Logistics Cost Reduction Strategies

Prof.Rameshwar Dubey Secretary Asian Council of Logistics Management Associate Professor Symbiosis Institute of Operations Management,Symbiosis International University

Relative Transportation Costs

Transportation costs represented 6.3% of total U.S. GDP in 1990 Transportation costs represented over 50% of total U.S. logistics expenditures in 1990 Transportation accounted for 27% of total U.S. energy use and 63% of total U.S. petroleum use in 1990

Logistics Overview
Why has logistics become increasingly important?

Cost reduction pressures are severe Logistics has a high impact on customer service A strong need exists for demand and supply planning consistency A focus on core competencies has placed logistics in the outsourcing spotlight Development of IT technology supports integrated logistics management Government deregulation of transportation has created new opportunities

Total Cost Concept

The total cost concept recognizes that an optimum cost in one area or function may not lead to an optimum total system cost Total cost analysis requires the management of supply chain trade-offs Logistical activity areas that drive total logistics costs: Customer service level costs Inventory carrying costs Lot quantity costs Order processing and information costs Warehousing costs Transportation costs

Customer Service Measures

Order cycle lead time Stock availability/fill rates/stockouts/back orders/partial shipments Record integrity Frequency of delivery Delivery reliability Order tracing capability Volume flexibility

Customer Service Measures

Invoice accuracy Order status information Technical support responsiveness Unscheduled service responsiveness Speed of product feature changes Product and service quality

Value-added Transportation Concept

Product/Info Flows

Inbound Supplier

Outbound Customer

Manufacturer

Info/Return Goods Flows

Transportation-Related Service Elements

Speed: time-in-transit Availability: accessible to customers when they want it Dependability: pick-up and delivery time variability Flexibility: adjustment to shippers needs

Basic Modes of Transportation

Fixed costs
Rail Motor Water Air high low medium low

Variable Traffic costs composition

low medium low high bulk food, mining, heavy mfg consumer goods, medium/light mfg bulk food, mining, chemicals high-value goods, rush shipments petroleum, chemicals, mineral slurry

Pipe

high

low

Relative Operating Characteristics

Operating characteristics Rail Speed Availability Dependability Capability Frequency Composite 1 = best, 5=worst Motor 3 2 3 2 4 14 Water 2 1 4 2 3 2 10

4
4 1 5 18

Air 1 3 5 4 3 16

Pipe 5 5 1 5 1 17

Intermodal
Rail Truck

Air

Water

Enables shippers to benefit from advantages of multiple modes of transportation minimizes disadvantages of individual modes

Transportation Decision Making in an Integrated Supply Chain

Macro
Understand total network flows Understand individual lane flows

Strategic

Decision Scope

Understand current carrier usage patterns Make mode/carrier decisions Routing/Scheduling, Load Planning, etc.

Micro
Inbound
Supplier Outbound Customer

Operational

Manufacturer

Decision Flow

Transportation Costs
Product related density stowability ease or difficulty of handling liability
Market related intramode/intermode competition location of markets nature and extent of regulation balance/imbalance of freight traffic seasonality of product movements domestic vs. international

Transportation Economies
Economy of Scale

LTL

T L

Volume/weight

Transportation Economies
Economy of Distance
Tapering Principle

Distance

Shelf Standards
Brand Consolidation Space Position Proper Groupings Price Schematic Housekeeping Point of Sale

Shelf Management Principles

Place your wines at eye level or the best position possible.
80% increase if moved from bottom to eye level 43% increase if moved from bottom to waist level

Place your wines next to the best selling competitive wines. Place your wines next to wines that are priced higher than your wines.

Topics
Introduction Transportation Infrastructure Transportation Management

Introduction
Importance of Transportation Value-added Role of Transportation

Transportation Role in Value Attainment Process

Critical element of structure, capacity, and movement decisions Both between supply chain members and intraorganizational

Transportation Infrastructure
Modal Characteristics

Changing Environment

Distribution of U.S. Intercity Freight (% of ton-miles)

1980 1990
Rail 38% 37% Motor 22% 26% Water 17% 16% Air Pipe .2% 24% .2% 20%

Average Revenue per Ton-Mile

1980 1990 $2.8 $2.7 $18.0 $24.4 $.77 $.75 $46 $140 $1.0 $1.4

Changing Transportation Environment

Deregulation Time-based competition Expanding geographic coverage Information technology Social and environmental concerns

Selected Results of the Changing Environment Economic Impact

Increased competition in individual markets - both within modes and between modes More efficient carrier operations - less interlining, more direct routing, efficient pricing Transportation costs declined in real terms and as percent of GDP Transportation service quality improved

Selected Results of the Changing Environment Industry Impact

Consolidation in rail, air and LTL trucking Proliferation of TL carriers Strong growth in regional trucking - networks TL growing faster than LTL Air freight growth Intermodal growth: rail-truck, air-truck, rail-ship Growth of one-stop shopping - 3PL Private fleet conversion

Selected Results of the Changing Environmen Market Impact

Demand for fast, dependable, responsive service at lower cost Demand for a broader range of services to integrate supply chain functions Core carrier concept - interdependence between shipper-carrier Customized price/service packages/contracts Relational view of transportation as a value-added service

Transportation Management
Network Freight Flows: MacroDecisions Micro-Decisions Information Systems Support

Network Freight Flows: A Fully Integrated Approach

Managing Inbound-Outbound flows in an optimal manner requires firm to have a good handle on the entire logistics process Traditionally view transportation in a vacuum-need to look at it in the context of the total logistics system Greatest improvement opportunities lie in integrating transportation with other logistics functional areas such as purchasing, inventory control, forecasting and production scheduling

Approach to Analysis
1 Analyze lane densities/frequencies: what opportunities emerge for:
inbound/outbound consolidation vehicle consolidation temporal consolidation network consolidation - cross dock potential (hub and spoke systems)

Approach to Analysis (cont.)

