Best-in-Class in Wholesale Distribution Series

[Pages:18]November 2005

Best-in-Class in Wholesale Distribution Series

Transportation Management: A Continous Improvement Framework

Dave Forberg Principal Achieve Consulting

Drew Satherlie Industry Consultant Durable Distribution FedEx

November 2005

Best-in-Class Wholesale Distribution Series

Transportation Management: A Continuous Improvement Framework

Dave Forberg Principal Achieve Consulting

Drew Satherlie Industry Consultant Durable Distribution FedEx

Best in Class - Wholesale Distribution Seminar Series Overview

Business is changing rapidly and wholesale distributors are in the middle, playing a critical role in helping their manufacturing and customer partners manage the supply chain and all the activities that go with it (inventory management, logistics, sourcing, payment, etc). In one recent study, 80% of CEOs said Supply Chain Management was important or very important for the success of their company, and within five years this number is projected to grow to 88%. In addition, external dynamics are impacting distributors in a profound way. Including:

? Return on assets (ROA) remains low between 3%- 4% from 2000 to 2004. (see below)

5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Median ROA 2001 - 2004 Public Distributors

2000

2001

2002 Durable NonDurable

2003

2004

? Customers who have more choices on where to get product and what they will pay for it. They are demanding more from distributors.

? Costs which are increasing at an ever faster rate and distributors have not or cannot pass on these increased costs. These costs are payroll, healthcare, and financing to name a few.

? Technology that is helping distributors to deliver things better, faster, cheaper, smarter - and more customized. This has been a great productivity tool for distributors in the past to help bring down costs.

? Channel partners that are forcing distributors to become more efficient and productive in search of profits. Distributors have responded primarily by rationalizing and leveraging their supply base and have achieved mixed results.

? Increased and new forms of competition and Globalization that have commoditized some products and industries, focusing attention on price and service as differentiators. Distributors try to remain current with this trend.

? The median revenue of these companies was approximately $763 million, and the operating income margin was approximately 3.5% or $27 million. (See below) which although low is within a point of two of historical averages.

4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

Median Operating Income Margin

2000

2001

2002

2003

Durable NonDurable

2004

Thus, to increase profitability, distributors must focus on getting more out of existing assets.2 If network operating costs (inventory, facility and transportation) are about 8.0% of revenues3, then the median public distributor spends about $61 million managing their network. A 10% improvement in managing this cost would result in $6 million increase to the bottom line or increasing operating income 22%. The data and this example provide a compelling case of why distributors are looking at new and creative ways to manage their business.

FedEx recently studied 197 publicly-held durable and non-durable distributors and found the following financial issues:

2 Finlistics, FedEx, and Achieve Consulting study 2005. 3 Council of Logistics Management "State of Logistics" report

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It was from the external dynamics and the fact that distributors are struggling to remain profitable that FedEx decided to launch a series of Best-in-class in distribution seminar series aimed at trying to help distributors address their key issues (internally or externally). By studying these problems, we hope to understand the issues distributors are facing and possible solutions.

FedEx has two goals in mind for this best in class series:

1) To help the distributor better understand their industry, their supply chain and the issues impacting them and;

2) To develop tools that distributors can use to improve their business.

We hope you enjoy this and future papers. If you have any questions, comments, or suggestions, please contact your FedEx sales rep or email us.

Sincerely,

Drew Satherlie drew.satherlie@

Mike Younkin mike.younkin@

FedEx Distribution Industry Consultants

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Executive Summary

Demand for transportation services and the available supply of capacity are out of sync and worsening. Wholesale distributors need to be prepared to deal with this environment. Recently shippers have responded by implementing some fundamental changes that have been effective, but more is needed to continue to improve.

A transportation framework has been developed to allow distributors to align their transportation operation with their supply chain strategy and overall business objectives. This framework allows shippers to take their improvement to "the next level" because it is in sync with the goals of the organization. However, it is a dynamic framework that allows for continuous improvement.

The framework identifies the following major processes within transportation management for further review and analysis.

? Carrier Management

? Load planning and optimization

? Shipping Execution

? Shipment Monitoring

? Freight pay and audit

? Performance monitoring

A corresponding maturity assessment tool is also provided to describe a continuum of operating capability across the transportation processes. Shippers can use as a self-evaluation tool. The tool will also help them prioritize where they might employ resources to maximize their overall performance. We have provided the tool at the end of the whitepaper.

This paper provides a road map for companies to improve performance in each of these process areas.

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Transportation Management Best Practices: Continuous Improvement Framework

The Transportation Landscape: Past, Present, and Future

Prior to the 1980s, transportation was highly regulated and characterized as lethargic with little differentiation between carriers on price or service. In the 1980s, deregulation changed the landscape for freight movement and shifted the balance of power from carriers to shippers. Competition increased in all modes and shippers demanded and received better pricing and improved service.

costs continue to increase at an accelerated rate. Logistics Management reports costs have increased by nearly 20% since 2001. (Figure 2)

Demand for transportation remained strong through the 1990s as the United States economy surged forward. Driven in part by outsourcing and globalization, huge increases in imports began straining ports, creating capacity issues in trucking, and clogging inter-modal operations everywhere. Naturally, cost and pricing grew steadily through the 1990s (See Figure1).

