Want to save money? Let’s talk about utilization. When most people think about saving money in logistics, the first thought tends to be freight costs. Can you squeeze the vendors? Are the transportation providers or other 3PL carriers gouging you? Well, there may be some money on the table in negotiated freight costs, but that is generally less than 5%. If you improve utilization in the areas of cube, order framing, inventory and transportation, you could save 15-20% of your logistics costs.
We will discuss the utilization of orders, mode, drivers, equipment and warehouses. Each of these areas offers a potential to save more than 5%. We will walk through some simple, hypothetical math, and demonstrate the logic behind these opportunities. To make a dry subject a bit more interesting, we will refer to the picture of the camel pulling the cart loaded with bags of coffee beans.
What is order framing? A better word would be ‘consolidation’. Most companies receive and process orders throughout the day. At some point those orders are released to the warehouse to pick, pack and load onto the truck for delivery. As an example, most of us use Amazon, and have received multiple boxes on the same day.
The idea of order utilization (order consolidation, order framing) is to join multiple orders going to the same place so that those orders are picked and packed into the same box for shipping. It makes little sense to have two boxes (or pallets, etc) to be packed and shipped separately. The issue is that many systems do not have a consolidation activity. In other cases, the orders were released to the warehouse at different times, so the opportunity was lost to consolidate.
Reference our picture with the camel and the coffee beans. Can you imagine the extra costs if each bag of beans was delivered with a separate cart and a separate camel for each bag? You can bet that if their customer ordered one more bag at the last minute it would be strapped right to the top of the bundle!
What about mode shift? One common example is the shift from TL (truck load) to Intermodal. Another is small shipment management. Let’s start with the classic modes for shipments: small package like Fed Ex, Less than truck load (or LTL) like Roadway, full truck load (FTL), and intermodal. The general rule of thumb is that you will pay 10 times the cost per pound LESS when you use the next higher mode. As a general rule, the cut offs are:
- Small pack – less than 150 pounds
- LTL – 150 pounds up to 6-10 pallets
- FTL – more than 6-10 pallets
- Intermodal – Cost versus transit time planning tradeoffs for FTL
One of the main drivers of order consolidation opportunities is mode shift. The main reason boils down to mode shift and minimum shipment costs.
- If the minimum shipment cost is $75, and your company has 2 minimums, you will pay $150, e.g. 2 min shipments x $75 = $150
- If you combined the shipments, you might pay more than the minimum, but less than two minimum shipment costs. For example: 1 shipment, 2 pallets = $100
The Government mandates that a driver only has about 10 hours of drive time available on any given day. This is the number of hours behind the wheel or ‘on the clock’, not the number of miles being driven. So there are opportunities to manage the drive time by paying attention to traffic patterns. For example:
- Can the shipments be moved in the middle of the night when there is less traffic?
- Are your trucks being held up a light in the middle of town? If so, an alternative routing could help
- Are drivers wasting time waiting for loads to be loaded instead of driving?
Strangely, our camel picture shows no driver. Maybe that is who is taking the picture. Maybe the camel knows the way, in which case no driver is needed. Hmmm, maybe they are onto something! In any case, those coffee beans are en route somewhere!!
- In the general public, we tend to think of one truck one driver. But if a driver can only drive 10 hours a day, that means that the truck is sitting idle for 1/2 the day. Consider arranging your operation to allow for a second driver to take over for the second half of the day.
- It is true that there is more maintenance, but there is also full utilization of the equipment
- The general rule of thumb, even after additional operational costs are considered, is that you will save 10-20% oof total logistics costs if you fully utilize the equipment on a 24 hour clock
- How far do you think a camel can go before it needs rest, food and water? These beasts are uniquely adapted to desert conditions, and may outperform a diesel in some limited applications! The point here is: sometimes we need to think “out of the box”!
- Are your warehouses being utilized? How much inventory is obsolete or slow moving? Is that obsolete inventory sitting where operators have to constantly work around it?
- If you removed the obsolete inventory, could you lease a smaller warehouse?
- For slow moving items, consider a “make to order” strategy – this relieves warehouse space and precious capital that can be productively redeployed
- In my experience, most companies can reduce warehouse space usage by 10-20% when obsolete and slow moving items are removed.
In the picture, the camel and the cart appear to be ‘fully utilized’. Is your operation optimized for full utilization? Can you save some money in any of these areas – orders, mode, drivers, equipment or warehouses?
See for yourself. Think about your utilization opportunities for orders, mode, drivers, equipment and warehouses. Hopefully these ideas will help you to improve your bottom line. If you want to explore the opportunities more deeply, consider some creative solutions or discuss some tricky spots, Give BEI Global a call!