Identifying Alternative Savings Levers
As we noted earlier, the analysis of a shipper's transportation management practices and service requirements, combined with evaluation of the carrier market, results in the detailed sourcing strategy and identification of alternative savings levers. In practice, these two tasks are performed simultaneously.
Alternative savings levers generate additional opportunity by effectively moving lanes within the “lane complexity” and “carrier market status” matrix. These movements can take two forms:
1) Reduction in lane complexity—moving lanes from the high-complexity quadrants to the low-complexity quadrants, and 2) Creation of additional competition in the marketplace—moving lanes from a carrier's market to a shipper's market. The goal is to identify the best opportunities for cost savings and operational improvement.
Reduce Lane Complexity
Better transportation processes can make the shipper more carrier-friendly, which allows carriers to reduce operating costs. This reduction in operating costs, when properly executed, will result in lower rates. In order to achieve this goal, shippers need to quantify the return on investment in making the required changes.
We often find that shippers fully understand where their transportation management processes are causing additional complexities and costs for their carriers. However, they rarely have the incentive to make investments that will result in improved carrier collaboration.
A structured approach provides shippers the opportunity to quantify the benefit of changes in their practices and develop a return on their investment. For example, one company recently developed a process for integrating its sales forecasts into its transportation requirements planning. The resulting improvement in the shipper's projected transportation demand allowed its carriers to plan appropriately—and provide additional capacity without increasing the unloaded miles and associated costs. The initiative created a true collaborative environment with the carriers that resulted in increased available capacity, improved service levels, and reduced costs.
Create Additional Competition in the Marketplace
Greater competition generates more opportunities for meeting the shipper's needs through alternative services or modes of transportation. A competitive marketplace, which may also include non-traditional competitors, is more likely to offer price concessions.
To realize these opportunities, shippers need to fully understand the capabilities in the marketplace and their own leverage with providers.
Another company recently used the strategic sourcing strategy to move several lanes from the “bottleneck spend” category to the “open spend” category. While the company had very little leverage with existing rail providers to combat recent rate increases, its management determined that several lanes could be moved profitably from rail to truck. This analysis provided the company with the required leverage to negotiate lower rates from its existing rail providers.
The strategic sourcing approach has proven robust in many diverse situations: whether a company has high or low service requirements, operates in a carrier's or shipper's market, has best-in-class or traditional transportation management practices, or a combination of the above.