Cost per ton mile

Index

125 120 115 110 105 100

95 90 85 80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

(Source: Bureau Transport at ion St at ist ics)

Year

Figure 1

Source: Logistics Management (11/05)

Figure 2

Today, the transportation industry is maturing but demand and supply are not synchronized. Consider the following supply-side facts:

? Trucks handle more than 85% of all goods moved through the US22 and are experiencing unprecedented capacity issues. Service changes have improved safety but reduced capacity by over 6%.3

? The average driver is 56.4 Retiring drivers increase capacity pressures.

? Average drivers' wages increased 78%. But there is a projected shortage of more than 100,000 drivers over the next 10 years.5

Demand continues to increase each year in all modes. The Bureau of Transportation Statistics reports that air freight ton miles are up approximately 4% since 2000 and motor freight ton miles are up over 6.5%. Accordingly,

2 DC Velocity, October 2005 2 Transport Topics 3 Fortune, November, 2004 4 Logistics Management, 2005 5 American Truckers Association

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? West Coast port traffic is at an alltime high with nearly 40,000 fortyfoot containers (FEU) entering each day.6

? Inter-modal volume is up over 65% since 1990.7

? Durable goods shipping have increased by nearly 10% since 2003 and air freight is up 12%.8

? Transport Topics reports that many carriers were overbooked by 10-15% on any given day in 2004.9

Looking forward, there is no evidence that there will be a return to the "good old days" of the 1980s and 1990s. Clearly, distributors need to develop a rational, competitive response to these events.

New Environment and Realities

Wholesale distributors have had limited success navigating the tight channel between managing supplier relationships and cost-effectively satisfying customers. Previous transportation management efforts may have been implemented and many have delivered the expected results. During this time shippers have:

? Centralized carrier management as part of the procurement function and stressed efficiencies

? Emphasized narrowing the shipper base to 1-2 carriers to leverage scale and drive down rates through maximizing discounts.

6 Fortune, November, 2004 7 DC Velocity, October, 2005 8 DC Velocity, October, 2005 9 Transportation Topics

? Outsourced the delivery function entirely, or simply shopped for new partners or service providers to lower costs.

? Established core carrier programs with 1-2 carriers in each lane for scale economies.

? Dedicated volume to a single parcel express carrier to drive down pricing or to gain technology capability

These methods are effective, but are not enough. Combined with capacity constraints, shippers must find a new way.

One path is to "share" the pain with customers by trying to initiate special charges, such as accessorial fees, fuel surcharges, and "extra service" charges. A leading lab equipment distributor introduced temporary surcharges even for customers with pre-existing free shipping contracts. Customer pressure forced a repeal of the charges after a few short months. Customers will be tolerant for only so long.

Transportation Management Continuous Improvement Framework and Maturity assessment tool

A different framework has emerged to help manage transportation processes and spend, and align them better with company goals. This new framework is comprised of two components:

1) A continuous improvement framework which looks at the six processes and 23 activities encompassing transportation management.

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2) The transportation maturity assessment tool which evaluates your capabilities in key processes against a continuum of best in class practices.

At the core of the transportation management framework is flexibility which allows alignment between transportation and business strategy. The model does not profess one right answer that fits all situations or advise that all distributors should aspire to leading practices in all processes. Instead, the model helps distributors tie their transportation management process and activities to their business strategy. If and when environmental issues change or business strategies evolve, so to does the need to supply products from manufacturer to customer. The model helps see what to change and how.

The maturity assessment tool helps identify and align the best practices of the key processes and sub-processes. These best practices apply whether your company utilizes a private fleet, dedicated carriers, a set of core common carriers, or contract parcel services. With this approach, shippers can focus on improving specific areas within transportation management in order to achieve their strategic objectives of:

? Controlling transportation costs

? Increasing reliability of order delivery and real time status availability

? Making transportation and logistics a differentiator in the market place.

Tactical Best Practices are Necessary to Win "In the Trenches"

While fundamental concepts serve as the foundation for a program of improving transportation operations from a time, cost, and service standpoint (see box on next page), real progress is made by applying tactical best practices that enable a more effective transportation management operation.

The ability to get things done on the dock and on the road differentiates a transportation operation's effectiveness in the customer's mind. This is achieved when all aspects of transportation management are in sync and working towards servicing customers, while minimizing headaches and costs for all supply chain partners. For many distributors, the question is "Where to begin?"

The transportation management framework suggests that shippers "break down" transportation management into processes and subprocesses that can be better managed and optimized. Improvements in each area of the framework contribute to a better overall operation. There are six processes or stages to the framework depicted in the figure on page 9.

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