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Transportation Strategy Session

May 8, 2012
Three transportation managers from three different industries share how they cope with one constant challenge: change.
“Transportation Managers” are outgrowing that title. In these complex times, that two-word designation is rather limiting. The people answering to it are also customer service managers, packaging specialists and sometimes, even political scientists. Those words might not be in their titles, but such functions are in their strategies.

This report will introduce you to three logistics professionals whose jobs have changed radically in the last few years to help their companies cope with turbulent times.

Combine Visibility with Timing

Caterpillar can take pride in being an anomaly. While meeting the needs of earth-moving and mining equipment users working in troubled economies around the globe, the company has been enjoying robust health. Last year business grew 20%. Its revenue was about $58 billion and it expects to reach $70 billion this year. Its products are used mostly in the construction industry and also at the mine sites of commodities producers that are driven by price. It takes smart logistics management to develop global transportation and distribution strategies that keep your company financially healthy in these environments.

That’s Tom France’s job. As director of global transportation for Caterpillar, he manages a team that has to be a master of market timing.

“There’s a threshold cost for what it takes to get those materials out of the ground,” he explains. “As long as that commodity is above threshold those companies want to go 24/7 because sooner or later it will fall below that and they’ll shut down. Our machines have to be available when the customer needs them. If not they’ll find another alternative. Right now [where logistics decisions are concerned], everything has to be a home run.”

When France first started as a transportation manager he could design a distribution network that would be good for 15 years. Now a network serves its market for three to five years before needing a redesign. Someone in France’s position needs flexible options to constantly change their network.

“We don’t want a lot of transportation assets tied up that we’re stuck with as our network changes,” he says. “It’s better to have flexible solutions through third parties and leased space that we can quickly change.”

He boils his strategy down to the following musts:

  • Establish visibility throughout your network. That’s the only way you’ll know when changes are needed. He recommends applying cloud-based tools.
  • Be asset light, in case you need to change your network quickly.
  • Design big hub-and-spoke networks because transportation responds to scale.
  • Spend time getting your story out to legislators so they understand the needs of your business.

That last item is not an aspect of the job France relishes, but it’s a necessary evil if this country’s creaking transportation infrastructure is going to be fixed.

“Inventory in transit is a cash drain on your company, so velocity and getting turns so you don’t keep things on your books is more important than ever,” he says. “For a company like Caterpillar, that on any given day has over $1 billion in parts either on the water, in the air or in a truck, we would do anything to take one day out of the system. But as a top 10 exporter, it’s difficult to be competitive when our infrastructure doesn’t allow us to move things quickly. We’re competing with emerging markets like China that has been developing an updated infrastructure.”

He cites U.S. ports as one of the biggest challenges. Even with the 2014 opening of an expanded Panama Canal and the prospect of its handling larger ships with bigger payloads, France doesn’t believe that most ports in the Eastern U.S. will be able to accommodate those ships.

“Harbor deepening projects have been delayed forever,” he says. “That makes us less competitive compared to the rest of the world. And we’re competing against worldwide companies.”

That’s why France is focusing on designing bigger hub-and-spoke networks—and to flow product out of fewer ports. There are risks to that, he admits, but he’s trying to make his network’s nodes and flows flexible enough so he can react quickly when he needs to change strategy.

Be a Supply Chain Facilitator

James Bach knows something about changing strategies. As vice president of inventory management for the Cardinal Health Medical Segment, he’s responsible not only for getting medical products to customers, but acting as a facilitator between those customers and product vendors.

In addition to delivering medical-surgical products to ambulatory care centers, physician offices, clinical laboratories and hospitals across the U.S. and Canada, the Cardinal Health Medical segment also manufactures high-volume replenishable products such as gloves, gowns, surgical drapes, scrubs and fluid management products. In addition, the Medical segment includes the Cardinal Health surgical and procedural kitting operations that assemble all necessary single-use surgical products and apparel for specific procedures into one kit.

“The traditional focus of just being a middle man isn’t good enough anymore,” he says. “You really need to be a facilitator and help simplify processes such as pricing and invoicing. That’s why we created a new group, ILS, Integrated Logistics Services.”

As a medical business and a wholesaler Cardinal’s primary focus has been getting products from DC to customer. But because it is also a manufacturer and has a distribution network, it has relationships with lots of carriers. This new group leverages those relationships as well as the Cardinal Health distribution infrastructure into services for vendors.

