Time to rethink your freight-operations model?

During the past year, supply chains have experienced a convergence of market challenges, from COVID-19 and the rapid rise of e-commerce, to Brexit and U.S.-China tariffs and continuing trade conflicts, to increased regulation and severe weather events. Nearly everything that could go wrong, did.

The global transportation and logistics impacts are well-reported: Capacity-demand mismatches across transport modes; import delays from COVID-related port congestion and grounded passenger travel; ocean container imbalances and shortages on major backhaul trade lanes; and an overnight shift from business-to-business (B2B) palletized truckload freight to business-to-consumer (B2C) omnichannel fulfillment of a continuous flow of cartons and SKUs.

The responses that companies have deployed to these challenges during the past year have been largely reactive: focusing negotiations on securing capacity with key carriers at competitive rates; shifting the overall distribution mix toward cheaper transport modes and alternate port gateways; building inventory in key product lines and inputs; aggressively forward-deploying inventory closer to customers; and significantly postponing order delivery.

Going forward, however, a more strategic and surgical approach to freight management will be needed to broadly maximize value, drive operational excellence, and increase resiliency over the longer term. As market volatility continues, strategy will need to shift from targeted actions to a more comprehensive approach that balances cost efficiency with long-term supply chain resilience. These longer-term strategies will focus on enabling real-time shipment visibility, driving flexibility to pivot quickly as exceptions and chokepoints arise, and implementing analytics that continuously monitor freight networks to anticipate potential disruptions and assess performance.

This more strategic approach will require many companies to take a close look at redesigning the freight operating model itself. (Figure 1 shows the functions typically included in freight management.) The redesign will be guided by how the organization views its freight function internally: as an enabler, as a key differentiator, or as a core element driving competitive advantage and future growth.

This internal view of freight management will help determine three key factors that will shape the operations model:

1. the desired level of freight operations resiliency;

2. the optimal degree of outsourcing for supply chain functions; and 

3. the best approach for managing and consuming freight operations data.  

Setting the right level of resiliency

How a company views its freight function internally and how much resiliency is necessary to be designed into the operating model will be shaped by a number of factors. Some of the most important include: the type of business, its organizational core competencies, and the impact of freight spend on its bottom line.

Type of business. Organizations with exposure to fast-changing markets or with fast-to-market requirements are going to require more supply chain resiliency. For example, supply chain resiliency will be of crucial importance to companies in the apparel, grocery, fast-moving consumer goods, consumer electronics industry and those that feed essential parts into just-in-time production lines. It will be less important to companies that focus on less-critical industrial products or durable goods. But even some industries with ordinarily predictable inputs—such as building materials, hospital supplies, or food staples—may now need to be reassessed for potential risk and added resiliency.  

Core competency. Freight operations touch most organizations in some way, but vary in the degree to which they are integral and central to operations, customer service, or the bottom line. Comcast, Whirlpool, Apple, and Home Depot, as examples, are all large organizations with varying levels of freight activity. Comcast may serve several customers nationally, but freight is peripheral to its core competency as a media and entertainment company. Whirlpool, a global manufacturer, makes its own products and has a relatively straightforward, stable B2B freight footprint for appliances and parts, with relatively low time-sensitivity. Apple has complex production and retail supply chains, with tight internal supply chain controls relating to product value, time-to-market, brand preservation, and intellectual property. Home Depot, a specialty retailer serving trade and consumer segments with a strong omnichannel presence, relies as much on the freight function as on product to manage inventory and serve customers. The farther freight management resides from a company’s core competency, the less important it will be to ensure resiliency in its operations.

Freight spend and bottom-line impacts. Equally important to freight operations resiliency is the proportionate role and impact of freight spend in the context of the company’s overall cost structure. Clearly most enterprises have a compelling interest in managing freight resiliency, but a specific company may choose not to allocate its limited resources to freight resiliency due to the relatively small size and scope of its operations.

In some cases, freight spend may account for only a small share of the expenditures column, representing only a small operational segment, but investing in resiliency may still be important. For example, that segment may be a lucrative one. Or, it may be subject to complex technical standards, strict trade regulations, or significant ESG (environmental, social, and governance) provenance. These standards and regulations may necessitate added resilience to diversify sourcing and avoid disruption.

In-house or outsourced?

Once strategic priorities for the freight function and the necessary level of supply chain resiliency and flexibility have been identified, the next question involves how much of the freight operations should be performed in-house versus outsourced to third-party freight service providers. Companies can choose from a spectrum of outsourcing scenarios from fully internal operations to mostly outsourced freight operations. One example of this spectrum can be seen in Figure 2.

