implementing best practices in transportation procurement · mbbc model market lh fb jmc base rate...

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JMC Steel Group and Chainalytics | SCOPE Spring | April 23, 2012

Implementing Best Practices in Transportation Procurement

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Optimizing Fuel Surcharge Structure

Managing Carrier Relationships Under Tightening Capacity

Introduction

Best Practices in Transportation Procurement

Summary and Q&A

2




Introduction


Summary and Q&A

3

Who is JMC Steel Group?

Largest non-energy tubular manufacturer

in North America

• Revenues: + $1.8 Billion

• Steel consumption of + 1.6 Million Tons

• Production capacity of ~2.6 Million Tons

• Employees total approximately 1,800

Market leader in products accounting

for 80%+ of sales

• Structural Tubing

• Standard Pipe

• Electrical Conduit

Portfolio Mix

Structural Tubing

51% Standard Pipe 21%

Electrical 12%

DOM 5%

Fence 4%

Sprinkler 2%

Other 5%

4

The JMC Steel Group

• Three operating

divisions

• 12 Facilities

• Approximately

2 million tons of pipe

and tube each year

• Delivering solutions

across the continent

Delivering Solutions Across North America

5


6

Who is Chainalytics?

Over 80 FTEs Worldwide

Our Clients

More Than 180 Unique Clients

14 of AMR’s Top 25 Supply Chains

57 Fortune 500 Companies

5 of Top 10 Retailers

7 of Top 10 Food & Beverage Manufacturers

5 of Top 10 CPG Companies

6 of Top 10 Forest, Paper and Packaging Companies

Our Experience

More Than 375 Engagements

TODAY

•1st Named to “100 Great Supply Chain Partners” List by SupplyChainBrain; Recognized for 8 Years Running

•Launch of Freight Market Intelligence Consortium (FMIC)

2001

2002

2003

2004

2005

2006

2007

2009

2010

2011

2008

Our Genesis

•Market Lacked Proven, Focused Supply Chain Analytics Competence

• “Best Analytical Minds in Supply Chain”

Empowering Fact-Based Decisions

Across Your Supply Chain

•Launch of Sales & Operations Variability Consortium (S&OVC)

•Mike Kilgore named a “Pro to Know” by Supply & Demand Chain Executive; Jeff Metersky (2006), Gary Girotti (2007), Steve Ellet (2011), and Irv Grossman (2011) also named Pros to Know

•Established Chainalytics India Private Limited in Bangalore

2012

•Strategic Growth via Mergers & Acquisitions

− Supply Chain Operations (Chainnovations)

− Packaging Optimization (Adalis Packaging Solutions Group)

•FMIC named “Top Supply Chain Innovation” by Supply & Demand Chain Executive

•Named to ARC Advisory’s “10 Coolest Supply Chain Boutiques”


Years

Quarters

Months

Weeks

Planning

Horizon

We Support Value-Driven Supply Chain Decisions

At what service level can we

profitably satisfy demand?

How should we transport

product through the supply

chain?

How much and where should inventory be

positioned in the supply chain?

Can we reduce our transport and logistics costs by improving cube

utilization?

Should our warehousing and material

operations be insourced

or outsourced?

When should we buy or make product to make the best use of our capacity?

What is the best flowpath?

How well do our current operations

mitigate repair and warranty

costs?

How can we increase

visibility to stakeholders?

7

Sales, Inventory & Operations Planning

Transportation Logistics Operations

Service Supply Chain

Packaging Optimization

Supply Chain Design


Outbound Flat Bed

$72.0

Intra-Company

$4.4

Rail $12.7

Inbound $10.7

Outbound Agent

Warehouse $3.6

8

Areas of Focus

Performance of current managed freight spend to market

Opportunities to improve performance to market

Transportation Practices

Current and support of best-in-class

Transportation Network Overlay

Looking for opportunities to leverage continuous moves or dedicated operations to lower freight expense

What did Chainalytics evaluate at JMC?

JMC Aggregate Freight

Spend ≈ $100M

Components Measured to Benchmark Consortium

JMC Freight Spend by Category (in Millions)


