Published In:
CFO, Australia Date Published:
30th June 2004 Author:
Simon Segal
The key to keepng transport costs low is to understand the importance of strategic partnerships in a highly fragmented industry. Simon Segal reports.
With much focus over the past few months on international oil prices, managing transport costs is bound to assume a more important role in Australia's corporate offices and boardrooms. Michael Byrne, CEO of cost consultancy Expense Reduction Analysts, believes that transport costs can be as high as 15% of a company's turnover in certain sectors. "For some, it is a big-spend item that demands considerable management," says Byrne.
Retailers, manufacturers and consumer goods companies are among the heaviest users of transport services and thus the most vulnerable to transport costs. Byrne says the debate over whether to outsource transport requirements or mange them internally is pretty much settled - almost all large firms with considerable transport requirements outsource their transport needs to specialists and enter into long-term strategic relationships with them. "Managing transport internally is an inappropriate use of assets Firms are far better at focusing on their core business."
Byrne finds that firms that spend more than $1.5million annually on transport would be well served by employing an inhouse specialist. "The key is to manage transport costs continually. Too often, transport systems are set up and management no longer devotes serious time to the issue. Worse, they do not educate and train their employees to understand and regularly review their transport needs and costs," says Byrne.
Most companies waste money on freight by not choosing the suppliers that can best meet their needs ad not fully understanding their options. Australia's transport industry is highly competitive, and leaves little room for negotiating lower rates on similar services. The edge is in the relationships and partnerships formed with the transport groups, which allow the haulier to understand their customer's transport needs.
Legh Winser, manging director of the trucking, rail and shipping company K&S Corporation notes that most of the large transport groups have dedicated teams assigned to their main clients. "The concept of partnering continues to be a key differentiator in the service offer to customers."
The most important element, as highlighted in the annual report of transport and logistics group Toll, is "the ability to design and manage innovative supply-chain solutions to provide customers with flexiblity, reliability and cost competitiveness in managing supply-chain requirements."
K&S's partnering concept involves three components - accountability, customer involvement and gain sharing. Accountability commits K&S to deliver what is promised, and is monitored against key performance indicators. Customer involvement requires the development of structures that ensure joint decision-making in operational and strategic changes. Gain sharing is based on the principles of sharing risk and reward. "Contracts are linked to savings, which enables both parties to share in any savings," says Winser.
Byrne finds that "The most important thing to grasp when looking at opportunities to cut transport costs is that one supplier does not fit all. The industry has fragmented, and the supplier that can provide the lowest cost, best service option for interstate consignments can be a very poor performer for local or regional deliveries on both counts."
Byrne feels that if a company wants to improve the management of transport costs, the starting premise ought to be a detailed analysis of recent freight transactions. "It is only when managers have a thorough understanding of their freight profile that they can begin to form a view about the freight services that should be used. Once this information is available, it can be matched with supplier options and an informed decision made."
The main areas of waste, says Glen Richmond, national account manager at Toll, are in multiple distributions, weight management and container sizes. "There is no standard model. Needs differ with all our clients," he says.
To this, Peter Glasson, director of customer service at express freight carrier Star Track Express, adds that managment should look at the detail. "Timely and accurate data for automatic sorting through transport depots, and clear bar-coded address labels for easy identification, can save money. Accurate weights and volume measurements ensure no over-charging occurs."
Managers wanting to reduce transport costs must understand their transport needs and volume-conversion structure: it is a huge waste to pay for a full container to be express-shipped from one side of the country to the other if only a small portion of the load requires this level of service. Other transport charges that management can focus on are the basic charges. Applying a single freight price to all freight, irrespective of the charged weight, wastes plenty of money.
Using courier services is another source of waste, says Byrne. If the standard service for delivering a 25-kilogram parcel is $25, a "super" service can cost $50 and a "super duper" service $75. "But it is often the case, for factors beyond the control of the courier driver, that the "super duper" service cannot get to the destination any faster than the super serivce. Displatch staff should be informed of industry charges and service limit promises so that they can make informed decisions."
To Byrne, speed is the most important determinant of cost. "Although this is is generally well understood by most corporate consumers, the decision-making process required to successfully implement the policy is not."
Rob O'Byrne, managing director of the consultantcy Logistics Bureau, believes that costs need to be categorised as inbound, storage and outbound, and assessed in terms of costs per unit (pallet, tonne, case), costs per order and stock turns. "Improving the cost-to-serve ratio is one of the easiest problems for a company to tackle to improve its supply-chain efficiency and bottom line. Every business has customers who cost money. It's easier to make them profitable than to dump them and have to find others. By simply identifying one by distribution cost, without realising that some customers are far more expensive and hence much less profitable than others, misses the true cost to serve the customer. When one knows the cost of serving customers, one can identify those customer groups that cost too much and develop more viable ways to service them."
The issue of managing transport costs is integral and feeds into the management of broader supply-chain costs. Ed Tidmarsh, general manager at the transport group Patrick Solutions, suggests a key solution in better managing supply-chain costs is developing an integrated funds and risk-management program. He argues this can result in a 20-50% reduction of inventory levels; enhancing service levels by up to 10%; improved supply-chain stability, which reduces logistics and operating costs; and new and less capital-intensive operating structures.
Tidmarsh says: "When these risks are well managed, they can significantly reduce capital needs, the cost of capital and potentially the capital structure of the business with securitised inventories. The various forms of risk are links in a chain of connected risk that can have a significant impact on business revenues, working capital requirements, cost of capital and return on assets or return on investment. Each of these risk links in the chain interacts with its neigboring link and influences its effectiveness," he says.
