Cargo Haulers Inc.
Cargo Haulers is a mid-sized distributor based in the central United States. The ability to distribute their products in a cost-efficient manner is imperative to remaining competitive in their field.
Transportation Manager Earl Monroe stopped by the office of Fred MacMurray Cargo Hauler’s VP of Supply Chain. “What’s new boss?” asked Monroe.
“We have a student intern named Dolores Del Rio starting today from Iowa State University, “replied MacMurray. “I’m going to assign her to you.”
“Awesome!” exclaimed Monroe. “This gives me the opportunity and the resources to look at that ‘if I had time’ wish list and assess a potential future employee. I have a project in mind for our new intern. This project should provide some real-world experience and increase her market value for her first career position. If this project is done correctly, I believe Cargo Haulers can realize some key cost saving benefits. So, when can I meet her?”
“You actually walked right past her outside my office.” Grinning, MacMurray looked at his open door and called, “Dolores, come into my office, I want to introduce you to your new boss and discuss our transportation strategies.”
As Dolores, walked through the door, MacMurray began, “Dolores, this is your boss Earl Monroe. According to your resume, you took a transportation course last semester with Professor Chen – tell me – what do you know about transportation consolidation?”
PART 1: SHIP DIRECT vs VEHICLE (Freight) CONSOLIDATION
“Professor Chen taught us that truckload (TL) rates per pound are lower than less-than-truckload (LTL) rates per pound.” Dolores replied. “With LTL you are handling many smaller shipments for different customers. Truckload shipments are often made up of a few shippers so you get kinda’ an ‘economics of scale’ thing: fewer delivery points, less handling, more profit for the carrier. Transportation rates reflect this and that is why TL rates are lower per pound. Strategically, you consolidate your freight into larger quantities so you can get the lower TL rate. There are two main types of consolidation: vehicle consolidation and temporal consolidation. Vehicle consolidation combines LTL shipments from various sources together into TL quantities so you can qualify for the lower TL rates.”
“Correct” agreed Monroe, “Cargo Haulers can either use a ship direct model where our four manufacturers ship LTL directly to our customer and we pay the high LTL freight charges, or we could switch to vehicle consolidation where the four manufacturers ship LTL to our distribution center at our expense and we combine these items into consolidated TL shipments to our customer. Not only would we be able to reduce dock congestion for our customer, but we may also be able to reduce our transportation costs.”
“As long as we can efficiently run our distribution center,” cautioned MacMurray, “our distribution center costs run $4.70 per 1,000 pounds handled.”
“Dolores, I want you to take a look at our data (Figure 1) and complete an analysis comparing the ship direct model and the vehicle consolidation over 52 weeks of shipping, “stated Monroe, looking at MacMurray who was nodding his approval. “Quantify a recommendation about the lowest cost strategy. And don’t forget to include our distribution center costs!” Rates are provided in CWT (hundredweight) or cents per hundred pounds.
MacMurray paused, remembering a prior conversation he had with corporate, “also, I would like to know what would happen if there is a 10% increase in our TL Rate DC to Customer later on in our future”.
PART 2: SHIP DIRECT vs TEMPORAL CONSOLIDATION
“So Dolores,” Monroe continued, “What about the other type of consolidation. The temporal one. What is that?”
“Well,” Dolores hesitated, “basically, temporal is a fancy word for time. With temporal consolidation Cargo Haulers would combine LTL shipments over time going to a single location into TL quantities to benefit from the lower TL rates per pound.”
“Perhaps we should use temporal consolidation to consolidate these shipments into larger, lower cost shipments rather than making a number of higher cost, small shipments,” stated Monroe. “OK. Dolores, I also want you to take a look at the possibility of using temporal consolidation from the Cargo Haulers’ Oklahoma City distribution center to each of our operations in Kansas.”
“Use the history of average past orders to three Kansas cities over consecutive three day periods (Figure 2) an assume this is representative of demand every three days throughout the year (e.g. Day 4 shipments would be identical to those on Day 1). Complete an analysis using our current rates (Figure 3) comparing no consolidation (e.g. ship direct) versus temporal consolidation of three days of shipments over a 30-day period. Quantify and make a recommendation based on the lowest cost.”
