Why do Companies Overspend for Logistics?

June 7, 2004
Onboard the Norwegian Dawn, delegates to the Logistics Forum received a basic outline of why companies overspend for logistics from Tom Mulherin, president

Onboard the Norwegian Dawn, delegates to the Logistics Forum received a basic outline of why companies overspend for logistics from Tom Mulherin, president of New England Cost Containment Inc. The reasons included difficulties with change management and the volume myth.

Organizational integration is easier with simple metrics, said Mulherin. 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 explained. 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 cautioned. Mulherin's point is that suppliers are integrated into the cost structure and the operations of the organization and making a change will affect a number of facets of both. 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.

There's also a myth prevalent among large companies that the bigger you are, the better you do on prices, said Mulherin. Less-than-truckload carriers pay attention to your volumes, he says, 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, said Mulherin. One solution he urged was packaging improvements. The benefit comes from increased cube utilization.

Mulherin concludes that 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 Management 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 transportation purchasing is often handled far from the transportation expertise. We've seen a greater sharing of information, but not liability, said Mulherin. He uses a personal anecdote from his corporate career where his department embarked on a rigorous cost containment effort only to have the entire savings erased by a bad sales decision where a buyer offered ten cents more if the company would cover the shipping costs. The part his company was selling cost over a dollar to ship, Mulherin said, virtually eliminating the benefits of his department's efforts to cut costs, hence Mulherin's argument for sharing both information and accountability.