Posts in category: News Coverage

Geoffrey Milsom of Consulting Firm enVista Offers Other Ideas to Take Out Freight Costs

In his First Thoughts column last week, SCDigest editor Dan Gilmore offered a number of ideas – some of them a bit out of the box – for reducing transportation costs. (See Smart Ideas for Reducing Transport Costs.)
Of course, soaring transportation costs are playing havoc with logistics budgets and even corporate profits, with a growign number of companies citing cost and capacity issues as impacting the bottom line.
Supply Chain Digest Says…
A constant struggle is understanding true fleet costs compared to truckload pricing contracts, but that aside, levering the fleet is most often the lower cost option.
What do you say?
Click here to send us your comments
Click here to see reader feedback
One idea Gilmore cited in his column came from Geoffrey Milsom, a senior director at consulting firm enVista. That idea – relative to balancing spot and contract market usage – was actually one of a number of good ideas Milson provided via email.

Here are the rest:

Strategic Ideas

General Conversations: We have been asked by several very large shippers recently to help them address the rising (and theoretically) unavoidable cost increases in transportation, particularly in the truckload segment, on how they can address the rising costs due to the capacity crunch.
Our short answer is that you cannot beat the market on an on-going basis, but you can focus on “moving freight differently” and re-thinking your sourcing strategies, optimization, modal-shift, TMS-supported processes, carrier relationships, and the operation things that follow. The longer answer involves not asking us to provide an outlook to predict the truckload market trends to tell the CFO that this broader market issues are unsolvable at the shipper level.

Network Design: The number 1 driver of transportation cost is the location of facilities (suppliers, DCs, and customers). While moving these, particularly for manufacturing, is very difficult, the lane pairs, mileage, and associated cost models (specific to LTL and parcel) creates a larger cost gap than just the modal decision once these points are fixed. The decision on where to put a facility then requires baking in more than just transportation cost (labor, real estate, inventory, etc.), though calculating these in unison can drive the most optimal total landed cost to the customer, while also adding in the service component, which has been disrupted by Amazon and other on-line only retailers.

Operational/Tactical

Tactical Sourcing: We have been working with shippers across several verticals this year on how to tactically source lanes, with and without TMSs implemented. We have found, through analyzing their historical truckload shipment data compared to market spot and market contract rates, that shippers have a very hard time establishing the optimal mix on their lanes.

What this means is they “play” in the spot market when they shouldn’t, and don’t when they should. It’s unrealistic for any shipper to achieve the optimal mix (hindsight being 20/20), but our shipper clients have a tendency to miss by greater than 50% of the time. The point of the story is that if shippers can move to a more real-time understanding of the markets, supported by strong process design plus strong TMS applications, they can do a better job mitigating their cost increases.

Footwear is walking away with consumer dollars online. Revenue from online footwear sales will jump 9.1 percent in 2018, predicts industry researcher IBISWorld. Between now and 2023, it expects to see continued growth, although at a lower annual rate of 6.3 percent.

Rising consumer spending in general, improved security and accessibility for online shopping, and traditional brick-and-mortar retailers adding e-commerce to re-capture sales lost to online-only retailers attributes to the growth.

“Like other e-commerce industries, the growth of online shoe sales has been positively influenced by the increasing accessibility of mobile internet connections,” says IBISWorld’s Online Shoe Sales Report in the U.S., released earlier in 2018. “The easier and more affordable it is to connect to the internet, the more accessible internet retailers are, making consumers more likely to purchase from online stores.”

Despite that growth, online footwear retailers still face many challenges. Thanks to the Amazon effect, consumers expect free shipping and returns. And because shoppers often order more than one size because of concerns about fit, the return rate can be as high as 35 percent—three times that of e-commerce in general. That makes shipping a significant expense that eats into profitability.

UPS recently implemented a brand-new audit fee for shipping charge corrections. This new fee will be assessed if the average shipping charge correction in a week is greater than five dollars. If a shipper exceeds this limit, UPS will charge them the greater of one dollar per correction or six percent of their total corrections that week. These terms mean that for every shipping charge correction a shipper has that exceeds five dollars, it brings them closer to being hit by this new fee, while shipping charge corrections less than five dollars can help offset some of the larger corrections. For example, take two hypothetical shippers:

Shipper A: $100 in shipping charge corrections with 50 total corrections; $2 per correction

Shipper B: $2 in shipping charge corrections with one total correction; $2 per correction

Both shippers have an average of two dollars per correction, so they would not be eligible for the fee. Now let’s add one correction for $10 to both shippers:

Shipper A: $110 in shipping charge corrections with 51 total corrections; $2.16 per correction

Shipper B: $12 in shipping charge corrections with two total corrections; $6 per correction

Shipper A is still below the threshold and would not be assessed the fee, but now Shipper B is above the threshold and would be eligible for the fee. This is because Shipper A had quite a few small corrections that helped offset the $10 correction, while Shipper B did not.

Since the triggers for this fee are corrections that are high dollar values and not the number of corrections, we need to determine what causes large shipping charge corrections. Let’s look at a few hypothetical shipments:

The first two shipments are identical packages, with the shippers in both scenarios not entering any dimensions for their packages. The only difference is the second package has negotiated discounts and a higher dim divisor. This allows the second package to remain under the five dollar threshold, while the first package exceeds it by more than eight dollars.

