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Logistics: Huge Gains on Express Lanes

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 {complink 577|Avnet Inc.}, 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.

5 comments on “Logistics: Huge Gains on Express Lanes

  1. AnalyzeThis
    November 1, 2011

    I think everyone reading this would agree that, “regularly re-evaluating all options of your transportation spend is a task which should not be overlooked” is indeed true, it's one of those tasks which is often pushed off until later or buried under more pressing issues and tasks.

    The RFQ process is time-consuming, for one thing… anyhow, long story short, I think partnering with someone can make a whole lot of sense in certain situations. Not only may you be able to take advantage to your partner's scale — as you mention — but there are certain things that you won't need to worry about as much. Enabling you to turn your focus back to those more pressing concerns.

  2. Daniel
    November 2, 2011

    “Reducing the number of shipments made and consolidating suppliers”

    Gerry, you are right. If there is a bulk transportation option or segregating all the orders from different vendors to a particular company can also help them to reduce the logistics cost. I think some of the logistics companies are adding additional fuel surcharges, in additional to the logistical cost.

  3. Jay_Bond
    November 2, 2011

    You have brought up some good points, in certain situations it might be a better to choice to go with a regional carrier or vary carriers based on destinations. By doing some research you might find out that using your large company for every delivery might be costing you more than sending items through different routes.

  4. Barbara Jorgensen
    November 2, 2011

    Gerry–as always, you bring something new to my understanding of the supply chain. When you think about “the shortest distance between two points” it makes sense to take advantage of routes that are heavily used. The airline industry has to some extent used the same philosophy in its hubs. Unfortunately, even if you are slightly outside of those hubs you end up making a connection no matter what. On the flip side, those flights always are the cheapest.

  5. JADEN
    November 17, 2011

    There is this option “Developing Core Carrier Programs”; it is one of the ways to reduce transportation operating costs whereby the companies that leverage their relationships well with their carriers typically experience lower rates and better service.  Core carrier programs focus on shipping volumes on approved carriers that meet an established set of requirements.  Performance metrics are monitored and reviewed with those cariers periodically, and collaborative relationship is developed to improve service and reduce costs.

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