Kristyn talked about the macro-economic factors that have created this crunch, the Global Transportation Organization’s approach to relationships with the carriers, their push for innovation in dealing with the issues, and their use of technology. This article combines some of ChainLink’s own research with the story of the Global Transportation Organization (GTO).
We’ve all heard the “perfect storm” analogy in transportation— long-term economic forces, political factors, and physical constraints converging to create the current crunch. Examples of these forces include:
- Phenomenal growth in China
- Skyrocketing fuel prices
- Aging truck driver demographics
- Growth in construction sector (stealing potential drivers)
- Hours of service regulations
- Port strikes
- Hurricane Katrina
- Post 9-11 security regulations
- Rail congestion
- Shortages in ocean containers
- New engine requirements
- Chronic port capacity shortages
The infrastructure in the United States just isn’t keeping up with the volumes of traffic.
Carriers are in the Driver’s Seat
Many feel that these factors have led to a shift in the balance of power between carriers and shippers. No longer can shippers expect to continuously drive down rates through auctions or generic bid processes. The new environment requires relationships of partnerships rather than adversaries. In addition, creative transportation solutions are needed to reduce costs without fully depending on lowering rates. The GTO has had some success in achieving these goals
The Global Transportation Organization (GTO) – An Internal 3PL
In 2000, a consolidated transportation department was formed to facilitate best practice application, centralize core activities, and to leverage and optimize the combined transportation spend of the firm. The GTO in many ways acts essentially as an internal 3PL, and it must earn the business of the internal Operating Companies.
The GTO manages over $200 million in spend across all modes, domestic and international (import and export). They strive to be the provider of choice by creating value, leveraging spend, delivering innovative transportation projects and technology, and managing carriers for better performance and service. The goal of the GTO is to continuously provide value to the organization as related to cost and service.
The GTO uses education and communication throughout the company as an important tool to ensure that all business partners are aware of the industry forces that are present in transportation.
The GTO’s strategy for dealing with ongoing transportation capacity challenges involves improved carrier relationships as well as innovation in practices and technology.
Becoming the Shipper of Choice
Aware of the new realities, the GTO has turned the tables by asking “Why should transportation suppliers choose to do business with us?” They strive to make it a partnership relationship. They incorporate carriers’ feedback into process improvements within the GTO, at distribution centers, customer locations, and manufacturing sites. They consider the carriers to be their “eyes and ears”. This approach has enabled carriers to be very honest about where they see opportunities for improvement. One such area is freight payment, where the GTO worked very closely with their freight payment company to reduce the cycle time, and improve the accuracy, which has had a huge positive impact on their carrier supply bases.
The GTO invests in transportation innovation, constantly researching new and better policies, processes and technologies. Some examples include:
- Collaborative Transportation Management to forecast containers and truckloads
- Maxi-cube dedicated routes
- Temperature-controlled protective blankets, where possible, instead of more costly refrigerated trailers (“Reefers”)
- Dedicated fleets to control costs and guarantee service
- Cross-shipper dedicated loops (see explanation below)
- Truckload RFP Technology with Combinatorial Optimization
Cross-shipper Dedicated Loops
The GTO is currently working with two other large shippers, who are not direct competitors, comparing their networks to find connecting points in both networks and to create continuous moves on a weekly basis. There was no real technology used to do this – just a great deal of diligence to compare major shipping and receiving locations, volumes and areas of unmet need. Working with other shippers was aimed both at guaranteeing service levels and reducing cost. The GTO found it’s given them guaranteed capacity on lanes where it was difficult in the past.
The Search for the Right Truckload RFP Technology
In 2005, the GTO conducted an RFP for its domestic truckload business. The GTO required a platform that would enable total value creation through improved cost and service levels. Other goals for the RFP event included adding carrier capacity in constrained markets and expanding reefer capacity for temperature controlled products.
The GTO was very cognizant of the need for balancing carriers into and out of these markets where capacity was constrained. In addition, the GTO has diversity spend goals, and they wanted to increase diversity spend through the RFP event. Their technology requirements included:
- Power. A tool that could handle complexity—more than 1,000 lanes for twelve operating companies in all three sectors of business, with very different requirements such as temperature control, mode balance, diversity goals, as well as individual customer requirements.
- Usability. Ease of use, not only internally, but for carriers. Ability to easily create and execute analysis scenarios themselves.
- Speed. Real-time online views, rapid execution of complex scenarios.
- Flexibility. Able to handle diverse requirements.
The GTO selected a combinatorial optimization RFP tool with “Expressive Bidding” capabilities that allowed carriers to create as many combinations of lots or packages of lanes as they wanted. This lets carriers play to their own strengths. When looking at the GTO’s entire network, carriers could create miniature dedicated fleets, dedicated loops, and dedicated moves throughout the network. Through its combinatorial optimization (ability to analyze millions of different combinations of bids), the tool allowed the GTO to optimize many different parameters.
Ease of Use and Power
The tool allowed the GTO to create their own business rules and scenarios. They could run complex scenarios in less than five minutes. The GTO’s carriers and internal customers said the tool was user-friendly and provided access to the data that was needed. It had the detailed parameters available for analysis, and total network visibility, in a decentralized environment. Having visibility into the total network is a big plus.
Allowing Carriers to Offer Creative Solutions
This approach leveraged the creativity and knowledge of the carrier supply base. Carriers did much of the work of finding the optimal solution and proposing packages, from which dedicated moves could be created. This gave the GTO a better understanding of their carrier’s strengths and potential areas for growth. Their intermodal providers utilized the RFP event to make the GTO aware of numerous mode-conversion opportunities that existed within their network.
Customized Service for Key Customers
Price is obviously important, but having a price on paper that can’t be executed means nothing. The GTO used the tool to create a realistic, best case scenario to deliver the service expectations that their customers needed. The GTO was able to customize decisions made throughout the RFP event to make sure that they were servicing all customers appropriately.
The Bottom Line
The Global Transportation Organization was able to maintain a price inflation rate well below the national average and current benchmarks. More critically, these rates were executable and realistic. They increased capacity through new carriers and development of dedicated scenarios, and their buyer-supplier relationships were strengthened throughout this event.
The current environment is challenging. The balance of power has shifted. The GTO network is large and complex, with complex business requirements. A carrier for their pharmaceutical business has different requirements than a consumer truckload carrier. That needs to be taken into account when looking across their whole network. The enabling technology they chose helped to optimize their network based on these important criteria.
The GTO has said that they’re pleased with the results. They’ve seen value creation, and were able to introduce innovation. This combination of investing in the supplier relationship and innovation looks like a winner.
Click here to send questions or comments to the author.