300$ 86$ 12 X X

7th Stop Off Charge $/stop 55$ 95$ 138$ 181$ 300$ 86$ 12 X XStorage Fee $/event 25$ 35$ 40$ 50$ 100$ 15$ 10 18$ 134$

Value Ranges Cost Impact

Is there a benefit to being “carrier friendly”?How do I even measure this?What if we try to capture the accessorial policy.

Testing Out Policy Impacts




5

Testing Out Policy Impacts

• Individually, there is some limited rate impact

– Hard to separate out each individual policy/charge

– Potential for firms to have the same “footprint”

• Looking at the collective effect

– Shippers with charges consistently worse than the median = less friendly

– Do these shippers tend to pay more or less in terms of line haul rates?

Firms by Percentage of Accessorials &

Policies > Median

0

4

8

12

16

0% 20% 40% 60% 80% 100%

Percent of reported policies above the median

Nu

mb

er

of

Fir

ms Shippers with more than half of their

accessorials “worse” than median values paid ~3-5% more per load.




6

Agenda

• How should shippers procure transportation?

• What impact do policies and practices have on rates?

• How should a shipper handle fuel volatility?




7

Predicting Fuel Prices

• Delphi Study with ~30 Transportation professionals in April 2008

• What will the price of diesel be at the end of the next 4 quarters?

Fuel Price Delphi - Round 2 (4/2/08)

$3.00

$3.25

$3.50

$3.75

$4.00

$4.25

$4.50

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

Co

st

per

Gallo

n

1st Quartile max min 3rd Quartile Source: Chainalytics 2009

Median ForecastMaximum Forecast

Minimum Forecast




8

US Department of Energy

Energy Information Administration’s Outlook for 2009 (published June 2008)

• According to EIA’s June 2008 Short-Term Energy Outlook, national average retail diesel fuel prices will peak in the third quarter of 2008 at $4.75 before falling to $4.11 per gallon by the fourth quarter of 2009 . . . However, the recent volatility seen in crude oil and petroleum product prices, if continued, may significantly alter these price projections.”

Source: http://www.eia.doe.gov/bookshelf/brochures/diesel/




9

Fuel Price Estimates

National Diesel Prices - 2004 - 2009

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Apr-04

Jul-04

Oct-0

4

Jan-

05

Apr-05

Jul-05

Oct-0

5

Jan-

06

Apr-06

Jul-06

Oct-0

6

Jan-

07

Apr-07

Jul-07

Oct-0

7

Jan-

08

Apr-08

Jul-08

Oct-0

8

Jan-

09

Apr-09

4/08 Shipper Estimates6/08 US DOE Estimates




10

We never learn . . .

Source: Scenarios: An Explorer’s Guide, Shell International 2003.




11

Fuel Impacts

Change in Fuel Costs, Linehaul Costs, ALOH, and FSC Paid

80%

100%

120%

140%

160%

180%

200%

10/2/07 11/2/07 12/2/07 1/2/08 2/2/08 3/2/08 4/2/08 5/2/08 6/2/08 7/2/08 8/2/08 9/2/08

Week of Year

Perc

en

t C

han

ge f

rom

10/1

/07

ALOH ACPM DryFSCPaid Fuel ($/gal)

Comparing each to the value as of 1 Oct 2007 – note that the FSC paid increased faster than the actual cost of fuel.




12

Fuel Impacts

Linehaul CPM versus Cost of Fuel over Modeling Time Period

$1.450

$1.460

$1.470

$1.480

$1.490

$1.500

$1.510

$1.520

$1.530

$3.00 $3.20 $3.40 $3.60 $3.80 $4.00 $4.20 $4.40 $4.60 $4.80 $5.00

Fuel Cost per Gallon

Lin

eh

au

l C

ost

per

Mile

Each point represents the average line haul cost per mile plotted against the cost of fuel for that week – from Oct 2008 to Sep 2009.

Source: Chainalytics 2009

1 OCT 07

14 JUL 08

29 SEP 08

Underlying Line Haul Rates were modified!

No longer linked to fuel.




13

Fuel Impacts

Fuel versus Linehaul Costs

$1.45

$1.50

$1.55

$1.60

$1.65

$1.70

$2.25 $2.75 $3.25 $3.75 $4.25 $4.75

Cost of Fuel ($/gal)

Lin

eh

au

l C

os

t ($

/mil

e)

Longhaul Dry Van Longhaul Refrigerated Van

Oct 2006

Nov 2007 Mar

2008

Oct 2008

July 2008




1414

Fuel Surcharge Programs

Parameters for TL FSC programs:

Base or Peg Rate – Threshold cost of fuel per gallon

Escalator – Increase in fuel costs that triggers surcharge

Surcharge – Amount paid to carrier in dollars per mile

Effective Fuel Surcharge Programs:LHD: $1.238 Base with $0.058 Escalator and $0.01 SurchargeLHR: $1.240 Base with $0.054 Escalator and $0.01 SurchargeLHI: $1.258 Base with $0.066 Escalator and $0.01 Surcharge

Impact of FSC Programs

$(0.10)

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$2.00 $2.25 $2.50 $2.75 $3.00 $3.25 $3.50 $3.75 $4.00 $4.25 $4.50

Cost of Fuel ($/gallon)

FS

C P

aid

to

Car

rier

($/

mile

)

Min 25th Median 75th Max




15

Fuel Impact on Benchmark

• How does a shipper’s FSC program influence line haul rates?– Two Schools of Thought: Compensating or Independent

Case 1: LH and FSC Compensate Case 2: LH and FSC are Independent

Line Haul = $1.20

Line Haul = $1.26

Line Haul = $1.20

Line Haul = $1.20

FSC = $0.34

FSC = $0.28

Shipper A = Shipper B Total Cost = $1.54

Shipper A:

Shipper B:

e sent as ping requests to other nodes.��$1.48

FSC = $0.34

FSC = $0.28

• Previous Analysis– Prior to this model, FSC programs mainly varied with respect to the Escalator.– In Model 1 of 2008 we found that shippers with a $0.06 Escalator paid had

higher line haul rates (~$0.125 per mile) than shippers with a $0.05 Escalator. – This year – there was greater variability across all dimensions. Direct

comparisons of programs proved inconclusive.




16

Conclusions

• The more shippers expose in the Fuel Surcharge bucket the better off they are, in total rate paid– Keep the peg or base low

– Keep the escalator in line with estimated fuel efficiency

• The overall impact of your FSC program is only about 1%-2% of the total rate paid

• Predicting the future price of fuel is futile– Create a fair FSC and stick to it




17

Best Practices in Transportation Procurement

Gary GirottiVice President

Chainalytics LLC

Dr. Chris CapliceExecutive Director

MIT Center for Transportation & Logistics

March 3, 2009

2009 best practices in transportation part 2

Documents

supply chain management

supply chain objective

supply chainenergy

supply chain delphi

transportation logistics

transportation rates

supply chainwhat factors

median5 copyright