While shippers face the difficult market conditions of tight capacity and heightened customer demands, they are also challenged to find transportation cost savings and improve customer satisfaction. In the wake of double digit freight cost percentage increases, many transportation managers are scrambling to stabilize transportation budgets for the coming years. They are looking to secure the best truckload performance and rates as companies cannot afford to follow in the same footsteps as 2018.
While transportation prices are impacting nearly every industry, I’ve found that short lead time manufacturers are particularly being forced to postpone deliveries (impacting service performance to customers) or pay dearly to jump to the front of the line to capture capacity. For example, one paper manufacturer experienced a $7.8M decline in operating revenues due to the increased shipping costs. A packaging manufacturer saw annual transportation costs increase by $250K for just one major location because 40% of shipments were expedited unnecessarily. Lead time is an often overlooked factor in delivering freight on time and on-budget, yet it can be the difference between a shipper riding on their contracted rates or on an elevated spot market for capacity.
The driving force in transportation cost is related to lead time and how deep a shipper must tender in their routing guide until a carrier accepts their load.
Research from MIT has found that the first carrier in the routing guide will on average accept 78% of tenders. The acceptance rate drops significantly with each subsequent position in the routing guide. For example, tenders offered to the fifth carrier in the routing guide are accepted only 40% of the time on average. The more time a carrier has between the tender and pick up day, the more likely the first carriers in the routing guide are to accept the load at the contracted rate. Your ability to drive transportation cost savings in this carrier economy will depend on your ability to get tender acceptance high in your routing guide. Multiple rejections or “no responses” result in proportionately higher costs. In fact, our studies show that there’s a 15% increase in costs when you go beyond the “top 4” in the routing guide.
How short lead time is impacting manufacturers in terms of costs and service….
In MIT’s recent study, “Impact of Lead Time on Truckload Transportation Rates”, they learned that a four-day difference in average lead time resulted in the customer with the shortest lead time to pay an expected cost penalty of 4.2% of their annual transportation spend.
I’ve also seen studies where companies increased lead time by 1.5 days and their 3PL was able to secure lower rates and identify opportunities for consolidation or different mode choice for a 15-19% cost savings. On-time performance also increased to 98.57% as increased lead time enabled preferred carriers to offer higher levels of customer service.
Here are some ways shippers can increase their lead time for higher transportation cost savings...
- Look for ways to reduce your supply chain lead time to increase freight lead time - For example, many of our short lead time manufacturing clients are now direct shipping from plants, bypassing the DC, to remove at least 1 day out of their supply chain providing them with addition cushion for capturing capacity at lower cost.
- Leverage your 3PL as a department partner - It can be challenging for transportation managers alone to increase lead time, as they're managing the windows given to them by operations & customer orders. A strategic 3PL partner can be your go-to between departments, to help troubleshoot where Logistics can get in advance of those department needs.
- Segment your customers - Not all customers are equal so I do not understand why many manufacturers are incurring short lead time expenses for customers that do not have high demands nor high profit margins. Reserve next day or same-day privileges for your most profitable customers.
- Use a TMS with real-time capacity and price checks to capture capacity at rates that do not put margins at risk and ensure service requirements can be met.
- Improve communication throughout the complete supply chain - I’ve learned that manufacturers need to look further up the chain to uncover how to get information down to the shipping department faster.. Customer service, sales, purchasing and manufacturing do not often understand how short lead times have a direct correlation to higher transportation costs and reduced service. They do not understand how it impacts them and they do not understand the relationship with carriers and how contracted rates with a carrier does not require them to move a particular shipper’s freight unless there is a commitment on volume everyday.