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Multi-Modal Management: It’s a Group Effort – A Two-Part Series Privileged & Confidential: A.T. Kearney Only
Part one of two-part series examines transportation challenges and emerging trends in supplyTransportation chain Benefits by Operating Model
What is quickly becoming clear to shippers and carriers is that the U.S. freight industry is fast approaching its “used-by-date” plateau in its ability to further lower cost-to-serve. This industry is converging towards its new equilibrium which promises to be a combination of two models— cross-firm collaboration and modal optimization with an emphasis on sustainability. The new equilibrium promises a $6 billion to $15 billion opportunity in the U.S. alone. And the speed of migration will depend on how rapidly the “first movers,” i.e., the shipper industry titans, gather momentum and provide scale to the new equilibrium. These and other findings are among the main results of an A.T. Kearney study of the U.S. freight industry. Based on a survey of 154 decisionmakers across consumer products,
Procurement Operational Excellence
Fully Integrated Model
Best in class procurement of transportation services Increased leverage with transportation carriers Reduced transportation overhead for Vendor Reduced transportation overhead for Retailer A Standardized operational practices Standardized equipment
Value Sharing
T
he U.S. economy and freight industry are growing again. Overall revenues increased eight percent in 2010, after falling 25 percent in 2009. And while most U.S. organizations are struggling to close the gap between their desired and achieved levels of transportation performance (see figure 2), they don’t consider certain performance metrics—such as carbon footprint— as key to their overall success.
Retail-Centric Model
Benefits
Others
by Arun Kochar, Sean Monahan, Joy Peters, Jeff Ward
Transparency of transportation cost Balanced benefit award between retailers/suppliers Increase ability to set transportation industry standards
Benefits of vertical collaboration models.
food & beverage (F&B) and chemicals manufacturing industries, AMR Research highlighted three primary challenges, amongst several others, which the industry and its participants face: deadhead miles and asset utilization; cost to serve; and sustainability.
Deadhead miles and asset utilization Suppliers, manufacturers, retailers and transportation providers are all looking for ways to further reduce costs but can only make relatively small improvements. In 2010, the U.S. freight industry was estimated to be $655 billion, $523 billion of which was in commercial and private truck loads, according to American Trucking Associations’ “U.S. Freight Transportation Forecast to 2023” report. Deadhead miles accounted for about 10 percent of the mileage for the five major U.S. truck-load carriers, and even higher for private and dedicated fleets over the past five years (see figure 3). Our conservative estimates lead us
5 to believe that completely reducing deadhead miles for commercial and private truck load moves could eliminate at least 64 billion miles of traffic or yield almost $60 billion in incremental revenues for the industry— if the empty mile cost can be captured in service. Part of the reason for these inefficiencies is structural (nature of transportation flows) and part of it is asymmetric information (lack of visibility to combined transportation networks). Which factor contributes to what degree of inefficiency is unknown. A.T. Kearney’s survey of large shippers suggests 10 to 25 percent of this opportunity ($6 billion to $15 billion) can be captured depending on the future operating model of the U.S. freight industry.
Cost to serve Each transportation mode has unique challenges in maintaining the same service levels with fewer resources. Truckload suffers from strict regulations such as hours of
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Integrated Transportation Model
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Establish JV to pool Retailer A-Vendor transportation capacity
The U.S. freight industry’s transportation broker market is analogous to a trading floor on which transportation lanes are traded among freight carriers and shippers. Major players—such as C.H. Robinson Worldwide Inc. and Coyote Logistics LLC—have value propositions which include: real-time visibility to transportation capacity by lane/mode across several carriers and independent owners; access to several shippers’ supply chain networks and the customized requirements; established relationships that match demand and supply for transportation to minimize total cost-toserve; and expertise and state-of-the-art tools to optimize carriers’ and shippers’ supply chains.
C
Offer service or partnership to other vendors / retailers
Managed as a 3 PL Service
Other participating vendors
Sustainability The fact that the transportation sector contributes more than five percent (2,800 tons) of all carbon emissions in the U.S. is not lost on freight industry participants. More than 86 percent of the 150 companies polled have tried to (or plan to) improve their sustainability initiatives. Their options, however, vary in impact and effort required. Some involve the replacement of transportation vehicles while others involve the indirect efforts to reduce congestion.
