Spend Management – One of the Keys to Managing Spiraling Freight Costs
Logistics spending climbed for the fifth straight year to a record high of $1.4 trillion, a 7 percent increase over 2006, according to the Council of Supply Chain Management’s annual state of logistics report. Of course, these statistics do not reflect the rapid increase in fuel costs in 2008. Total logistics costs have increased by 52.3 percent since 2002.
Transportation costs across all modes grew by almost 6 percent in 2007 and rose 47.1 percent from 2002 to 2007. During the same period, the U.S. economy grew less than 20 percent since the last recession ended that year.
The rapid escalation in logistics costs is causing shippers to place more emphasis on transportation spend according to Todd Thompson, senior vice president of Exel Transportation Services. “Transportation spending is getting more visibility at the CFO level.”
To gain greater visibility into their freight spend and to manage it more effectively, record numbers of shippers are acquiring TMS (transportation management software systems) as are 3PL’s that are asked by shippers to provide leadership and control in this area. The Transportation Management Systems (TMS) market surpassed the $1 billion mark for the first time in 2006, and the market is poised to exceed $1.5 billion by 2011, according to Adrian Gonzalez, Director of ARC Advisory Councils Logistics Executive Council and author of the study, Transportation Management Systems Worldwide Outlook. Similar growth projections have been made by the Aberdeen Group.
TMS systems allow shippers to optimize shipment loadings and to create more cost effective routes. They also provide shippers with very valuable data to track the utilization of carriers that are not in the company’s routing guide, to identify usage of higher cost (expedited shipping) transportation modes and to see accessorial costs that are often the result of poor business practices (e.g. unscheduled appointments, excessive waiting time).
Shippers are also switching to less expensive modes of transport. According to UPS, shippers are choosing slower – and cheaper—ground transportation over air cargo. Rail, the most efficient means of transport after barges did the best in a bad freight environment. While their yields improved (e.g. 2.99 cents a ton compared to 2.84 a ton), rail carloadings were off 2.5 percent in 2007 and volumes fell 1.9 percent.
In some cases, shippers are regionalizing their warehouse and distribution networks to cut mileages traveled and reduce freight spend. In the current high-cost environment, shippers are willing to trade increased inventory carrying costs for reliability according to John P. Darling, president of Venango Freight Express.
As part of their trade-off analysis, shippers are looking at customer order cycles, transit times by mode, freight rates and fuel surcharges. By changing production schedules and order times, shippers can take advantage of the lower freight and fuel surcharge costs when shipping rail.
The freight environment in 2008 can still be characterized as a shipper’s market. Freight bids combined with aggressive rate negotiations, service level agreements, capacity commitments and longer term contracts can all help buffer shippers from the rapid growth in transportation costs. Entering the bid results into a quality TMS system can ensure visibility, maintain compliance with the routing guide and allow shippers to optimize their shipping activities.