In the second of a series of articles on buying domestic transport, 3T’s CEO Steve Twydell, CEO of the 3T Group (www.3t-europe.com) looks how domestic transport is measured and the cost of achieving high service levels.
Utilisation and optimisation should be the main drivers of transport management systems. However, getting the commercial balance right will vary from company to company.
Using domestic transport (your own fleet or a carrier who allocates trucks specifically for your deliveries), you have the prime leg of the journey. However, this comes at a cost – circa 30% above that of common user transport approach. Using a carrier on just a back haul basis can be risky because there are many more things that can go wrong before the vehicle collects and delivers your goods. This doesn’t make it a bad solution but there needs to be an understanding of the potential risks, benefits and cost as well as balance in the proportion of prime and secondary moves.
What does service mean to you?
It’s important to clarify what service means to your organisation i.e. what does service really mean? What are service requirements and what is the associated cost? This brings us to the thorny issue of key performance indicators (KPIs).
KPIs are usually the cornerstone of any performance related item in a contract and so it is important that they are fully understood. Unfortunately, this is often not the case.
Accurately measuring delivery performance
At 3T we manage in excess of 5000 shipments a day and have been doing so for 15 years. In our experience, it is very difficult to achieve a rate of +98% of deliveries on time. However, many people believe that they are achieving at least 99.5% – or even 100%. In reality, this is rarely the case. It is actually far more likely that they are failing to accurately measure what is really going on.
To prove this theory, let’s look at the figures and the measurement criteria more closely.
Firstly, 100% of what? Many KPIs about delivery performance are taken from customer complaints. However, an absence of complaints doesn’t necessarily mean that all your shipments are arriving on time; just that the number of complaints equate to the 99% criteria. For example, a fleet manager once told me (and his board), that he regularly achieves 90% utilisation. However, I could plainly see many vehicles lying idle. On clarifying the measurement criteria, it became clear that levels had been overestimated. Firstly, the 90% applied only to when vehicles were on the road (around two thirds of the time that a carrier would use a vehicle). Furthermore, it soon became clear that he measured the utilisation on a one way basis only with vehicles returning empty. So, when the true KPI was measured, utilisation was closer to 30%-33% compared to a probable carrier utilisation of around 80%-90% on full day shifts. His board believed he was getting good utilisation when the reality was just the opposite.
Understanding your transport criteria
Your measurement criteria have to be understood and accepted by everybody, which is harder than it sounds. Transport is a changeable and dynamic process. Dispatch departments and goods-in departments often talk to each other to rearrange deliveries and collections, and it is very difficult to capture every statistical change that occurs during the day. There are just so many things that can go wrong: from road works to late collections and goods-in departments holding a vehicle without giving a reason.
The reality is, true +98% utilisation is very difficult (but not impossible) to achieve. However, the cost of exceeding 98% is significant, as the graph below, based on real customer data, shows.
There is a commercial argument for the service levels you should have. As the graph demonstrates, if you require a very high service level i.e. 99%+, whatever transport option you use will become a dedicated solution. The jump in cost from 98% to 99% is double – and the jump from 99% to 99.8% is doubled again. Put another way, it costs at least 5 times more to ship products from a 98% service level to the best you could theoretically achieve. The average cost of domestic transport is circa 5% of turnover, so calculate how much more you have to sell to cover a 5% increase in your bottom line (i.e. 98% to 99%).
Applying the rule to JIT
When considering just in time operations, the application of this rule will vary depending on the type of operation. For example, the line going down is less expensive by the minute for JIT in food manufacturing than for a car manufacturer. When dealing with hundreds of thousands of pounds’ worth of car components, the contingencies obviously become greater. I have worked with operations on the JIT of car manufacturing where the contingency plan has included the use of helicopters to ferry parts in to keep the production line going. However, this simply wouldn’t occur if dealing with packaging in a food manufacturing operation. The amount of stock held is linked to the value of the product, as well the value of the contingency that is required against the service you are providing.