B Create a value sharing mechanism to allocate benefit based on efficiency contribution
Other participating retailers
service; insurance costs; rising fuel prices; and scarcity of capital to purchase new equipment. Intermodal is more economical than trucking but suffers from delays, product damage and limited network coverage. Air, which benefits from faster and more accurate delivery times, faces high fuel and equipment costs. Less than truckload (LTL), which offers cost advantage relative to air for overnight/ second day deliveries, suffers from high overhead and handling costs.
Capacity of 3PL servicing all members
Integrated transportation model.
in the freight industry, there are still substantial opportunities for U.S. carriers and private fleets to reduce them even more. And reducing deadhead miles has become a multibillion dollar opportunity that spawned two new trends: collaboration and modal optimization. Generally speaking, collaboration refers to developing partnerships among players all along the value chain—both vertically and horizontally. Modal optimization refers to cutting costs and improving efficiency. Total transportation costs fall by building larger and more economical loads across modes or shifting to more economical modes. These trends not only helped companies reduce their deadhead miles but also their costs for overall transportation and other supply chain activities such as storage and handling. And they helped create sustainable solutions by enabling more efficient use of transportation assets.
Emerging trends—collaboration and modal optimization
In addition, there is an opportunity to use collaboration (vertical and horizontal) and modal optimization to improve asset utilization and reduce supply chain costs by up to 30 percent.
While the transportation broker market helped cut deadhead miles
Vertical collaboration refers to partnerships among players
across the value chain, for example, consumer products companies (CPGs) with their raw material suppliers and retailers. The benefits of vertical collaboration include complementary transportation networks, scale and best-practice sharing. To date, the electronics and auto industries have successfully implemented this type of collaboration. Third-party logistics (3PL) provider Verst Group Logistics uses collaborative distribution to transport automotive parts from as many as 15 parts makers to Toyota, General Motors and Chrysler—a process which yielded a 30 percent reduction in supply chain costs. Horizontal collaboration involves partnerships among players within the same layer of the value chain, for example, two CPGs or two retailers. The benefits include scale, improved product mix and similar origin and destination pairs. CPGs have successfully implemented horizontal collaboration in both the U.S. and Europe. DeMet’s Candy Co., The Topps Co. Inc. and SunMaid Growers use a collaborative Kane-run distribution center. 3PL Kane Is Able gives cash rebates to retailers that participate in collaborative distribution. Retailers coordinate orders and manage delivery schedules.
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Average % Deadhead Miles for Major 5 Carriers
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At the same time that freight companies are starting to collaborate, they are also focusing on modal optimization to lower cost-toserve and improve customer service levels. Increasing fuel prices and technological advancements in the transportation equipment and infrastructure industries have accentuated this trend. This shift from single-modal to multi-modal shipments also blurred the lines between mode definitions. For instance, LTL increasingly encroaches on air space for next-day deliveries. Similarly, the greater-than-800 mile threshold no longer holds true for the “intermodal over TL” decision, with line-hauls as short as 600 miles shipped intermodal. DHL rolled out multimodal services from China to overseas markets including the U.S. in July 2010. As part of its goal to reduce cost-to-serve, the company combines air, over-the-road (OTR), rail and ocean into complex multi-stop (yet cheaper) routes for moving cargo from China to the rest of world. It expects to cut its transportation costs 20 to 50 percent by reducing deadhead miles, cost of handling and cost of storage. Modal optimization using multi-modal shipments is gaining momentum because of the increasing pressure to lower costs of transportation. The Dial Corporation (a Henkel company) reported 35 percent cost savings since relying on multi-modal transportation for years now. Dial worked with its suppliers to have chemicals shipped in ISO tank containers by doublestack trains. These containers are drayed to a truck at the destination terminal to be shipped to Dial’s plant, resulting in lower waste and transportation costs. Similarly, pulp and paper industry supplier Eka Chemicals (of AkzoNobel) lowered its transportation costs by shipping products by rail to trans-load facilities and then delivering them to customers by LTL.