9

Major Finding: Procurement Opportunity Re-Evaluate Fuel Surcharge Program

Base Rate Miles

Example Load 1,302$ 737

$1.77/mile

MBBC Model Market LH FB JMC

Base Rate 1.212$ 1.20$

Escalator 0.059$ $0.069 -$0.079

Increment/Mile 0.010$ 1% on base rate

Fuel CPG

Market

Surcharge/Mile

Market

Surcharge/Load

JMC %

Surcharge

JMC

Surcharge/Load

Cost /

(Savings) per

Load to JMC

% Variance

to Total

Market

2.86$ 0.277$ 204$ 22% 286$ 82$ 5.4%

3.00$ 0.301$ 222$ 24% 312$ 91$ 5.9%

3.25$ 0.343$ 253$ 27% 352$ 99$ 6.3%

3.50$ 0.385$ 284$ 30% 391$ 107$ 6.7%

Example Load

Base Rate Miles

Example Load 1,302$ 737

$1.77/mile

MBBC Model Market LH FB JMC

Base Rate 1.212$ 1.20$

Escalator 0.059$ $0.069 -$0.079

Increment/Mile 0.010$ 1% on base rate

Fuel CPG

Market

Surcharge/Mile

Market

Surcharge/Load

JMC %

Surcharge

JMC

Surcharge/Load

Cost /

(Savings) per

Load to JMC

% Variance

to Total

Market

2.86$ 0.277$ 204$ 22% 286$ 82$ 5.4%

3.00$ 0.301$ 222$ 24% 312$ 91$ 5.9%

3.25$ 0.343$ 253$ 27% 352$ 99$ 6.3%

3.50$ 0.385$ 284$ 30% 391$ 107$ 6.7%

Example Load

Correlating FSC to Mileage-Based

Surcharge Drives Carrier Operating Efficiency

Much of the TL industry has moved to mileage-based surcharge programs

JMC’s FSC program placed them at a disadvantage to the market; 5.4% over on average lane

Price disadvantage was more pronounced as fuel prices continued to rise

JMC program accelerated more than market average

Used transportation procurement event as an opportunity to establish a new FSC program




Introduction


Summary and Q&A

10


11

Go to market on a schedule known to you and your partner carriers

Annually

Every 18 Months

Every Two Years

Carriers WILL (understandably) build a risk premium into rates when they do not know when the next opportunity for review will occur

Best Practices in Transportation Procurement Frequency

Source: Chainalytics FMIC January 2012 TL Questionnaire

How often do you renegotiate or seek new bids from carriers?


12

Lanes and volumes exposed to all participants

All standardized accessorial and FSC agreements predefined

Services and special equipment requirements fully defined and visible at lane level where applicable

Carriers provide rate and volume capability

Lane level

Origin facility level

Global constraint

Shipper awards on targeted planned volumes and intended splits at the lane level

Percentage based lane splits

Load count based splits

Best Practices in Transportation Procurement Methodology: Multi-Round Bid


13

Less than 10% non-incumbents invited to event

Used as an opportunity to incent carrier behavior

Carriers performing well on KPI/Performance Metrics receive same or more volume

Underperforming carriers have less volume awarded

Carrier’s historical % of spend frequently protected

However, be prepared to allow significant lane level churn in awards

It’s a highly fragmented market for both shippers and carriers

Carrier’s strong lanes this bid cycle may differ from last bid cycle

Use optimization tool if the network is large or constraint scenarios are complex

Avoid the temptation to award existing incumbent carrier at the lane level if another established carrier who knows your business is providing a more cost effective rate or volume commitment

Best Practices in Transportation Procurement Methodology: Multi-Round Bid


14

Best Practices in Transportation Procurement Fuel Surcharge Treatment

DOE Diesel Projections vs. Actual Market Rates

Fuel is unpredictable. Implement fair and

equitable FSC programs.


15

• Establish a known base fuel cost

• Escalator based upon existing and/or planned improvements in overall fleet MPG targets

• $0.01 per mile is the typical surcharge

• Percentage based is still the norm in Intermodal

• May consider FSC minimums in the case of Short Haul activity

Fuel Surcharge Programs Chainalytics FMIC Membership




Introduction


Summary and Q&A

16


17

Historic base rates were essentially “at market” when compared to similar FMIC shippers

Fuel surcharge program was “% revenue” based and analysis indicated that this led to an all-in market position of roughly +6% on $75MM annual outbound flat bed spend

What we did at JMC:

What happened at JMC?

1-2 Months

Developed Formal

Procurement Strategy

Defined Strategic Carrier

Management Program

Conducted Transportation

Network Procurement

Event

Implemented Rates and

Commitments

Established Procurement Compliance Framework

3 Months 1-2 Months


18

• Base rates came in at 1.3% savings to baseline (which were essentially “at market”)

• All-in savings with re-bid base rates and new FSC program projected at 8.1% savings

• JMC estimated savings after post bid-adjustments ≈ $6 Million

What were the results?

