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Transportation Industry post financial crisis’08 – The up-hill task!

With international freight plummeting 13.5% (source: American Shipper Florida Connection Date Posted: 1/2/2009 12:44:07 PM), the transportation industry will be forced to explore dimensions, otherwise they would have preferred to ignore.


The World Bank in its report dated December 8, 2008 primarily sights the reason for the drop in global trade to the drop in demand in both the high-income as well as the developing countries. The World Bank report goes on to state that the global credit crunch is restricting export finance as well as is likely to affect private investment in the sector. If available credit is choked, exporting firms may cut back on shipments. Finally the crisis gets even more aggregated due to sharp, unpredictable swings in exchange rates, which also hamper trade.


According to Michael E. Porter, Harvard Business School Professor and world-renowned expert on strategy, success requires both the right strategy and “operational effectiveness”. “Managers must clearly distinguish operational effectiveness from strategy. Both are essential, but the two agendas are different. The operational agenda involves continual improvement everywhere there are no trade-offs. Failure to do this creates vulnerability even for companies with a good strategy. The operational agenda is the proper place for constant change, flexibility, and relentless efforts to achieve best practice. In contrast, the strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit.”[1], says Porter.

So what can be ideal strategy to the Transportation Service Providers? Reduction in fleet size, re-look into fleet components (fleet re alignment), merges, collaborations and development of fleet consortiums will be the only way to survive the global downturn. Companies must learn to shed that access weight and develop agility. After the financial crisis as global demand and exports dry up the situation returns to simple case of economics where in we find too many companies chasing too little freight. In order to remain competitive fleet consortiums will help win those big deals where otherwise the small Transportation Service providers would not stand a chance if they contested alone. This becomes a very lucrative area for the Fourth Party Logistics Service Providers (4PL).


4PL as an option

Fourth party logistics is an integrator that assembles the resources, capabilities, and technology of its own organization and other organizations to design, build and run comprehensive supply chain solutions.


With collaborations with more carriers the 4PL will be able to offer a comprehensive logistics solution to the shipper. This will be a win-win situation for both the manufacturer who will want to reduce his transportation costs as well as for 4PL operators who will be able to win larger deals. The 4PL will be able to offer improvements across the full supply chain, adding value in both inbound and outbound logistics, operations and service delivery. The emergence of 4PL would be the current Logistics service providers trying to move up the value chain by having collaborations with similar like minded players in the market.

On the operational front, investment into products like SAP TM will provide a technology platform to improve operational effectiveness by better asset utilization effective partner collaboration, enhanced visibility and optimized planning. It adds a new strategic dimension as well since it also offers higher ROI.

Typically in this industry, fuel costs remain the second largest cost next to labor. Curbing fuel costs will help improve margins across the supply chain network. Fuel prices have also been on the increase over the decade, most trucking companies have a fuel surcharge that takes care of the fluctuations but however there exists a lag between the effect of the fuel surcharge and the actual price of fuel. Besides fuel fluctuations there are also exchange rate fluctuations. Both these components can be adjusted for by the comprehensive charge calculation methodology provided by products like SAP TM.


Increasing operational effectiveness by right investment in products like SAP TM

Operational effectiveness can be achieved in the following ways

  • Group Operation
  • Re-aligning Asset base
  • Successful delivery trips
  • Back loading

Group operation

A group operation is the distribution of different products for a number of customers within a similar geographical region using a single vehicle. It optimizes vehicle utilization and makes the best use of resources through effective planning and grouping of part loads. Product such as SAP TM can help in planning function which is well equipped with an optimizer (complex algorithms capable of handling complex transportation problems)

Successful operations require:

A flexible pricing system that takes into account quantities, number of deliveries, urgency of delivery and any restrictions on delivery time/access. Product such as SAP TM with its advanced scheduling and routing systems not only meets this but also accommodates multiple delivery orders from a greater number of customers to ensure that the most effective route is taken for multiple drops.

The Benefits of Group Operations

  • Improved efficiency due to load consolidation (higher vehicle and driver utilization)
  • Cost savings from reduced fuel use and operating costs
  • Environmental benefits (reduced CO2 emissions and road congestion)
  • Increased flexibility (customers can order only the quantities they need)
  • Potential access to a wider customer base

Re-aligning Asset base

With freight becoming scarce companies need to re-look into their asset base and the type (volume of goods transported). This will help reduce maintenance costs and will help increase asset utilization and lower fuel costs. Reports generated by Business Intelligence systems like BIW will help segregate cost and profit centric assets/TSPs.

Successful delivery trips

Many a times a company vehicle will make multiple trips before a good may be successfully delivered. This just increases the cost of the transportation service provider. Event Management(offered by products like SAP TM) offers visibility over the transportation process. An email or sms can be triggered to inform about the arrival of the consignment at the ware house asking for a suitable time of delivery. This will help reduce costs of unsuccessful delivery for the transportation service provider.

 This has a lot of benefits

  • Increased Customer satisfaction
  • Efficiency of the delivery operation
  • The environment(CO2 emissions)

Back Loading (Avoiding Empty runs)

Back-loading is the practice of making use of spare capacity on the return leg of a delivery journey. It makes more efficient use of valuable resources, such as fuel and driver time, by finding loads that need to be shipped between similar areas as those visited by the returning vehicle.

Collecting additional loads for the empty or partially loaded return journey of an outbound delivery can:

  • Improve fuel efficiency
  • Increase vehicle and driver utilization
  • Remove the need for an additional vehicle journey
  • Increase vehicle availability
  • Reduce running costs

Back loading will also work well when there will be more than one collaborating party who wish to share resources.


The right recipe for success

There is huge role to play for IT implementation companies (companies like Wipro Technologies who partner SAP in implementations). They now have an opportunity to move from the level of product consulting to process consulting. They will have help companies identify those redundant non value adding processes (steps) and thus help in streamlining the processes as a result. Main aim would be to reduce those departmental silos that exist, combining deliveries across departments to reduce transportation costs. Stressing on web based solutions like SAP TM will facilitate real time procurement, real time carrier section through carrier tendering/bidding and finally increasing enterprise wide shipment visibility.

SAP on the other hand will have to identify best practices in the industry while launching new products. Having said this, the Transportation Service Providers have to be open to new changes in the Business processes. More importance will have to be given to change management. It is not necessary enough to just implement an IT solution; the existing problem may get transferred from the legacy. Effective Change Management is necessary to reap its true benefits.

It is an up hill task, partnering and complementing each other is the only option to come out of the financial crisis alive for we know from previous crisis of 1920 when companies withered away due to lack of demand.


[1]”What is strategy?”, Michael E. Porter, Harvard Business Review, Volume 74, Number 6

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