14 13 12 11 10 9 8 7 6 2007
Marten J B Hunt Knight Transportation Swift Transportation P.A.M. Transportation Average
2008
2009
2010
Average percentage of deadhead miles for major 5 U.S. carriers.
Operating models of the future
model, a retailer will manage its own transportation network and the part of its suppliers’ transportation networks An operating model based on used to serve that particular retailer collaboration and modal optimization through a joint venture or consortium will best address the industry with suppliers (see figure 9). This challenges. Major benefits of the retail-centric collaboration will cause multimodal approach include improved the retailer’s network to become equipment utilization; reduction of fully optimized, reducing deadhead deadhead miles; reduction in lane rates; miles and increasing asset utilization. lower capacity challenges; reduced These actions will also reduce the total transportation/logistics costs; and carrier’s cost to serve and result in reduction in greenhouse gas emissions. more sustainable solutions. Retailers adopting such models will share Within vertical collaboration, part of the cost-to-serve efficiencies two operating models are vying with their participating suppliers. for advantage: retail-centric and Privileged & Confidential: A.T. Kearney Only However, the suppliers’ remaining integrated transportation. One networks—which might be utilized or both are likely to emerge as to serve other retailers—are likely to viable in the near future as businesses become de-optimized due to a lack in the transportation industry begin of scale, forcing other retailers to to engage in large-scale vertical form their own similar joint venture collaboration. or consortium to avoid becoming marginalized by their competitors. Likely to emerge first, the retailAn integrated transportation model centric model will entail the retail will eventually be the more optimal giants to form exclusive alliances solution since it will look at all with their suppliers. With such a
Top Transportation-Related Performance Gaps(1) 81%
Transportation costs Carrier base performance Supply chain visibility Carbon footprint
62% 64% 47% 63% 48% 44% 43%
Top Transportation Performance Gaps, according to AMR Research.
Importance Performance
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retailers’ and suppliers’ networks in totality. Here, retailers and suppliers form a jointly-owned transportation management business unit that manages the combined transportation networks of all participating retailers and suppliers collectively, as a 3PL would do (see figure 10). The value captured by collectively managing all participants’ networks will be shared based on a variety of metrics including scale and stake in the transportation management business unit. This model will provide the maximum value capture because the transportation networks of a number of retailers and suppliers will be optimized together as opposed to optimizing individual retailers’ networks. This joint optimization will lead to even greater asset utilization and further lowering of cost to serve as compared to the retail-centric model. However, it will require competing retailers and suppliers to develop the level of trust needed to be able to work together. Both vertical collaboration models will help retailers and suppliers capture benefits they would otherwise be unable to capture by continuing to operate as independent entities. However, as figure 11 shows, the integrated model goes a few steps further than the retail-centric model by exercising additional benefit levers and expanding the realm of benefits.
External service provider Horizontal collaboration, which can be implemented in parallel with vertical collaboration, can yield incremental value. One operating model is to appoint an external service provider, i.e., a multi-client 4PL. This is a quick and easy strategy for starting the collaboration process. It entails extending the typical 3PL
Retail-Centric “One”-Network Model A Segment vendor transportation capability serving Retailer A C Manage within a JointVenture or Consortium
B
Combine vendor capabilities servicing Retailer A
Retailer A
D
Capacity servicing other retailers is managed separately
Other Retailers Capacity servicing Retailer A Capacity servicing other retailers
Retail-centric model
role—which is to serve each client individually—to serving all clients involved in a collaboration process as one large client. This option has few integration requirements since the 3PL provides an integrated service for all participants. On the downside, however, 3PLs charge commissions, do not always provide full transparency and sometimes take more than their fair share of value capture—all of which reduces the total value created for the participants. Nonetheless, it is a good option for getting the collaboration process started.