“But, Earl, if we delay shipments, our customer service level will drop. That has to cost us something,” cautioned Dolores. “True,” responded Monroe, “so in your analysis assume a cost of poor service of $2000 dollars per month (every 30 days).”
“This all sounds so complicated,” Dolores declared, “why don’t we use a freight forwarder or a freight broker to handle the Cargo Haulers freight?”
“Well, Dolores,” Monroe smiled, “I guess I would answer you with a question of my own: What is the difference between a freight forwarder and a freight broker? Why don’t you provide me the key differences and the similarities of each so we can discuss the options to consider.”
PART 3: FORMING A NEGOTIATION STRATEGY
Two weeks later Fred MacMurray called Dolores to his office. Earl was sitting in a chair when she arrived. “Dolores, after you completed your analysis of consolidation and completed the comparison of a freight forwarder and a freight broker, Mr. Monroe and I got to talking. We spent $6,704,325 last year shipping freight. I want to consider using a freight forwarder for our operations so Cargo Haulers can lower our transportation costs. Earl checked our NAICS 4885 in Hoovers Online and found there are 31,249 freight forwarding companies in their database. 19,900 of those have revenues below $1 million dollars annually – and we feel these are too small for us.” Fred leaned back in his chair and then stated “We also feel we wouldn’t have enough leverage with the really big freight forwarding companies that have over $500 million in annual revenues. So we would like to consider using one of the 121 mid-size firms ($50 – $500 million). We have been discussing doing business with MT Freight Forwarding and they have initially agreed to use the same surface carriers that we presently use so our customers will not notice anything different. We now have to negotiate the rates with MT Freight Forwarding.”
Monroe chimed in, “as a middleman, MT Freight Forwarding is able to consolidate Cargo Haulers freight along with freight from a number of other customers so they can qualify for a lower transportation rate. We realize that MT Freight Forwarding will have many customers, but we want to pay only our fair share. Our goal is negotiate rates with MT Freight Forwarding so they may earn their average profit margin or EBITDA and keep their shareholders happy. What we do not want to do is to subsidize the other customers of MT Freight Forwarding. So we need you to conduct an analysis for us to use in our negotiations that determines what these rates ‘should be’
MacMurray interposed, “Tell her about the Accenture report.”
“Oh yes,” Monroe continued, “I found an Accenture report which considers the ‘higher performer’ freight forwarders. The high performers have tightly controlled operating expenses and strong working capital management. Their average return to shareholders over a five-year period is 7.5% Hoover’s indicates that’s above the industry average EBITDA for all freight forwarders at 6.6%. It appears the high performers earn a higher return for their better efficiency. Happily, the medium sized freight forwarders have a lower average EBITDA of 6.3% (Figure 4) so we might be able to glean even more cost savings.”
“Since we already have rates from our carrier (Figure 5),” MacMurray interjected, “We can assume the forwarder has the same shipping rates or better. So use these rates to develop a strategy so we can negotiate a flat rate per CWT for each zone for what we would expect to pay knowing EBITDA target of 6.3% and a Transportation Purchase (Spend) of 65.4%”
Questions
Part 1:
Q #1: If we use the ship direct model, using data from Figure 1, what will be our total costs over a 52-week period?
Q#2: If we use the vehicle consolidation model, using data from Figure 1, what will be our total costs over a 52-week period?
Q#3: Which model do you recommend and why?
Q#4: If we use the vehicle consolidation model, using data from Figure 1, what will happen if we have a 10% increase in the Truckline (TL) Rates from the Distribution Center (DC) to our customers (i.e. what will be the savings / or increase over the ship direct model)?
Part 2:
Q#5: If we use the ship direct model, using data from Figure 2 and 3, what will be our total costs over a 30-day period?
Q#6: If we use the three-day temporal consolidation model, using data from Figure 2 and 3, what will be our total costs over a 30-day period?
Q#7: Do you recommend using the ship direct model OR the three-day temporal consolidation model? Explain why.
Q#8: Compare and contrast the similarities and differences between a freight forwarder and a freight broker. When is it appropriate to use one but not the other?
Part 3:
Q#9: Propose a flat rate for each of the five zones using a cost /CWT.
Zone A:
Zone B:
Zone C:
Zone D:
Zone E:
Q#10: What will be the savings in dollars ($) and as a percentage (%) compared to the old transportation spend?
2