Strategic Freight Procurement
Business Case Scenario:
John is a transportation manager and is responsible for transportation at XYZ Ltd in Europe, a manufacturer of Chemical Products. The manufactured products are shipped regularly to the various dealer locations in US. John has to identify the logistics service providers or carriers with whom he could have a long term contract, to carry out the regular transportation. So he needs to send out a global tender to 6 – 8 carriers for his transportation requirement.
The current process is manual and tedious, with data exchange taking place in the form of MS-Excel from multiple sources starting from collecting the transportation requirement to inviting carriers, collecting responses, comparing and analyzing responses (sometimes which are non-homogeneous) and finally awarding contracts to a few carriers Since transportation costs for a company have a significant impact on the overall profitability of the company, he needs better support and Strategic Freight Procurement is probably what he needs.
The process starts out with John analyzing all his historical capacities, costs, trade lanes, carriers he has done business with. All this information can be obtained from the Order History present in SAP BW system.
Here, a lot of what – if analysis, forecasting and simulation can be performed. Now from the forecast values, John is aware of the various logistical parameters that will form input to the Freight Agreement RFQ.
1) Lane/Carrier prioritization based on business rules.
2) Insights into historical spend categories e.g. LTL v/s FTL, MOT which helps in planning future procurement.
The Freight Agreement RFQ Master can be created using multiple options
- From Scratch
- From an RFQ template
- From an existing expiring Agreement
- From Historical Data using Work list
The RFQ document is similar in structure to the Freight Agreement. The header having the most important information like your Response deadline dates,RFQ validity dates etc.
Using the Business Context Viewer side panel, the contextual information regarding the carriers John can invite carriers for his RFQ process. The carrier performance ( KPIs ) at the trade lane level can be configured based on parameters like invoice discrepancy , on time delivery , pick – up etc.
Modelling of John’s bidding requirement can be done using RFQ items where each item can represent different trade lanes, mode of transport, stage types, capacities, priority, charges and rate tables etc.
Now John can publish the RFQ to various carriers. There is also a configurable workflow process for approval here.
1) Re-use TM master data,TCM master data and templates and objects thus simplifying the effort of implementation.
2) Selection of carriers based on their historical performance.
3) Output Management Integration.
The published RFQ goes out to the carriers through multiple ways: email, B2B or the collaboration portal.
In case of an email or collaboration portal the carrier can respond to the RFQ using an excel provided to him.
Upon submission, the responses undergo basic validations and integrity checks before entering the TM system. After the response deadline date John can compare all the responses.
The comparison cockpit is the place where John can compare responses for individual or several RFQ items.
This is called manual comparison which assumes infinite capacity (comparison is only based on rates). Manual comparison can be used when the data set is small and when there are no logistical constraints. The system gives the carrier ranking based on cost. There is also a possibility to have a graphical representation of rates across carriers and view/download rate comparison using an excel.
1) Carrier ranking based on Response rates.
2) Graphical Representation of Data helps in better understanding.
For bigger data sets (when the number of RFQ items/location pairs and carriers are very large), there would be more logistical constraints (cost, capacity, risk) based on which carrier selection/assignment of target shares needs to be performed. This can be performed using the automated comparison.
John can choose the carriers’ responses; configure strategies and conditions (Maximum/Minimum target share for incumbent carriers, new carriers). These constraints are taken and the Cost Minimization Carrier Selection Optimizer is invoked. The optimizer proposes the ideal target share for the most optimal solution. He can also evaluate the estimated spend for the target share distribution by calling the charge calculation engine. The estimated solution spend is the approximate cost XYZ Company would incur if John were to create freight agreements with the proposed target shares. There is also a graphical representation of the estimated spend distribution across carriers. John can now create multiple spend simulations or versions by varying the constraints and invoking the optimizer.
He can finally accept the most optimal version as the preferred scenario. Alternatively he can also override the system proposed target share values.
This step could be performed per RFQ item or across RFQ items
1) Automated comparison of responses via optimizer improves Value (Cost, Service, and Risk) assessment.
2) Insights into Projected Spend.
Award Summary: Prior to creating a freight agreement, the system provides a graphical summary of the capacity and cost distribution across carriers and trade lanes. This helps John to get insights on the capacity and spend distribution on the critical trade lanes/carriers etc.. The summary of the accepted responses for the transportation requirement is graphically represented here in three different views Award by Trade Lane, Carrier and RFQ item.
The above figure depicts a comparison among the budget, estimated spend, historical spend for a given trade lane.
For a given trade lane we can represent an RFQ item and its responses, also what we see here is the estimate spend across carriers.
In the below depiction we can see the target share across carriers for the RFQ item.
1) Capacity/cost distribution across carriers for a trade lane.
2) Capacity/cost distribution across trade lanes for a carrier.
3) Easy insights from graphical data depicting management summary.
After John reads through the summary, he could decide either to create a freight agreement or to go to the next negotiation round.
To create the freight agreement: If the estimated solution spend is within the acceptable range of the shipper and the carriers also have agreed to comply with the terms and conditions. You can accept the preferred strategy, on doing so the confirmed capacities are calculated for the carriers based on the proposed business shares.
John can now proceed to the one-click freight agreement creation process. All the data from the carriers’ responses are replicated to the agreement.
The Freight Agreements are created and would be consumed by the Freight Order which is the Execution Document in Transportation Management.
1) One-click Agreement Creation / Extension.
2) Reuse Existing Agreements.
The entire SFP process is a closed loop where both the shipper and the carrier work mutually with one another.
The SFM module is available from TM 9.1.
Overall Benefits of SFP:
1) One system with an open interface for all related processes without modification.
2) Insight to action based on process flow (Historical Data, RFQ Preparation, Spend analysis, Award).
3) Simple modeling of complex scenarios/packages.
4) Powerful Simulations/What-If.
5) Efficient information exchange with carriers/LSP.
I would be happy to receive feedback and provide any detailed information for any of the steps from 1 to 6.
Do check out the podcast session on Strategic Freight Procurement .