Joint venture This option provides higher value capture than can be achieved by appointing a multi-client 4PL but it demands a higher level of integration among the transportation functions of the participating entities. Eliminating an external 3PL service provider leaves higher savings to be shared among the participating entities. However, doing so requires several enablers including data transparency; coordination of bidding
cycles; standardization of systems; and above all, a certain level of trust. Compared to a 4PL, this option is a more evolved state of collaboration that has its inherent advantages but may take time to mature.
Benefits reconfirmed The operating model discussed in this paper is sustainable for two reasons: there is a monetary component and an opportunity for all concerned parties—shippers, carriers and 3PL providers—to benefit. What is required, however, is the trust and willingness to work together, especially on behalf of shippers. Look for part two of our series in September, which will cover the seven best practices for multi-modal operation. Arun Kochar, Manager, A.T. Kearney can be reached at arun.kochar@atkearney. com. Sean Monahan, Partner, A.T. Kearney can be reached at sean.monahan@atkearney. com. Joy Peters, Principal, A.T. Kearney, can be reached at
[email protected]. Jeff Ward, Partner, A.T. Kearney can be reached at
[email protected].
Reprinted with permission from Supply & Demand Chain Executive, July 12, 2012. © Cygnus Business Media, Inc. All Rights Reserved.
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Multi-Modal Management
Seven Ways to Multimodal Hemera/Thinkstock
Part Two of the series discusses how to adopt best practices to improve asset utilization, lower costto-serve and reduce carbon footprint By Arun Kochar, Sean Monahan, Joy Peters, Jeff Ward
T
he costs and efficiencies of multimodal—moving products by combining air, rail, road and ocean transportation—are recognized by many carriers and third-party logistics (3PLs) providers, as discussed last month in the first part of this series: “Multi-Modal Management: It’s a Group Effort.” But several food & beverage (F&B) transportation companies reveal that less than 40 percent of companies make sincere efforts to institute any modal optimization initiatives, according to 2009 data from AMR Research. To improve asset utilization, lower cost-to-serve and reduce carbon footprint, companies and 3PLs need to adopt best practices. Additionally, 3PLs must be involved in multi-party collaboration to extend best-in-class modal optimization practices across a broader supply chain network. In continuation of our two-part series, this month we identify seven best practices within the multi-modal approach of moving products; and the implications of the operating model for shippers, carriers and 3PLs. Parcel Case Strapping—Multiple parcel orders for the same customers are strapped and shipped to the customer as a single shipment. This
parcel aggregation model often reduces cost because there is an optimal weight/cube bracket within which a parcel is most economical. Shipments that are too light or small and fall outside this bracket are more expensive if shipped independently. Parcel/LTL Minimum Charge Analysis—Parcel costs and less than truckload (LTL) minimum charges are compared for each shipment and shipped using the cheaper mode. Parcel Zone Jumping—Parcel shipments for certain expensive zones
Once the advantages of multi-modal operation are recognized, the industry will see a ‘snowballing’ effect–a landslide of alliances will form. can be shipped at a lower cost by using a combination of truckload (TL) and parcel. Parcel shipments to the same zone are consolidated and shipped via TL to the zone, cross-docked and delivered to customers via a series of parcel shipments. This helps transporting goods for a majority of the distance via TL, which is more economical than parcel because it avoids parcel shipments’ expensive zones.
Cross Dock/Pooling—LTL shipments going to the same three- or five-digit zip codes can be pooled at the origin to build TL loads, shipped to the destination zip codes, crossdocked there and finally delivered to end customers via LTL shipments. This helps to transport the goods for the majority of the distance via TL, which is more economical than LTL. Aggregation—Aggregation aims at consolidating orders and shipments between the same origin and destination points to build larger shipments to customers without changing modes, e.g., shipping fewer LTL shipments in heavier LTL weight brackets as opposed to shipping a high number of LTL shipments in lighter LTL weight brackets. Similarly, shipping fewer and fuller partial TL loads as opposed to a higher number of and less-full partial TL shipments. Consolidation/Co-Loading— This is similar to the aggregation best practice with the difference of consolidating LTL and partial TL shipments into full TL shipments. Continuous Move Routing—This best practice helps convert partial TL loads to full TL loads and minimizes the deadhead miles. Instead of going from point A to point B and back to point A, continuous move routing builds routes such as A to B to C and
Multi-Modal Management
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Modal Optimization – Best Practices
ultimately back to A. The interim stops can be either for making customer deliveries or picking up loads from suppliers to be carried back to point A.