2 ) Once opportunities for consolidation are visible, make mode/carrier selection based on service/cost mix
Given similar service, are rates better on 1 mode/carrier than another? Does any mode/carrier have relative strengths in a particular lane? Any backhaul opportunities?

3 ) If so, look to consolidate loads on mode/carrier with best cost structure - assign private fleet to most costly routes

Consolidation Opportunities
Inbound-Outbound flow consolidation: look for opportunities to combine inbound/outbound freight Vehicle consolidation: use one vehicle/multi stops for LTL volumes vs. one shipment to each Temporal consolidation: hold orders until large volume shipment possible

Suggested Analyses
Network flows Lane densities, frequencies, consistency Freight distribution by mode, carrier Consolidation opportunities

Nodes and links in a Logistics System

(W=warehouse, P=plant, M=market)

M M P M W M P W W W W P W P

Lane Densities
Volume on a weekly basis Consistency of volume Volume + Consistency = Rate bargaining power Identify LTL freight consolidation opportunities

Inbound-Outbound Lane Densities

Site DC 1 DC 2 DC3 DC1 DC2 DC3 DC1 DC2 DC3 State CA CA CA AZ AZ AZ NM NM NM In # 135 110 125 2 7 1 0 0 0 Avg Wt 2024 625 1690 228 502 1135 0 0 0 Out # 592 465 572 28 9 36 44 42 89 Avg Wt 989 654 1005 444 484 622 462 418 517

DC1 DC2 DC3

TX TX TX

598 911 1631

971 3147 1619

1975 2125 1368

957 693 1716

Mode/Carrier Profile Analysis

Understand freight distribution among carriers by state Identify potential for core carrier concept

Summary
Identify:

Opportunities to achieve balanced flows - obtain lower rates for providing loads both ways

Significant volumes for rate negotiation

Vehicle/temporal consolidation opportunities

Advantages of reducing number of carriers

Mode/Carrier Selection
step 1

step 2 Modal Choice basic mode intermodal Specific Carrier legal type individual carrier step 3 Transport provider

Transportation Pricing

Function of: cost-of-service value-of-service

Prices and Volume

Per pound costs will decrease over volume/weight

Weight of load

Price and Density

Assuming no weighing out, denser products use space better
Price per pound
cotton

Product Density

steel

Transportation Cost Structures

Variable: costs vary with services or volume: line-haul costs of fuel, labor and maintenance handling pickup and delivery Fixed: constant regardless of activity Facilities, equipment and administration Joint: hand-in-hand costs -- unavoidable Example: the backhaul move Common: shared costs (overhead) need for Activity-based costing

Pricing Structures
Cost-of-service: cost plus method Value-of-service: market based method

Combination: a middle of the road approach using cost (minimum) and value (maximum) Net Rate Pricing: All-inclusive prices specific to customers needs (not discount-based)

Limits on Rates
maximum value of service demand

rate level
minimum cost of service fully allocated average variable out-of-pocket supply

Routing and Scheduling

Goals: find best path a vehicle should follow through networks of roads, rail lines, shipping lanes, and air routes determine best pattern for stops, multi-vehicle use, driver layovers, time of day restrictions Benefits: greater vehicle utilization improved and more responsive customer service reduced transportation expenses reduced capital investment in equipment

Principles for Good Routing/Scheduling

load trucks with deliveries for customers closest to each other stops on individual days arranged together start routes with farthest stops first circular routes - dont cross paths use largest vehicles first if can be filled mix pickups in with deliveries, not at end if one stop far from other, use other truck avoid narrow stop time windows, or handle separately

What Is Contract Logistics?

It is a very confusing term because there are so many different descriptions of what it really is. Contracting out the entire distribution function and the related information function Subcontracting specific logistics activities to a third-party specialist service provider. A wide range of practices fall under these definitions

Services Provided by Third-party Logistics Providers

Transportation Warehousing Information management Human resources Management

Two Types of Providers

Asset-based Own their own warehousing, transportation, computer systems, etc. Data-based essentially asset free companies who sell logistics management capability through their computer systems and managerial skill There is frequently a bias against asset-based providers

Categories of Services Available

Exclusive Service Provider-devotes all resources to a single client Consortium Service Provider-provides services to a small group of clients Specialist Provider-provides services for products or clients who have specialized needs National/Multinational Provider-provides services to many clients throughout the world

Business Drivers
Stick to the knitting Vertical disintegration How to do more, with less

Changing Business Environment

Debt reduction <> unleveraging Strategic focus of ... Financial resources Human resources Information technology Competition Faster (agility) Better (quality) Cheaper (low cost provider)

Investment Rationing

Advantages/Disadvantages
Less asset investment, redeploy capital Lower operating cost (service provider has economies of scope and scale) Time lag between increased costs and changing rates More attention for core business Gather missing management knowledge Provide higher service level Increased flexibility Entry mode to new markets Flexibility as environment changes

Switching costs Possible higher operating costs

Less direct customer contact Dependency Loss of control

Information Systems Support

Network analysis Electronic Data Interchange Freight rate maintenance and auditing Routing and scheduling Administration
Produce/track bill of lading for each shipment Automated bills of lading Automate shipment data files Carrier evaluation