In the May issue, we discussed how having great parcel rates does not necessarily mean you have a great contract. The contractual terms of a parcel contract can provide as much value and financial return as the base rates themselves. Nevertheless, let’s say you are one of these “over-achiever” types and you feel pretty confident that, through your guidance, your company is already operating in world-class territory when it comes to your parcel contract. What is next? Ask yourself this question: “Is my parcel network optimized?” If the answer is “No” or you are not sure, then you may still have some work left to do before you can truly say you have a best-in-class parcel solution. Only an optimized parcel network can take advantage of the full value of a parcel contract.
What does the word optimize mean, and how does it apply to your parcel network? Optimized has two academic definitions, but the second is the one that most accurately describes the parcel optimization process: Optimization means to modify to achieve maximum efficiency in capacity, time or cost. Companies that are not operating their parcel networks to achieve maximum efficiency can reduce costs, improve service levels and reduce transit time through optimization. Most large shippers do not have the technology or resources to perform the level of analysis required to identify optimization opportunities. For those that do, the results can be a 10% to 20% improvement in overall network efficiency.
The first step towards optimization is to create, refine and communicate your parcel transportation strategy. Your carrier contract and your transportation strategy have to be coordinated, or you risk losing valuable efficiency. A shipper’s transportation strategy consists of many different elements. There are the obvious ones that come to mind, such as defining the service levels required to support each business segment and planning for future volume growth. But there are also other pieces to the puzzle that should be addressed as part of developing your parcel strategy. Here are four examples of strategic focus areas that, if overlooked, can result in an out-of-sync network.
1) Understanding the value of operating a single carrier vs. a multi-carrier model
2) Defining your order management model to determine what is the customer’s expectation of service
3) Preferred contract cycle for each business segment
4) Identifying future infrastructure plans, such as additional shipping locations
Taking a fresh look at your network strategy is a key enabler to true network optimization. Any shipper operating without a clearly defined parcel strategy is treading in dangerous territory.
Once you have your strategy developed, the rest of the organization has to buy into it in order to make it work. As transportation managers, we can negotiate great contracts and develop comprehensive shipping strategies but we are still dependent on others within the organization to achieve our results. This is often a difficult task when it comes to parcel shipments. Unlike LTL and Truckload, everyone has shipped a personal package with a parcel carrier. This experience creates a confident user-community that is not compelled to ask questions or educate themselves on the contracts or shipping. Educating users can bring about some relief. Front-end shipping systems can force compliance at key shipping locations, such as a corporate office where shipping volumes are spread across a wide number of sporadic users. True compliance is driven by visibility. If you really want to make sure that users are using the services and strategies that your team has put in place, start reporting on it. A compliance report or “hot list” distributed to each department head can quickly achieve the desired results and go a long way towards eliminating costly shipping charges.
An optimized network is a network cleansed of wasteful shipping practices. Waste in the parcel network is any cost or service that is not adding any value. Most shippers see the contract negotiation process as the primary way to reduce costs or improve service. But shippers should take note that eliminating the waste in their current networks can reduce costs and improve service within the framework of their current carrier agreements. You don’t have to wait until your contract expires to improve. I recently helped a shipper identify one-day AM shipments that were consistently being sent to a commercial customer that did not open until 10:00 AM. The driver was attempting delivery at 9:00 AM and actually delivering the packages later in the afternoon. The shipper was able to switch these shipments to one-day afternoon service and reduced costs by over 20% in the process.
Identifying these types of opportunities takes time, resources and technology to execute. In most cases, the opportunities are not million dollar ideas. They are smaller in number and require effort to both find and implement. But for the shipper willing to put forth the time and effort, the cumulative payoff can be substantial.
Most shippers understand the importance of being able to accurately report and monitor the performance of their network. However, many companies don’t have the right metrics in place to explain variance from period to period. Shippers oftentimes make changes to their networks because they instinctively know the impact will be positive but lack the detailed reporting to measure the actual impact. Volume, mix of services and fuel prices can make the task of explaining monthly cost variances extremely challenging. By implementing a thorough reporting system, shippers can more quickly identify cost and service issues and proactively make the changes necessary to maintain an optimized parcel network.
The objective for shippers both large and small is a fully optimized parcel network. Optimization is not a one-time event; it is an ongoing process. Re-optimization is required at major events such as acquisitions, shifts in network strategy and cost reduction initiatives. It is not only the strength of your parcel contract that counts, it is also how you execute it.
Mike Williams is the Vice President of Consulting Services at Green Mountain Consulting. For more information, contact Mike at firstname.lastname@example.org or 901-507-9331 or visit www.greenmountainconsulting.com.