Adoption impact on shippers, carriers & 3PLs Once the advantages of multi-modal operation are recognized, the industry will see a “snowballing” effect, i.e., after the first few successful collaborative alliances are established, a landslide of alliances will form. The following looks at the implications on shippers, carriers and 3PLs. Shippers—Shippers have much to gain. Their most tangible benefit will be lower cost of transportation as a result of both collaboration and modal optimization. Collaboration will lower lane rates and help reduce transportation overhead costs of individual organizations, as the level of collaboration increases and the transportation function is increasingly centrally-managed across all participating shipper organizations. Another less tangible but important advantage is the ability of corporations to focus on their primary businesses. Having off-loaded the transportation function to the internal group created by the collaborating parties, or to the external 3PL hired by the parties, companies can focus on their core competencies such as manufacturing, new product design or marketing. In addition, shipper organizations can better meet their sustainability mandates by playing an active role in reducing deadhead miles and increasing asset utilization—which will reduce the total miles traveled. Sustainability benefits will not be limited to a lower carbon footprint but also will extend to other realms, such as less congestion, noise pollution and needed infrastructure. Shipper organizations
Targeted Mode Best Practice
1 Parcel Case Strapping
Objective
Parcel/ LTL Small Min Charge Mark
LTL Mid Mark
TL High Mark
< Full
Build Larger Loads
X
Mode Shift (Parcel -> LTL, LTL -> Parcel)
X
3 Parcel Zone Jumping
Mode Shift (Parcel -> TL + Parcel)
X
4 Cross Dock/Pooling
Mode Shift (LTL -> TL + LTL)
X
X
5 Aggregation
Build Larger Loads
X
X
X
X
X
X
X
2
Parcel/LTL Min Charge Analysis
6
Consolidation/ Co-loading
Mode Shift (LTL -> TL)
7
Continuous Move Routing
Mode Shift (TL -> “Tour” Mode TL)
X
Full
X
Employ multi-modal best practices for transportation operation success.
can achieve all of this and maintain their competitive differentiation as value sharing in collaborative alliances is based on the individual contributions of each organization—contributions based on metrics such as scale and network footprint. Carriers, private fleets and 3PLs— Carriers and private fleets will accrue the majority of benefits, which will then be shared with shippers. To start with, collaboration will help carriers and private fleets minimize their deadhead miles and capture incremental revenue with almost the same total miles traveled. The incremental fixed costs associated with capturing this incremental revenue opportunity will be insignificant. Hence, the impact on the bottom line will be substantial, providing these organizations an opportunity to reduce their cost-toserve and their lane rates. Similarly, modal optimization will reduce carriers’ and private fleets’ cost-to-serve, as well as improve their asset utilization and lower their capex needs. Similar to shipper organizations, carriers and private fleets will also be able to meet their sustainability goals. 3PL providers will be positioned for a unique opportunity. As mentioned earlier, shipper
organizations are likely to appoint 3PLs for multi-party collaboration--at least during initial stages of collaboration as they test the waters and build trust. Thus, 3PLs will have the opportunity to maintain their roles and become indispensable. Key success factors for 3PLs will be seamlessly integrating disparate systems of shipper organizations and working with the different cultures of various organizations. If 3PLs are able to display enough value capture for the collaborating parties, minus 3PL fees, shipper organizations will be hooked. ■ Arun Kochar, Manager, A.T. Kearney can be reached at arun.kochar@ atkearney.com. Sean Monahan, Partner, A.T. Kearney can be reached at
[email protected].
Joy Peters, Principal, A.T. Kearney, can be reached at
[email protected]. Jeff Ward, Partner, A.T. Kearney can be reached at
[email protected].
Reprinted with permission from Supply & Demand Chain Executive, September 2012. © Cygnus Business Media, Inc. All Rights Reserved.
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