Lower rates and fewer carrier partners… have your cake and eat it too

By Gary Girotti, Vice President, Transportation Practice, Chainalytics LLC

The for-hire carrier market is extremely soft, and shippers are taking advantage of it. Just one look at the results from some recent procurement events shows proof (see figure). Shippers are enjoying double-digit rate savings. But at the same time they are reducing their carrier base. Is this near-sighted?

Not really. It’s not only shippers that are altering the relationship, it’s also the carriers. In the shadows of this depressed market, carriers have altered their networks at unprecedented levels. So, shippers' decisions to bring their freight to market are not solely based on cost (yes, it’s one obvious large objective), they are also based on a need to realign their network of providers to those carriers that align best with their operations.



Reducing the number of carriers you work with can have a number of benefits. By focusing on fewer carriers, you have greater opportunity to build stronger, more focused relationships, enabling you to work with each carrier uniquely. These tighter relationships can theoretically improve service and capture operational efficiencies. For example, with fewer touch points in the delivery network, promotional programs, seasonal fluctuations, and periodic routing changes are more easily managed and efficiently implemented. In addition, appointment setting, yard management, EDI communications, and claims management can all be managed with fewer internal resources.

But you can push it too far. If you’re left with too few carriers, the operational savings won’t offset the potential rate increases you could become vulnerable to when the market stabilizes.

So, how many carriers is enough? The mathematical answer is one less than the number at which an additional carrier does not reduce line-haul costs enough to offset operational costs of managing more carriers. If quantifying the operational costs was easy, the result would be obvious. The reality is that the number will come through experience and some trial and error. To this end, it is a good exercise for shippers to monitor each carrier’s service failures, turndown rates, and shipper interactions by lane. This will provide you a good sense of the balance you’re achieving.

Even if big rate reductions won’t materialize in 2010, it is still a good practice to realign your carrier network to better match the current carrier market and explore opportunities to reduce your carrier base.

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Going With the (Optimal) Flow

By Tim Brown, Principal, Supply Chain Strategy Practice, Chainalytics LLC

Flow Path optimization has been tossed around lately as the phrase du jour. Just what is it? Flow Path describes the series of “links and nodes” that move and transform products on their way to the final customer. It includes the various activities that occur and the varied modes of transport that connect to supplier locations and manufacturing and distribution facilities. Every business has its own unique Flow Paths, but the alternatives tend to be common across industries.

Flow Path Optimization is a hybrid analysis between network design and S&OP that incorporates a finer level of detail than network strategy is sufficiently capable. Companies use Flow Path Optimization to make decisions such as which products are inventoried versus flowed-through, how seasonal inventories are built, and which plant or DC serves customers.

Interest in Flow Path has been particularly intense in the retail segment, and the range of techniques is quite exhaustive from seasonal sourcing analysis on spreadsheets to simulation analysis of effective stocking strategies. Why the sudden interest? When you think about it, it’s easy to see the drivers of the new focus. They include the usual suspects: economic recession, global sourcing, and changing product assortment. Companies are reducing capital spending and having to look for ways to optimize existing infrastructure. They want to know what their end-to-end inventory costs are when comparing component alternatives. How would their supply chain support demand shaping activities? And imagine if the hype associated with GHG emissions actually came to fruition.

All of this network complexity drives the need for continued analysis of service trade-offs like lead-time and equipment utilization. Taken one step further, you can see that companies must evaluate not just strategic decisions, but those that can make near term impacts. This is where flow path comes in.

Flow Path shares many traits with traditional Network Design. It includes several supply chain cost elements; strives to identify the least cost flow of products from supplier through customer; and incorporates service requirements in the decision analysis process.

But this is where it differs. Unlike network design, Flow Path generally assumes a fixed network of distribution and demand locations. The goal of Flow Path analysis is to find the least cost path to satisfy demand for a SKU when accounting for more detailed or dynamic nuances than can be addressed in network design. For example, in network design, many companies forecast fuel cost and perform sensitivity analysis across a wide range of possibilities to make the most “robust” network. When faced with planning in the next 3-6 months, the range of fuel cost possibilities is much smaller and thus makes this range of reasonable – and certainly optimal – possibilities much smaller.

As is the case with everything in supply chain management, Flow Path is all about tradeoff analysis. The trickiest part is accurately modeling the cost and service tradeoffs between drivers such as replenishment frequency, end-to-end inventory requirements, and transportation costs.

As Flow Path becomes ingrained as an ongoing supply chain process in retail and other industries, there are issues to work out. For one, while supply chain is responsible for developing capacity plans and executing those plans, merchants, product managers, or sales are responsible for designating the specific seasonal flow paths. Without visibility to actual available capacity, it becomes impossible to meet cross-functional requirements. For Flow Path to be successful, many things need to be aligned, including internal organizations, metrics, communications, visibility, and planning platforms. When this happens, we just might experience the optimal flows.

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