The bottom line is, service is very difficult to measure accurately. So what are the criteria for actually buying or understanding your service?
The golden rules
Buying transport is a three dimensional process. The very first decision is determining the true service that is acceptable to you: what are the cost parameters of providing that service and understanding the true cost of providing +99.5% service? Once these questions have been answered, how do you find the correct supplier and method for your transport? This is best approached in steps rather than trying to do everything at once. For example, companies may put out a tender and then struggle to achieve a like for like comparison. The golden rule is: agree, understand and accept service level requirements and commercial constraints before finding a supplier.
Reducing rates or cost?
Obviously, saving money is a key driver but it does beg the question: do you want to reduce your rates or cost? When transport procurement is carried out by professional buyers, they will focus on the rate as this is how they are judged. Whilst reducing rates by 10% is a great result, it doesn’t mean you have reduced costs. In fact, the rate table can often cause confusion: some rates may be reduced by 20% and others not at all. Unsurprisingly, the rates for the lanes that you use may not be reduced – and could even increase. This means that the confusion around the rate table often fails to give a true rate saving.
Reducing cost is not actually attributed to reducing rates. The two areas affected by cost are actually utilisation of vehicles and administration.
Vehicle utilisation yields the biggest savings and efficiencies. It doesn’t take a rocket scientist to understand that filling a vehicle throughout its operational unit period (a shift or a day in the life of that vehicle), will ensure optimum value from a cost point of view.
Looking closely at the unit period, there are two sets of people able to influence utilisation to ensure maximum usage: those in control of outbound loads and those in control of inbound loads or the vehicle’s next load. From a customer’s point of view, if undertaking a delivery, vehicle utilisation is very much based on what you can achieve.
For example, (assuming the next load is a return to base), for a full truck load, can you optimise and utilise the vehicle on the outbound journey? It is then the vehicle owner’s responsibility to ensure optimisation for the inbound journey. The vehicle owner will often be a carrier, although it could also be your own fleet. For example, the customer is optimising vehicle utilisation on the outbound leg and the carrier is also trying to utilise that vehicle on the return journey. The carrier wants to cover the costs for that operational unit; if the customer is affecting the outbound journey, they want to have synergy with the carrier who is optimising the inbound journey. If you have a fixed fleet or deal with one particular carrier, it is difficult to get this flexibility and it is likely that the carrier will be subcontracting to achieve flexibility. So, if using carriers, you need to have the best mix, with a synergy with your operation and specific lanes. For nationwide delivery, you will need a greater mix of carriers and synergy will be essential.
For the majority of carriers that requires a level of technical competence rarely available.
This is broken down into two areas: what you can do as a customer or a user of transport, and what the transport provider can do. If running your own fleet, as the transport provider, how do you reduce the cost of administration? The simplest solution is automation of absolutely everything. Administration and management of a carrier’s business is circa 10% of their cost. If this can be reduced by 50%, that constitutes a 5% reduction in rates. The reality is that carriers are not making much money in today’s market; most are struggling to make more than 4% profit. This is just about acceptable for a small business, but for a corporation would be way below what is expected. Unfortunately, as most regional carriers are managed businesses, there is no real desire to invest in the technology that could automate tasks – and thus reduce their costs.
When purchasing transport, people mostly think about trucks, rates, drivers and dispatch. The importance of the transport management system (TMS) is often misunderstood. It is assumed that it is a module within a customer’s ERP system, or that it can be done on the back of a fag packet, like so many transport planning type roles are. However, with a transport spend that could account for 5%-10% of your turnover, it makes commercial sense to use one of the most sophisticated systems around, capable of optimising routing and planning systems to reduce cost. Furthermore, the range and functionality of transport management systems on the market has vastly increased, making it a more of a necessity than a luxury.
For information about 3T’s range of domestic transport management solutions, call us on + 44 (0) 116 2824 111.