"CEOs haven't shown this much interest in transportation since trucking deregulation in the 1980s," said one long-time transportation industry observer not too long ago. Rising fuel prices, carrier capacity problems and customer demands for 100% on-time service, have made it necessary for companies to reassess their transportation performance at the strategic, tactical, and transactional levels.
Information gained through a thorough assessment process helps identify gaps between current performance and "world-class" performance. Such assessments can close the gaps, develop a roadmap for improvement initiatives and help build the business case for any needed investments.
The data and detail needed for an effective transportation assessment have grown. In the last five years there have been remarkable changes in transportation information technology, people skills and the speed of transportation transactions. Improvements in telecommunications and the Internet only accelerate the need to review transportation performance just to "stay even," never mind the possibility—dear to the heart of every CEO—of using transportation excellence to create a sustainable competitive advantage in the marketplace.
The recent attention to transportation by CEOs is driven by economics. For companies where transportation has been considered a "sunk cost," those costs have risen by 20 to 30% in the last 18 months because of rising rates, fuel surcharges and capacity constraints. A company-wide $20 million freight bill is now $24 to $25 million. Since transportation costs, especially among industrial manufacturers and distributors, are one of the top five expense items (after payroll and raw materials), the latest jump in transportation expenditures is causing many companies to re-think their transportation program and to assess its performance.
Where to begin
Assessing transportation performance begins with the realization that the transportation function needs an assessment process that warrants investment and senior management attention, particularly for larger firms with transportation activity at multiple sites around the globe. The executive who sponsors the transportation assessment must be committed-to the possibility that assessing transportation performance leads to:
- Better control of transportation performance
- Identifying and capturing scale economies in transportation activity
- Better control (and possible reduction) in overall transportation costs, across the company.
The second step in a transportation assessment is to determine the scope of the assessment. For those firms where there is no recent history of assessing transportation performance at any level, the first look ought to be global. Managers at all levels should be asked how operations currently perform against key rules for improving transportation performance. These rules include being committed to a 100% on-time standard, having planned dates and times for pickup and delivery that are communicated to suppliers and customers, and advance communication of service needs with carriers.
As the results of this initial high-level questionnaire are compiled it is important to compare local responses to those at headquarters. Not surprisingly, local transportation staff tend to rate their performance higher than headquarters staff.
This leads to a frequent finding of the initial assessment: Control of local transportation activity and spending may be effective, but tight local control often results in lost scale economies across the company. The transportation bill across the company is higher because local operations managers cannot—and occasionally will not—see the possible scale economies to be gained by collaboration.
As part of the initial assessment, it is necessary to measure transportation activity at each operating location. This too ought to be accomplished using a relatively simple information-gathering tool, a sample of which is shown in figure 1.
These initial assessments will guide the executive sponsor to areas that need the most attention, setting the stage for a more in-depth analysis of facilities where control over transportation activity and costs are most lacking. As these surveys are reviewed, the executive sponsor needs to determine who among his or her staff has the potential to conduct more in-depth assessments and to drive the results of the assessment through to implementation.
For a more in-depth look at the locations or business units, there needs to be a set of standards by which local activity can be measured. These standards need to be objective and quantifiable, as the results will inevitably be challenged by local P&L managers or the senior executive team.
One technique is to establish a set of "best practices" for the company for each of the applicable transportation functions and compare each unit to those best practices. It is equally important to identify inhibitors to best practices.
Throughout the assessment process, it is important to take the time to impart both education and vision. Describing the possibilities of the particular competency and how those possibilities might be relevant to each business unit being assessed is an important task for the assessment team. A graphic portrayal of current status and future state helps the assessment team describe the "gap" and the commentary helps describe the nuances of that gap, as shown in figure 2.
A graphic depiction of the gap between current state and future need becomes one of the building blocks in the assessment process. When each of the competencies at each of the target entities within the company has been assessed, the assessment team then needs to prioritize the needs of the entire firm. The prioritization effort needs to consider both potential benefit/payback and potential cost (in terms of time and dollars). This can be shown graphically as well and becomes the beginning point for both a roadmap for the improvements identified in the assessment and for building a more detailed financial business case.
Rough estimates of costs and benefits need to be converted into a roadmap for implementing the initiatives, and a detailed business case for larger, more expensive initiatives. The development of the roadmap requires consultation outside the transportation function. For example, an initiative to revise driver pay structure would have to include participation and agreement from human resources, finance, payroll, and, for companies with a union driver force, the company attorney or labor negotiator. Early consultation, buy-in and agreement among all of these functions are critical success factors.
When benefits and costs have been calculated, the business case can be presented to senior management for review and approval. It is important to be explicit about the assumptions used to calculate costs and benefits. The remaining task is to convey graphically the expected payback and if required calculate the internal rate of return for the project.
The last step for the assessment team is to create—if one does not already exist—a process for measuring the performance of the transportation function across the company. This means that key performance indicators (KPIs) need to be developed for each level on the organization. Each KPI has to have a data source and an agreed upon definition. Absent an advanced TMS collecting data, attention must be paid to the difficulty of collecting the data needed for metric calculation. Over time these KPIs become the benchmark for measuring the impact of the initiatives and reporting back to senior management on progress towards achieving the stated goals the transportation function across the entire company at the strategic, tactical and transactional levels.
Peter Ward is a senior manager with Hitachi Consulting (www.hitachiconsulting.com). He has more than 20 years experience in directing supply chain performance improvement programs for manufacturers, distributors and retailers.