Transport costs have escalated for manufacturing companies over the past few years. Tim Fawkes of transport management company 3t Logistics explains how businesses can make their supply chain more cost effective.
Recent figures for manufacturing output suggest that the first quarter of 2012 will be more active than 2011. The latest CIPS Purchasing Managers Index (PMI) reported a result of 51.2 – far enough over the 50 mark to indicate signs of growth and its hoped that the Olympics will boost numerous sectors of the British economy as the year progresses.
A good portion of this realised and potential growth is attributed to exports. However, as exports to Asia and the US are increasing, exports to the recession-hit eurozone are falling.
Furthermore, while inflation is at a lower level than this time last year, the prices of materials such as fuel, chemicals, metals and plastic are rising. This means that manufacturers will need to continue monitoring their costs closely if they are to maintain or increase margins.
The news in February that diesel prices had hit a high of £1.50 per litre inevitably has serious implications for companies involved in manufacturing. Combined with the proposed 3p per litre rise in fuel duty scheduled for August, transportation costs look set to continue rising throughout the year.
But the good news is that this is an area where most companies can actually reduce costs – the difficulty is knowing how to go about it.
Better utilisation or renegotiation?
As a company specialising in the reduction of transport costs, we regularly canvas companies about what they are doing to manage transportation expenditure.
Our most recent survey of transport managers across a range of industries returned some interesting results. Not surprisingly, respondents acknowledged that rising fuel prices were likely to cause logistics costs to rise. Over half also believed that this expense could be offset by the introduction of cost reduction initiatives.
A couple of popular techniques for cost reduction emerged as better vehicle utilisation, 69% cited this as key, and supplier renegotiation was identified was the strategy that they were most likely to use. This latter approach was largely considered to be an easier way of lowering outlay, favoured above improving their own efficiency.
This might be the case, but relying on supplier renegotiation as the main way of reducing transport costs is risky and problematic.
Most logistics companies are now operating at minimal profit levels and simply can’t cut their prices any further. While hauliers may not have passed the full increase of their operating costs to suppliers, their costs have risen at inflation busting levels, cutting their profit margins to the bone.
For example, the Freight Transport Association (FTA) estimates that vehicle operating costs for rigid, articulated and drawbar vehicles rose by 6.2% in the 12 month period from October 2010. However, the costs passed on rose by only an average of 2.8%, while the average profitability of the top 100 hauliers is now just 4%.
Identifying where waste occurs
The reality is that many manufacturers don’t really know where to start. Very few of the manufacturing companies that we work with have tackled the crucial first step of measuring their transport efficiency accurately. Yet it is only by identifying where waste occurs that it can be effectively managed out of the process and there are two key areas to focus on.
- Empty running – the distance a haulier travels between a delivery and the next collection currently accounts for over a quarter of all kms travelled.
- Vehicle utilisation – the average vehicle utilisation in theUKis around two thirds of truck capacity
In addition to reducing costs, tackling these areas also reduces energy consumption and carbon emissions – issues which are becoming increasingly significant as increased taxes are to be levied on companies who generate excessive carbon emissions in their transport operations.
In line with the EU, the UK government is aiming to for a 50% reduction in emissions by the year 2025. Initiatives to help achieve this include mandatory carbon reporting and a tax on dirty fuel such as coal and diesel. As a result, clients are increasingly requesting greenhouse gas reports on how much carbon dioxide, methane and nitrous oxide their transport operation produces.
In the role of manufacturing transport management partners, we see increasing pressure on companies to reduce delivery batch sizes. Space is often at a premium and most manufacturers want to use all available space for production rather than excessive quantities of raw material or finished goods inventory.
Even if the product is relatively low value and doesn’t tie up capital, they don’t want premium space taken up with non-productive activity. Unfortunately, this has the effect of pushing stocks back to the suppliers, increasing frequency of smaller deliveries which does nothing to improve transport efficiency and just adds to the challenge.
Increasingly, manufacturers are contemplating working with like-minded unrelated companies with similar transport requirements. In theory, working in partnership can reduce empty running, improve vehicle utilisation and reduce carbon emissions for all parties. This can offset the cost pressures on transport, including the issue of reduced, more frequent batch sizes.
The problem with collaboration can be the alignment of two otherwise independent businesses; and of sharing the savings. Sophisticated transport management systems and an independent transport management party are required to ensure service level and process alignment – and a fair approach to sharing the spoils.
