Friday, September 5, 2014

23rd Annual Study of Logistics and Transportation Trends: The transportation tug of war

Results from our annual survey suggest that carriers, driven by a need to maximize profitability, are at a polar opposite with shippers who are focused on reducing costs. This lack of alignment has created a struggle that has resulted in a loss of focus on the bigger prize—being able to compete supply chain to supply chain.
By Mary C. Holcomb, Ph.D., and Karl Manrodt, Ph.D., Contributing Editors
September 01, 2014
The analogies between the game of “tug of war” and the current state offreight transportation management are almost boundless. Increasing transportation costs driven by a host of factors has now created a struggle between shippers and carriers as each side seeks to achieve their goals.
In fact, the results of the 23rd Annual Study of Trends and Issues in Transportation and Logistics neatly define the tussle, where carriers are pulling hard to maximize their profitability while shippers are focused on reducing rising transportation costs.
Shippers are being pulled into higher rate territory as carriers deal with the impact of compliance, a driver shortage, and increased demand—all of which are driving up their costs. And to make the situation worse, constantly changing customer requests coupled with increasing demand uncertainty has created an environment where the only constant is uncertainty.
The Global Recession signaled changes to the operating parameters of the game that most of us didn’t fully understand. It has given temporary advantages to carriers, much like the shippers had in earlier times. Yet, like tug of war, the game results in one winner and one loser. 
Is this the game that carriers and shippers should be playing? Or, should they change the rules of the game and work together to solve problems that affect both of them, thereby allowing both to achieve their goals? What would happen if a team was composed of carriers and shippers working together to solve their mutual problems rather than competing?
The results of our 23rd Annual Study of Trends and Issues in Transportation and Logistics suggest that the winner in the “new normal” business environment will be those companies that pull together in order to achieve their opposing objectives.
This involves two critical facets: establishing the gaps that exist between current and desired future practice and then mutually deciding upon the priority of actions to close them. In other words, carriers and shippers that master the gap will have to determine how they can leverage their knowledge and expertise to collaborate even when they have conflicting goals.
Understanding the current state
All the study respondents share a common view of the challenges presented by the current business environment. The cost to serve (distribution), inventory management, control, and labor costs as well as total landed costs are combining with the factors previously discussed to force changes in the way companies are managing transportation and logistics activities.
It’s now clear that our new world consists of customers demanding shorter order fulfillment cycles, white glove service, and integrated omni-channel strategy to support their purchasing expectations. In order to support these customer requirements, service levels, and offerings must also increase.
While carriers have the capability to provide the desired services at the needed level, it often comes at a cost that many shippers have difficulty accommodating in the current environment of cost reduction. This situation sets the stage for a tug of war between the two groups in that shippers need more in terms of service, but are unwilling—or unable—to obtain the transportation budget to support the additional cost that carriers say the increased levels of service and offerings produce.
In fact, many shippers are asking for cost reductions at the same time that they’re asking for improvement in service. In a marketplace where capacity is tight and carrier costs are increasing due to factors such as the hours-of-service (HOS) rule change and the impact of CSA, a struggle has ensued to find a collaborative point. 
The tug of war atmosphere is made more complicated by the fact that shippers and carriers have diametrically opposite business objectives. The study results show that the primary objective of carriers is profit maximization while the main goal for shippers is cost reduction.
How can two parties achieve success and collaborate under these circumstances? Perhaps the answer is in the two parties finding common ground. Our analysis of this year’s results shows that shippers and carriers are aligned on two key points:
  1. Strategic/core carriers add value to companies through the transportation services they provide.
  2. Strategic/core carriers help companies achieve their business goals and objectives through the transportation services they provide.
Unfortunately, there is one other element on which carriers and shippers had a moderately high level of agreement. Both agree that shippers rely heavily on price when choosing a strategic/core carrier. It’s difficult to be innovative, strategic, and help achieve your customer’s goals while being the lowest cost service provider. 
This gap between shippers and carriers represents a zone of opportunity to change the current tug of war. Instead of pulling against each other, carriers and shippers must work on those areas that will result in lower operating costs for the carrier, while providing better service to end customers.
“This is where strategy really matters,” notes Tommy Barnes, president of Con-way Multimodal, one of this year’s survey analysts. “Companies have to share their strategic plan with the carriers so that they can better meet the needs of the customer. And on the flip side, carriers need to share their plans as well to make sure that there is alignment. Misalignment drives up costs and increases the potential for misunderstandings.”
Mind the gap: Differences that matter
To “mind” means to pay attention or concentrate on something. For shippers, the primary things that they mind are the cost of service and the resulting service they receive for those expenditures.
Data from the annual study show that some substantial shifts in spending have occurred since last year. There were no companies that reported transportation expenditures of less than 1 percent of sales. The results suggest that increasing transportation costs have moved this group to the 1 percent to 2 percent of sales category. Further, companies spending between 4 percent and 5 percent of sales on transportation showed a significant increase from the previous year.
While the year-over-year difference in the >5 percent group points towards a shift, further analysis shows that this difference is not statistically significant and this it is due to changes in the size of companies that participated in the study.
Realistic or not, many shippers expect that spending more money should result in better service—or at a minimum the maintenance of current service levels. The data show mixed performance outcomes. Improvements in service were reported relative to damage, with all modes showing substantial declines in damaged shipments. On-time delivery for truckload (TL) and intermodal declined, with TL reporting the largest drop in on-time delivery year-over-year with a 1.3 percentage point decline from 2013.