The third shipment has an entered length that is off by five inches, but everything else is entered accurately. However, the shipping charge correction amount ends up being just under $100! This is because the five inches is the difference between being eligible for a large package surcharge or not. Large package surcharges get assessed an $80 fee, as well as a minimum billed weight of 90 lbs. So even though this shipper has negotiated discounts, a high dimensional divisor, and the length was only off by five inches, they end up with a $99 shipping charge correction.

In the fourth scenario, the shipper has negotiated discounts, and the difference in weight is only five pounds. However, since the package is using an expensive service and zone, the correction amount ends up being well over the five dollar limit. All these examples highlight a few key points:

Inaccurately manifesting dimensions (or failing to manifest dimensions at all) can lead to large shipping charge corrections due to dimensional weight.
Negotiating strong discounts, as well as dimensional divisors, can help mitigate the impact of shipping charge corrections.
Mistakes (even small mistakes) on packages that lead to accessorials such as large package surcharges, additional handling charges, or over maximum limit fees can lead to large shipping charge corrections.
Mistakes on packages using priority services or expensive zones will lead to much higher shipping charge corrections.

If you notice you have shipments that are having corrections with large weight discrepancies, corrections that lead to accessorials being applied, or corrections on expensive services or zones, you could see your shipping costs increase because of this new fee. The most straightforward way to mitigate this new audit fee would be to accurately upload weight and dimensions for packages. In addition to this, shippers can limit the severity of shipping charge corrections by negotiating a custom dimensional divisor, strong base and earned discounts, and strong discounts on accessorial fees that are based on dimensions — such as large package surcharges, over maximum limit fees, and additional handling fees. Shippers could also take a more direct negotiating approach and negotiate the actual audit fee itself. As always, it is important have strong audit practices in place to ensure UPS accurately bills any shipping charge corrections and to ensure the new audit fee is billed accurately.

Keegan Leisz is a Parcel Audit Analyst at enVista, a global consulting and software solutions firm. In his role, Keegan is responsible for global freight auditing and specializes in analytics. You can contact him at kleisz@envistacorp.com.

Online truck brokerageConvoy has rolled out the latest version of a software product that helps shippers avoid booking their freight through the volatile and expensive spot market by generating a real-time index of carriers with available capacity, the firm said July 31.

Seattle-based Convoy has been testing its Dynamic Backup product through pilot projects with several shippers and is now unveiling the platform for public use, ConvoySenior Product Manager Himani Jain said in an interview.

The launch is the latest effort by Convoy to use technology to disrupt the traditional brokerage model by automating many steps in the process of matching loads and carriers. Investors have powered that growing “Uber for trucking” sector by funding startup firms with capital such as the $62 million Convoy raised in 2017, just weeks after rival freight marketplace Transfix raised $42 million.

Convoy has timed the release of its Dynamic Backup product as shippers struggle with some of the tightest capacity conditions and fastest rising rates in freight industry history. “In conversations with shippers, we kept hearing that the process of managing routing guides is pretty painful,” Jain said.

Despite those challenging business conditions, shippers are still using traditional, decades-old methods for finding capacity, Jain said. Shippers issue requests for proposals (RFPs) to carriers and brokers, then rank the replies by metrics including price and on-time performance. But since the bids are often seen as handshake agreements, many carriers reject the loads they had pledged to carry, she said.

“Shippers usually get 70 to 80 percent compliance, but it can be much lower. The market is dynamic and volatile, so either [carriers] don’t have the capacity or they don’t have that capacity at the rate agreed.” And if enough carriers reject a load, shippers are forced to rely on the spot market, which is more expensive and less predictable, she said.

As an alternative to that scenario, Convoy says its Dynamic Backup platform builds routing guides from real-time, guaranteed prices for contractual freight, instead of using data generated from static bids that quickly become outdated as volatile market conditions change, Jain said in a recent blog post.

Convoy generates its revenue by “baking in” a transactional percentage fee that is attached to the truck rates it generates, she said. Other technology providers could theoretically provide a similar service, but they would have to recreate two of the critical software tools that Convoy uses to manage the process, she said: A real-time pricing data model that determines the current market price, and a relevance model that finds the best available truck for the job.

Convoy says it is in talks with three transportation management system (TMS) providers to offer its service through those platforms, although shippers can currently use Dynamic Backup by extracting information from their own software systems.

Supporting a connection to shippers’ TMS platforms through integrations with application programming interfaces (APIs) will be key to the product’s success, said Jesse Gates, a principal consultant with the Carmel, Ind.-based consulting firm Envista LLC, specializing in transportation systems strategy and network design.

To help shippers identify current market conditions, a lot of TMS vendors and service providers like load board provider DAT Solutions LLC currently offer benchmark rates to help shippers understand early in the routing guide process whether the spot market is the place they want to be, Gates said.

If it can build those data connections, Convoy’s product could be valuable as long as tight capacity conditions persist and spot market rates remain significantly higher than contract prices. The product could also find a market among smaller shippers that lack access to the benchmark rates and reverse auctions that big players use to identify the lowest rates each day, he said.