In general, companies that choose lower levels of outsourcing will manage more sensitive strategic activities internally and outsource more downstream tactical functions. Strategic activities may include: strategic sourcing, carrier relationship management, carrier performance management, transportation network design, event management, human resources management, and transportation data management. Tactical activities may include transportation order management support, routing guide support, traffic data warehouse maintenance, freight audit, freight payment, load planning, and load tendering/booking.

Each successive level along the spectrum reflects tradeoffs in cost, efficiency, performance, and control. Third-party providers can bring better scale, technology, and knowledge of certain freight activities relative to a company’s internal capabilities. At the same time, they add a layer of management and operational control and, with those, a layer of complexity. Ideally, the upfront costs of working with a third-party are outweighed by long-term efficiencies and cost savings that may be hard to develop and maintain internally.

Identifying the optimal degree of outsourcing for a particular organization requires careful study and consideration because every organization’s structure and situation are different. Key considerations driving this decision will include the maturity of each organization’s internal logistics capabilities; the competitive transportation and logistics choices; the service and pricing leverage the provider can offer in major markets; and the regulatory complexity and constraints imposed in those markets.

The extent to which market conditions will shape outsourcing decisions can be seen by looking at three different market profiles: the United States, the United Kingdom, and the Nordic countries. 

In the U.S., with its sizable market, relative ease of market entry, and light regulatory touch, shippers enjoy a wide choice of carrier and third-party service providers. As a result, the level of transportation management outsourcing tends to be optimized for cost and control. In this context, smaller shippers lean more heavily on third-party logistics providers (3PLs) and other freight intermediaries and, increasingly, new, cloud-based technology solutions. Larger shippers tend to rely more on internal operations. The outsourcing decision tends to focus on whether a provider can help improve pricing transparency and manage shipment costs. 

The U.K. market, by contrast, has a somewhat higher degree of freight management outsourcing. The industry structure for groupage (or less-than-truckload) in the U.K is complex. As a result, shippers of all sizes rely more heavily on freight intermediaries to secure space and leverage volume to obtain favorable rates in this sector. Brexit has also encouraged outsourcing for cross-border groupage moves. Here logistics service providers help shippers manage documentation, customs clearance, and duty/VAT (value-added tax) payment to avoid delays across borders within the U.K. and with the European Union.

A useful example of regulatory impacts on freight management outsourcing can be found throughout most of the Nordic region. In these countries, the distribution and sale of alcoholic beverages is handled through government-owned monopoly networks, which arrange transportation for exports and in-country sales.

Putting data to work

An increased reliance on outsourcing demands corresponding visibility into supplier performance, shipment status, and financial metrics. No matter what its level of outsourcing, the freight operating model is only as reliable, responsive, and resilient as the data that flows through it.

Managing data, however, is often the most challenging aspect of managing freight in today’s environment. First the sheer volume of data generated by the modern supply chain is daunting, and growing exponentially. Currently this includes more traditional data such as freight operations data; rate, payment, and audit data; load booking/scheduling data, and service performance data. It is also beginning to encompass end-to-end, real-time visibility information from global positioning systems (GPS) and internet of things sensor/scanning technology; descriptive, diagnostic and predictive analytics with exception notifications; and automated processes supported by machine learning. Furthermore, this data flows into the operating model in many forms, both structured and formatted for databases and not. It also is coming from a range of sources, such as suppliers, third-party vendors, subcontractors, partners, customers, information systems, and devices in the field.

To be able to actually use all this data, companies need to make sure that they are:

• Managing who has access to the data. All parties must be properly onboarded and given discreet roles and permissions to access specific data.
• Validating and standardizing the data in common fields according to specific business rules for shared use.
• Making the data accessible to all relevant users in real time, so that they can take actions to respond to rapidly changing conditions.

To manage all of this, it is important that companies have a data steward who is responsible for data ownership, governance, and processes. The steward’s role would differ depending on the company’s freight operating model and its position along the outsourcing spectrum.

In a more internally run model, for example, the steward might have greater ownership over components such as shipment-level freight data and carrier performance metrics, with sole visibility into freight audit and payment data. In a more highly outsourced model, the steward would have less direct data ownership and control but would maintain upstream ownership of supplier relationship management (SRM) and lane-level shipment data. The steward would also need full “control tower” visibility into downstream booking, scheduling, distribution, pricing, and payment. This concept of the data steward needing more or less control of specific types of data is shown in Figure 3.

The only constant: change

The turbulence and disruptions that shippers are experiencing today are not expected to go away any time soon. Scientists expect more frequent pandemics and 100-year weather events in coming years. Meanwhile retail e-commerce, global sourcing, and trade will grow increasingly complex. These conditions put the supply chain and its underlying freight operating model front and center in the push for competitive advantage. An optimal balance of internal and outsourced functions, coupled with efficient data management and stewardship, will leave organizations well-positioned to take on whatever challenges volatile markets may bring.