Why do companies overspend for logistics?

Why do companies overspend for logistics

There's a myth prevalent among large companies that the bigger you are, the better you do on prices. Not so, says Tom Mulherin, president of New England Cost Containment Inc. (www.necostcontainment.com). Less-than- truckload (LTL) carriers pay attention to your volumes, but small package pricing is very negotiable and the little guy tends to do as well as the larger company.

Ocean pricing, however, is a narrow band across the board, with neither large nor small shippers seeing much leverage.

Recently, parcel carriers got what appeared to be a small increase of 1.9%, but the actual cost impact was substantially more because of increases in other areas like accessorials, Mulherin notes. One solution he urges is packaging improvements — the benefit comes from increased cube utilization.

According to Mulherin, who spoke at the recent Logistics & Supply Chain Forum, there are two standards for purchases: one for material, one for carriers. But, transportation purchases have not had the rigorous process many organizations apply to materials procurement, he points out. “It's a matter of, ‘He gave me a 5% discount, so let's switch.'”

The Center for Advanced Purchasing Studies (www.capsresearch.org) has studied purchasing patterns and concludes a high percentage of purchasing takes place outside of the purchasing department. It seems clear from Mulherin's comments that transportation purchasing is often handled by people lacking in transportation expertise.

One solution is organizational integration, which is easier to achieve if you stick to simple metrics, Mulherin observes. Make measurements easy to understand, ensure they encourage appropriate behavior, measure only key performance indicators, and ask yourself if the benefits of reporting metrics outweigh the cost of reporting them, he suggests. And when making a change, ensure that the change will have a positive impact on at least one critical cost area.

Keep in mind that changing a supplier is a change in the organization, he cautions. Mulherin's point is that suppliers are integrated into the cost structure and the operations of the organization, and making a change will have some ripple effects. Resistance to new supplies is often the result of a lack of ownership for the cost savings the change would bring. In addition, long-standing supplier relationships and “back door selling” techniques used by a supplier tend to foster resistance to change.

Working inside the organization to effect change is a delicate balance of selling hard and soft benefits and involving users in the choice — including developing and rating supplier qualifications, site visits and ownership of the result. LT

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July, 2004

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