The data for two service elements—equipment availability and the turndown ratio—are particularly revealing. TL, LTL, and intermodal providers showed meaningful declines in equipment availability. In the case of TL, this service challenge was also reflected in the turndown ratio that increased substantially.
For the other modes, the turndown ratio declined, which may suggest that carriers are doing a better job of managing their available capacity. The law of supply and demand suggests that this situation will lead to increased cost as each unit of available capacity becomes more valuable in the marketplace.
Mine the gap: Finding “gold”
Results from this year’s annual study further point out why the tug of war between shippers and carriers is not a winning game plan for either party.
It’s clear that both parties agree that price is a major factor when choosing a strategic/core carrier. Further, they agree that many of the transportation services provided are highly standardized, which in turn makes standardization of the processes and procedures more straightforward. These factors point to a commoditization of transportation.
While at first glance commoditization of transportation services may seem like a viable avenue for shippers to reduce costs, it may be more costly in the long run as continuous improvement and differentiation of service are needed to compete. For carriers, commoditization will likely drive the relationship to a more transactional one with an emphasis on price.
However, the study results also reveal where opportunity gaps exist to stop the progression towards commoditization. The opportunities are found in the following statements that shippers widely agreed with:
  • The process of moving to a new strategic/core carrier is not quick and easy.
  • Strategic/core carriers are not the primary source of innovation in transportation services.
Our interpretation of the first point is that the relationship investment that a shipper makes to elevate a carrier to a strategic/core level is intended to be long-term. After being “promoted” to this level, carriers have the opportunity to leverage the partnership.
“This is where the long-term view is so critical,” says Joel Clum, president of CarrierDirect, a research partner in this year’s survey. “Too many times carriers and shippers have taken a transactional view of their business. But this focus will never lead to efficiencies and “wins” in the market. A long-term view gets both parties to think about sustainable solutions and building mechanisms to adapt to a changing environment.”
The ability to leverage the partnership requires a deep understanding on the part of the carrier of what matters most to their strategic customer and then meeting or exceeding those requirements. The penalty for not doing this was also revealed in the study results: the shipper can, and will, switch significant volumes of freight to other strategic/core carriers.
The second opportunity area is one that has risen in importance as transportation costs have increased and the concept of value-add becomes more widely adopted. In the past, offering a quality service at a reasonable price maintained a carrier’s competitiveness in the marketplace. Today, shippers seek transportation partners that can help them improve the efficiency and effectiveness of their organizations.
They require innovative processes that drive down costs and improve productivity. They expect value-added services that will lead to the creation of new business opportunities. The study results indicate that presently strategic/core carriers are not delivering on this need. The message to carriers is simple: If you don’t want to compete on price, you’ll need innovative services and ideas to make your business stand out from the competition.
The last area for minding the gap between carriers and shippers involves a deeper understanding of where the two parties need to work together to succeed in the marketplace. Study participants noted that increasing cost to serve customers, changing customer requirements, and demand uncertainties are causing them to manage transportation and logistics differently than before. Indeed, these conditions make it essential for companies to be able to quickly respond to change as it occurs.
Companies have to be flexible in order to take action as necessary. The study findings indicate two important areas that companies are working on to improve operational flexibility that need innovative input from their strategic carriers—reducing order fulfillment lead times and utilizing multiple modes of transportation.
The study results show that an equal percentage of companies are in the planning and implementation stage of projects or initiatives to reduce order fulfillment lead times. Based on the overall theme of our findings, now is the time for strategic carriers to provide their input to develop processes and procedures that achieve the maximum flexibility possible.
The data indicate that 46 percent of the study participants have already incorporated the use of multiple modes of transportation to increase operational flexibility. For shippers that are in the planning and implementation stage (34 percent), carrier involvement is critical to ensure that transportation is leveraged to the extent possible to achieve both parties’ objectives.
Power to master the gap 
In a tug of war, only one side wins at the expense of the loser. Abraham Lincoln famously noted that “a house divided cannot stand.” The internal warring, bickering, and contentions of a nation makes it weaker and vulnerable to external threats. 
In the same way, supply chains are weakened when its members attempt to gain an advantage over the other,
losing sight of the other competing supply chains on the field. While a shipper or carrier might win in the short term, they neglect to take into account the future consequences of these actions. Further, the current business environment makes the existing atmosphere between carriers and shippers untenable in the long term if both desire to succeed.
Perhaps the most compelling argument for reforming the current relationship between carriers and shippers are the answers to the following questions: Is what we’re doing today actually working? Are we taking cost out of the supply chain? Are we increasing service levels to our customers? Do we really understand what factors drive our partners in the supply chain? Who will lead the way? Even if many of the answers are “yes,” the fact of the matter is that tomorrow’s innovative solutions require collaborative attention today.
Our customary theme for the annual study has been to focus on the Masters of Logistics, or those logistics operations inside companies with greater than $3 billion in annual sales. The way we define this group has been evolving over time from the largest revenue companies to those companies that establish the bar for leading-edge practice across a number of areas such as supply chain visibility, operational flexibility, and service excellence.
The results of this year’s study confirm that the size of company does not make an organization a Master of Logistics. Rather, the findings suggest that the Masters will be those companies that use the power of “minding and mining the gap” between the current and desired state and then mastering how to deliver the best value in the form of service, cost, and innovation to the ultimate customer.
Perhaps mastering the gap is a team effort; or as Ray Kroc used to say: “None of us is as good as all of us.” 
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