Fluctuations in oil prices impact very differently on different sectors of the economy. The transport sector specifically represents 56% of total oil consumption in the European Union (according to 2009 data). It is, therefore, the most exposed to the swings in the price of oil.
On the other hand, manufacturers who have to resort to external transport complain that these fluctuations -especially when they are on the rise- are reflected in the rates of transport providers, while oil drops do not usually have the same effect..
Over the past few years, many companies have chosen to outsource transportation services through specialized agencies. This decision has led, in most cases, to a significant reduction in costs, greater flexibility and a substantial improvement in service. However, many entrepreneurs feel that they have " lost control " and find themselves with new problems that are more complex to solve.
The case of a manufacturer with more than two thousand clients throughout Spain and with its outsourced parcel transport in agencies is described below, which comes to us because it needs to reduce its costs. We propose to address -among other points and within an action plan- a reduction in transport costs.
To do this, we set ourselves a series of needs to be solved:
· Verification of the Transport Invoice. We only receive an invoice with the services provided and, if we request it, we receive an extract with more than 3,500 lines with all the details of the shipments made. Checking expedition by expedition is an excessively cumbersome task.
· Selection of the Best Supplier. There is a wide assortment of transport agencies. But, if on any given day we receive a new rate from an agency, how can we know which is the best? Our agency or the latter? The comparison is too complex since not every month we sell equally in the same geographical areas (geographic mix) and the weights and volumes vary continuously (sales mix). Likewise, the areas of each agency have different names, the billing systems are not always the same (linear or scaled), nor is the transformation from volume to weight always the same. Comparing different options does complex and tedious work.
· Optimization of Logistics Cost. I have decided for 3 agencies, why not send the merchandise, whenever possible, by the cheapest operator for each shipment according to weight, volume and destination?
· Transfer the Information to the Income Statement. Since I have managed to associate the cost with each sales transaction, I would like to know the cost of transportation for each client. We know the total cost of transportation, but how do I distribute it for each sales operation, customer and geographic area to analyze the profitability of each one?
With these objectives in mind, we designed using BI & CPM a logistics cost calculation engine based on the shipments made, the products shipped, destinations and the conditions agreed with the transport agencies for each area. After a previous phase of prospecting the different sources of information, we ensure the reliability of the data, since they are the fundamental ingredient of the system. Once this information has been audited, the calculation engine will provide us with a highly accurate estimate of the invoice that must be received from the transport operator. The invoice will help us to contrast and validate the system once all possible errors have been cleared. We have covered the first objective.
In our experience and depending on the starting circumstances, the improvements can reach a 20% reduction in transport costs by adopting this management model. Especially when the following point applies.
Once the transport providers have been selected, the next step is to calculate the Minimum Logistics Cost. What do we understand by this term? Each logistics operator has a differentiated rate by area and there are cheaper agencies for some areas than for others. In many cases it is worth considering who, what and where it is shipped. The system proposes to us through which agency we should send the articles based on the cost optimization criterion. This proposal could even be integrated into the management system within the Picking List or Expedition List.
To ensure proper operation, the Operations Manager must keep track of the differential between the cost incurred and the target cost or Minimum Logistics Cost within the control table of the Operations Department.
Finally, and as a last step, we will take advantage of the fact that the system allows us to distribute the transport costs for each shipment, for each sale operation and for each client and item to increase the degree of precision of the cost system and, ultimately, the account of results.
The application of our Intelligence Management methodology, implemented globally or as in this particular case, which is a specific problem, comes to solving problems with the ultimate objective of obtaining tangible economic results.
