In cost-conscious times like these freight professionals often turn to familiar sources of savings such as network design and carrier negotiations to trim the organization’s transportation budget. But there are other, less obvious, ways to meet savings goals.
Tender lead time, tender and pick up day of the week, and carrier size preference are all examples of cost-cutting levers that are easy to overlook. A lack of research into these mechanisms over the years has helped to keep them in the background.
Research carried out by Erik Caldwell and Bryan Fisher at the MIT Center for Transportation & Logistics for their M. Eng in Logistics thesis titled “The Impact of Truck Lead Time on Truck Load Transportation Rates,” narrowed this knowledge gap. They analyzed more than one million truckload transactions in partnership with TMC, a division of C.H. Robinson Worldwide Inc, and showed how it is possible for shippers to capture savings by modifying certain business processes.
A key determinant of the cost of transportation is how deep a shipper must tender in its routing guide until a carrier accepts a load. Generally, the least expensive carriers occupy the higher positions in the route guide, and have the first opportunity to accept a tender. The researchers found that on average primary carriers accepted 78% of the tenders reviewed. Acceptance rates decline lower in the guide; fifth-placed carriers accepted loads only 40% of the time.
The more time a carrier had between the tender and pick up day the more likely the first carriers in the routing guide were to accept the load. The decrease in routing guide depth then corresponded to a decrease in the cost per mile paid by shippers that provided longer lead times.
From this observation Caldwell and Fisher concluded that the impact of business policy is actually measured by the effect it has on the likelihood a tender will be accepted, since multiple rejections resulted in increased cost. They found that frequently rejected loads had the greatest impact on the average rate paid by the shippers in the study. This relatively small fraction of the total loads tendered added cost by forcing the shipper to reach deeper into the routing guide. The analysis showed that for loads with three or more days of lead time, much of the impact of these high-rejection shipments was mitigated. This result helped to explain why there was an improvement in cost per mile after five days of lead time.
More specifically, the researchers found that for nine shippers using the same tendering platform, average lead time varied from less than one day to more than five days. The enterprise with the shortest lead time paid a cost penalty of $42 per load, or 4.2% of its annual transportation spend.
The research also looked at how different periods of carrier availability affect freight operations. In the model variant of a market where capacity was tight the penalty for short lead time increased by 40% compared to the original model, whereas it dropped by 50% in the loose-capacity version of the model.
Another interesting result was that tendering at the end of the week became more expensive. Tender and pick up capacity on the weekends incurred an average cost penalty of $23 per load.
So, as you reach into your cost-cutting toolbox don’t neglect the less well-used tools at the bottom of the box. These include items such as increasing average lead time and focusing on the loads responsible for the most expensive cost variances. Another option is altering your Monday-to-Friday work routine. According to the researchers breaking with tradition by introducing a Wednesday-to-Tuesday schedule avoids more costly, end-of-the-week freight activity.
As the research underlines, achieving cost savings does not begin and end with network design and carrier negotiation.
Ways to optimize truckload procurement – including the methods described in this blog – are analyzed in a new Explores report published by the Council of Supply Chain Management Professionals (CSCMP) and authored by Kevin McCarthy and Chris Brady from C. H. Robinson Worldwide. For more information on the Deriving Strategic Advantage from Truckload Procurement Explores report please visit http://cscmp.org/