Five ways to improve efficiency
If manufacturers want to reduce their transport costs they have to be proactive. Simply seeking to negotiate lower rates from your haulage company just won’t cut it. Eeach organisation is different, but there are some basic principles that can be applied to managing waste in the supply chain.
- Measure current transport activity in detail. How full are your vehicles when they leave the factory and how much empty running is involved in your transport network? We often advise clients to consider implementing an independent transport management system, such as 3t’s own Global Carrier Manager system which will capture accurate data and provide the information to start the process. If you don’t measure it you can’t manage it – it’s the first step in avoiding emotionally based arguments providing relevant, fact based data.
- Focus on optimisation. Managers rarely have sufficient time to focus on optimisation techniques so the drive for efficiency often starts with the production line or procurement of raw materials. An external transport management partner has the advantage of expertise and objectivity, while freeing valuable time for managers to focus on the core business.
- Increase your number of carriers. Carriers can offer a range of services and expertise. Increasing the number of carriers can significantly reduce costs, but few companies have the internal resource or expertise to deal with numerous partners. However, introducing a transport management system will offset any increase in complexity by automation. You may also wish to consider implementing a reward system to overcome the issue of a carrier’s reluctance to reduce the number of vehicles involved in your operation (which may mean less revenue and profit for them).
- Review tariffs and invoicing. Are your transport tariffs structured in your best interest or that of your carriers? As well as checking that the tariffs are applied correctly watch out for additional charges, such as fuel surcharge and demurrage charges; make sure you understand how they will be applied before you agree to the tariff.
- Make your customers profitable. Customers are vital to your business, but an unprofitable customer is of little or no value. Calculate client costs in terms of transport so that you can identify where savings can be made or where services need to be realigned to ensure profitability. If your customers dictate when goods should be delivered and in what quantity, encourage them to be flexible, e.g. share transport savings achieved between you by offering delivery on a set day.
An Olympic challenge
The year 2012 is a unique one for British industry, bringing the Olympics and Paralympics to the capital and surrounding areas. Though these events offer manufacturers opportunities in the form of increased sales – for many they will also cause disruption. As well as the 300,000 athletes, there will be an estimated 11 million spectators, all travelling around UK hotspots within a two month period.
Most forward thinking companies are already analysing the effect it will have on their business, including planning alternative delivery strategies to customers located near the venues.
As well as additional journey times, security screening and specific venue and parking plans need to be considered. An Olympic route network (ORN) is being put in place to enable athletes, officials and media to get to the events on time. This includes 1% of all London’s roads and no stopping will be allowed on this route between the hours of 6am and 12pm.
So, if your business has customers on this route you will need to plan to deliver at night. Moreover, 33% of the ORN will be completely closed to traffic between 6am and 12pm, inevitably increasing pressure on surrounding road networks. In fact, night time deliveries throughout London would be a good strategy to adopt as a general rule. The website www.tfl.gov.uk will provide access to day to day congestion maps, enabling businesses to assess the impact in real time.
Ultimately, the best advice is to plan well ahead for disruption to avoid customer service issues and service level problems. Companies should be creating their Olympic transport plan document now, ready to be put in place by the end of May so that it can be communicated to customers ahead of time.
As part of the planning process, identify customers within the London region and assess their impact against the Olympic venues and maps, including those within and around the M25. Make it someone’s specific responsibility by nominating an Olympic champion within the company who can provide daily updates on delivery issues as well as monitoring and reporting on delivery performance for those most impacted.
Delivery strategies for the Olympics
- Arrange out of hours deliveries when the roads will be quieter – don’t just think about the ORN, consider the impact on the whole of London and surrounding areas
- Increase stock levels of non-perishable goods
- Postpone non-essential deliveries until after the games if possible
- Review the postcodes affected against your own deliveries and find alternative depots if possible
- Consolidate deliveries as much as possible to deliver less frequently
- Collaborate with neighbouring businesses to share deliveries
- Encourage your customers to collaborate to reduce the number of times you need to deliver to affected areas
- Use a driver’s mate to speed up stop times
- Use secure drop boxes for smaller items
2012 could well be a year of much needed opportunity and optimism for manufacturers. However, companies need to be realistic about rising costs and to take decisive action about where and how savings can be made – without impacting on customer service.