With transportation accounting for as much as 50 percent of a supply chain's total cost, it is an expense that all companies within the electronics supply chain must continually evaluate for new savings opportunities. For many, efforts to rein in transportation costs typically fall into two categories: reducing the number of shipments made and consolidating suppliers to affect greater economies of scale. These actions may generate some savings, but the biggest opportunity for cost reduction remains largely untapped.
At Avnet Inc. (NYSE: AVT), we have found that a more strategic allocation of shipping requirements among carrier lanes is a much more effective approach to transportation management. Every carrier operates with a network of transportation lanes -- the direct routes between two locations: source and target. The carrier's ability to cost-effectively move goods within those lanes depends on a number of factors, including the concentration of customers within a designated lane and the number of facilities they operate within that lane. As a result, some carriers can operate more efficiently and therefore at a lower cost than others within those same routes or lanes can.
Now, I know that procurement personnel tend to be wary of a supplier that comes in with a significantly lower bid than the competition, and they should be. Cheaper doesn't always turn out to be lowest cost. This is why it is important to do your due diligence and pre-qualify carriers before submitting an RFQ (request for quotation). If you have checked the financials, service track record, etc., then you should have a fair degree of confidence that any supplier invited to bid will be capable of meeting your service standards.
The prospect of evaluating each carrier's lane-specific strengths may sound daunting, but it really can be much simpler than you think. The RFQ process is an excellent tool for this task. When you put together your RFQ, be as specific as possible in terms of target shipping lanes and required transit times. You must also be sure that the carrier's quote includes all associated costs, such as fuel surcharges, which can be calculated differently by each carrier. Don't forget to include service level agreements in the contract, a clearly defined carrier liability statement, and an "out" clause that enables you to terminate a contract without any financial repercussion.
Once contracts are in place, quarterly business reviews will enable you to stay abreast of any changes that might impact a carrier's costs -- and therefore your costs -- both on the upside and downside.
It is important to consider your options and realize that there may be substantial savings out there just waiting to be realized. However, this may not be a one-size-fits-all issue. Avnet can take advantage of these due to our scale that may not be available to medium and small-volume shippers. They may benefit more by leveraging their transportation spend with a single carrier.
Whatever the case, regularly re-evaluating all options of your transportation spend is a task which should not be overlooked.