“As we have trucks coming into our redistribution centers and volume moving into our DCs, we offer both cross-dock facilities and inventory facilities to our vendors who can only get product to us using parcel or LTL,” Bach explains. “Now we say, ‘Ship it to us in full truckload and we’ll handle that last couple hundred miles for you.’ We can gainshare in that because we’re going to a more optimum mode. I get the benefits of more velocity going through with my carriers and get a better cost for both us and the vendors.”

Supply chain relationships for Cardinal are more collaborative than they used to be for some very good reasons: to make money from their system and to take non-value-added dollars out. To assist in that effort the company implemented a new SAP ERP system ( with all 40 of its warehouses, including all order processing and P.O. generation.

“We knew we had to get our infrastructure upgraded and improve our web-based communication so we could collaborate with our customers,” he says. “We’re also working on collaborating better with suppliers on master data and inbound shipping information.”

The Cardinal Health Medical segment is working to adopt the GS1 standards GTIN (Global Trade Identification Number) and GLN (Global Location Number). Those standards include things like item identification—what it’s called, what it looks like, its shape and size, etc., and network identifiers including customer and shipping location addresses.

“We have to move toward these standards so we can enter into a new business relationship with streamlined processes—without dozens of phone calls to each other, misdirected product, and confusion,” Bach says. “When we all start leveraging cloud-based technology as a solution for synchronizing product data, we will save time and money.”

Mine Data and Use it Strategically

Logistics plays a big part in profit and loss, and at Cisco Systems, P&L was aggregated at the CEO level. That changed when Cisco became more focused on the P&Ls of individual business entities. In today’s world at Cisco, managers are focused not only on their contribution margin, but also on the overall gross margin. This drives a great deal of interest in freight cost by each business, making logistics at Cisco a hot topic these days for cost.

Consequently these managers keep a sharper eye on freight rates. In fact Jack Allen, senior director of logistics and manufacturing solutions for Cisco Systems Supply Chain Operations, says in the past year that focus has increased tenfold.

Cisco’s core business is to provide network-centric enterprise platforms to customers around the world. Forecasting in this fickle business is tough. But recent growth has made transportation strategy more challenging for Cisco.

Their strategy starts with finding the right tools. With Cisco’s history of growth came a patchwork of heavily customized systems to drive logistics. Carriers in certain lanes were hard coded in their transportation system from a messaging standpoint, which created a lack of flexibility. That didn’t jibe with Cisco’s service outsourcing model. That’s why Cisco is completing the first round of implementing Oracle’s TMS.

“We did that to save money as a secondary reason, but the primary was to unlock our highly customized, very rigid logistics system and to create a flexible system that would be a backbone we can grow with,” Allen says. “It has itineraries that drive what gets picked up where and by what mode. I can have a FedEx itinerary and UPS itinerary, and the itinerary knows who the carrier is and sends the right message to the right carrier at the right time.”

The tool will also rate shop between carriers and try to drive to a consolidation or mode shift to hit the lowest cost at a date the customer wants the product. This is quite a change from two years ago when there was no such flexibility in transportation planning. Everything was shipped the way it was prescribed and coded in Cisco’s system. However, an important lesson for Allen in implementing this tool was not to take data for granted.

“You really need to think through what your strategy is around data and understand where it’s coming from, particularly if you have an outsourced network,” he says. “If you’re doing everything manually or are a small guy you still need a way to capture that information and be able to analyze it to understand trends and details like where your major costs are. For a big company like us it’s very easy to lose opportunities in the mass of data without a system and a strategy to enable it.”

A lot of what Allen does is common sense, he admits, and you don’t need a tool to give you that. However, the right tool can highlight the right opportunities.

“If you’re in an outsourced environment you have to be fairly serious about standardization,” he adds. “As you grow and add more carriers, if every carrier is a one-off it gets to be difficult to manage.”

The opportunities he sees include shifting some of Cisco’s air freight to ocean, yielding not only a more cost effective transportation chain, but also a greener one. And because much of what Cisco builds starts in Asia, he’s keeping an eye on rail development in China.

With this greater focus on transportation details, Allen’s team is also focusing on packaging—a department in Cisco that now reports to him.

“It’s a best practice to have packaging report to logistics because they care about how efficient that package is, they care about damage, and all those things are wrapped into transport,” he says. “Packaging is one of our biggest savings categories. If I can make the package weigh less, that also saves cost and saves the environment. Our packaging guys have freed up about 25 million pounds of airfreight capacity through better efficiencies. That’s about 104 fully loaded airfreighters.”

As the cost of fuel goes up and economic uncertainties multiply, “transportation manager”—and all the unstated titles that come with that job—will become even more important. Negotiator is one of those titles. Be prepared to find new sources of savings as your conversations with carriers focus more on price stabilization than price cuts.

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