Round

2010 Base

Spend

Fuel @ DOE

$3.976/gallon

Total All In @

DOE

$3.976/gallon Loads Lanes

1 59,997,284 21,574,747$ 81,572,031$ 47,799 868

2 59,994,870 21,574,747$ 81,569,617$ 47,799 1,180

Date Scenario Round Solution Spend

Solution Fuel @

DOE $3.976/gallon

Total All In @ DOE

$3.976/gallon Description Unawarded 2010 Baseline

2010 Baseline

%

2010 Baseline

+ Fuel

2010 Baseline

+ Fuel %

03/11/11 01 1 $49,023,703 $15,029,845 $64,053,548 Round 1: Unconstrained 0 $10,973,582 18.3% $17,518,483 21.5%

03/12/11 02 1 $55,837,016 $15,029,845 $70,866,861 Round 1: No Brokers 4 $4,160,268 6.9% $10,705,170 13.1%

03/12/11 03 1 $55,127,913 $15,029,845 $70,157,758 Round 1: Grow and Maintain Only 0 $4,869,371 8.1% $11,414,273 14.0%

03/14/11 04 1 $52,583,430 $15,029,845 $67,613,275 Round 1: Limit Brokers - 50% Spend + Cap TPSL 0 $7,413,854 12.4% $13,958,756 17.1%

04/07/11 05 2 $50,370,273 $15,029,845 $65,400,118 Round 2: Unconstrained - Round 2 Rates Only 0 $9,624,598 16.0% $16,169,499 19.8%

04/07/11 06 2 $55,523,215 $15,029,845 $70,553,060 Round 2: Carrier Capacity Constrained 0 $4,471,655 7.5% $11,016,557 13.5%

04/07/11 07 2 $58,802,400 $15,029,845 $73,832,245 Round 2: No Pure Brokers Carrier Capacity Constrained 4 $1,192,470 2.0% $7,737,372 9.5%

04/07/11 08 2 $57,903,155 $15,029,845 $72,933,000 Round 2: Grow and Maintain Only - Capacity Constrained 1 $2,091,716 3.5% $8,636,617 10.6%

04/13/11 09 2 $57,677,525 $15,029,845 $72,707,370 Round 2: Forced 22 Carriers at 50% of Historic Spend 1 $2,317,345 3.9% $8,862,247 10.9%

04/13/11 10 2 $57,650,996 $15,029,845 $72,680,841 Round 2: Scenario 09 + Limit to 75 Carriers 1 $2,343,875 3.9% $8,888,777 10.9%

04/13/11 11 2 $57,808,340 $15,029,845 $72,838,185 Round 2: Scenario 09 + Brokers 25% Facility Cap 2 $2,186,531 3.6% $8,731,432 10.7%

04/13/11 12 2 $57,713,128 $15,029,845 $72,742,973 Round 2: Scenario 09 + Rank 4 25% Facility Cap 1 $2,281,742 3.8% $8,826,644 10.8%

04/15/11 13 2 $57,808,339 $15,029,845 $72,838,184 Round 2: Pure Brokers and Rank 4 25% Facility Cap 1 $2,186,531 3.6% $8,731,433 10.7%

04/20/11 14 2 $59,281,882 $15,029,845 $74,311,727 Round 2: Scenario 13 + Various 1 $712,988 1.2% $7,257,890 8.9%

06/15/11 15 2 $59,195,185 $15,795,339 $74,990,524 Round 2: Scenario 11 + FINAL ADJUSTMENTS 0 $799,686 1.3% $6,579,094 8.1%

Baseline

Savings




Introduction


Summary and Q&A

19


20

What were the major challenges? Supply and Demand Cycle

We undertook this

procurement event at

the start of 2Q 2010.


21

Organization

Skeptical of multi-round procurement event

Belief that business was unique or fundamentally different

Strongly held belief that modification of FSC program was a deal breaker

Carriers

Had not historically dealt with procurement events with JMC Steel Group

Many smaller carriers were passing FSC to owner/operators “as is.” Without business process change the reduction in FSC might be problematic

Many smaller carriers had low technology sophistication. Using a web-based procurement portal required more carrier support than usual

Some felt empowered to “not play ball” due to the demand cycle

What were the major challenges? Organization and Carriers


22

Scope and breadth of our data

Initial usage of TMS data to drive a procurement event

Defining the ‘right’ solution mix

Reliance on top few carriers vs. opportunity with new carriers

Implementing new rates and FSC into our TMS

Measuring the results

Easy on FSC impact

Challenging on linehaul rates

What were the major challenges? JMC Perspective




Introduction


Summary and Q&A

23


24

Go to market on a routine, scheduled basis

Use the procurement event as the primary tool for awarding good carrier behavior

Keep FSC escalators aligned with fair fleet average MPG targets

Fair and equitable treatment of carriers during pricing review is the surest hedge against inevitable demand spikes in the carrier market

View procurement process as a healthy part of your relationship with your partners and carriers

Summary


Questions?


Tony Heldreth Vice President, Logistics

JMC Steel Group [email protected]

312-275-1608

Mike Eaton Principal, Transportation Practice

Chainalytics [email protected]

678-384-3613

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