implementing best practices in transportation procurement · mbbc model market lh fb jmc base rate...
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JMC Steel Group and Chainalytics | SCOPE Spring | April 23, 2012
Implementing Best Practices in Transportation Procurement
Click to edit Master title style Agenda
Optimizing Fuel Surcharge Structure
Managing Carrier Relationships Under Tightening Capacity
Introduction
Best Practices in Transportation Procurement
Summary and Q&A
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Click to edit Master title style Agenda
Optimizing Fuel Surcharge Structure
Managing Carrier Relationships Under Tightening Capacity
Introduction
Best Practices in Transportation Procurement
Summary and Q&A
3
Who is JMC Steel Group?
Largest non-energy tubular manufacturer
in North America
• Revenues: + $1.8 Billion
• Steel consumption of + 1.6 Million Tons
• Production capacity of ~2.6 Million Tons
• Employees total approximately 1,800
Market leader in products accounting
for 80%+ of sales
• Structural Tubing
• Standard Pipe
• Electrical Conduit
Portfolio Mix
Structural Tubing
51% Standard Pipe 21%
Electrical 12%
DOM 5%
Fence 4%
Sprinkler 2%
Other 5%
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The JMC Steel Group
• Three operating
divisions
• 12 Facilities
• Approximately
2 million tons of pipe
and tube each year
• Delivering solutions
across the continent
Delivering Solutions Across North America
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Who is Chainalytics?
Over 80 FTEs Worldwide
Our Clients
More Than 180 Unique Clients
14 of AMR’s Top 25 Supply Chains
57 Fortune 500 Companies
5 of Top 10 Retailers
7 of Top 10 Food & Beverage Manufacturers
5 of Top 10 CPG Companies
6 of Top 10 Forest, Paper and Packaging Companies
Our Experience
More Than 375 Engagements
TODAY
•1st Named to “100 Great Supply Chain Partners” List by SupplyChainBrain; Recognized for 8 Years Running
•Launch of Freight Market Intelligence Consortium (FMIC)
2001
2002
2003
2004
2005
2006
2007
2009
2010
2011
2008
Our Genesis
•Market Lacked Proven, Focused Supply Chain Analytics Competence
• “Best Analytical Minds in Supply Chain”
Empowering Fact-Based Decisions
Across Your Supply Chain
•Launch of Sales & Operations Variability Consortium (S&OVC)
•Mike Kilgore named a “Pro to Know” by Supply & Demand Chain Executive; Jeff Metersky (2006), Gary Girotti (2007), Steve Ellet (2011), and Irv Grossman (2011) also named Pros to Know
•Established Chainalytics India Private Limited in Bangalore
2012
•Strategic Growth via Mergers & Acquisitions
− Supply Chain Operations (Chainnovations)
− Packaging Optimization (Adalis Packaging Solutions Group)
•FMIC named “Top Supply Chain Innovation” by Supply & Demand Chain Executive
•Named to ARC Advisory’s “10 Coolest Supply Chain Boutiques”
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Years
Quarters
Months
Weeks
Planning
Horizon
We Support Value-Driven Supply Chain Decisions
At what service level can we
profitably satisfy demand?
How should we transport
product through the supply
chain?
How much and where should inventory be
positioned in the supply chain?
Can we reduce our transport and logistics costs by improving cube
utilization?
Should our warehousing and material
operations be insourced
or outsourced?
When should we buy or make product to make the best use of our capacity?
What is the best flowpath?
How well do our current operations
mitigate repair and warranty
costs?
How can we increase
visibility to stakeholders?
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Sales, Inventory & Operations Planning
Transportation Logistics Operations
Service Supply Chain
Packaging Optimization
Supply Chain Design
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Outbound Flat Bed
$72.0
Intra-Company
$4.4
Rail $12.7
Inbound $10.7
Outbound Agent
Warehouse $3.6
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Areas of Focus
Performance of current managed freight spend to market
Opportunities to improve performance to market
Transportation Practices
Current and support of best-in-class
Transportation Network Overlay
Looking for opportunities to leverage continuous moves or dedicated operations to lower freight expense
What did Chainalytics evaluate at JMC?
JMC Aggregate Freight
Spend ≈ $100M
Components Measured to Benchmark Consortium
JMC Freight Spend by Category (in Millions)
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Major Finding: Procurement Opportunity Re-Evaluate Fuel Surcharge Program
Base Rate Miles
Example Load 1,302$ 737
$1.77/mile
MBBC Model Market LH FB JMC
Base Rate 1.212$ 1.20$
Escalator 0.059$ $0.069 -$0.079
Increment/Mile 0.010$ 1% on base rate
Fuel CPG
Market
Surcharge/Mile
Market
Surcharge/Load
JMC %
Surcharge
JMC
Surcharge/Load
Cost /
(Savings) per
Load to JMC
% Variance
to Total
Market
2.86$ 0.277$ 204$ 22% 286$ 82$ 5.4%
3.00$ 0.301$ 222$ 24% 312$ 91$ 5.9%
3.25$ 0.343$ 253$ 27% 352$ 99$ 6.3%
3.50$ 0.385$ 284$ 30% 391$ 107$ 6.7%
Example Load
Base Rate Miles
Example Load 1,302$ 737
$1.77/mile
MBBC Model Market LH FB JMC
Base Rate 1.212$ 1.20$
Escalator 0.059$ $0.069 -$0.079
Increment/Mile 0.010$ 1% on base rate
Fuel CPG
Market
Surcharge/Mile
Market
Surcharge/Load
JMC %
Surcharge
JMC
Surcharge/Load
Cost /
(Savings) per
Load to JMC
% Variance
to Total
Market
2.86$ 0.277$ 204$ 22% 286$ 82$ 5.4%
3.00$ 0.301$ 222$ 24% 312$ 91$ 5.9%
3.25$ 0.343$ 253$ 27% 352$ 99$ 6.3%
3.50$ 0.385$ 284$ 30% 391$ 107$ 6.7%
Example Load
Correlating FSC to Mileage-Based
Surcharge Drives Carrier Operating Efficiency
Much of the TL industry has moved to mileage-based surcharge programs
JMC’s FSC program placed them at a disadvantage to the market; 5.4% over on average lane
Price disadvantage was more pronounced as fuel prices continued to rise
JMC program accelerated more than market average
Used transportation procurement event as an opportunity to establish a new FSC program
Click to edit Master title style Agenda
Optimizing Fuel Surcharge Structure
Managing Carrier Relationships Under Tightening Capacity
Introduction
Best Practices in Transportation Procurement
Summary and Q&A
10
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Go to market on a schedule known to you and your partner carriers
Annually
Every 18 Months
Every Two Years
Carriers WILL (understandably) build a risk premium into rates when they do not know when the next opportunity for review will occur
Best Practices in Transportation Procurement Frequency
Source: Chainalytics FMIC January 2012 TL Questionnaire
How often do you renegotiate or seek new bids from carriers?
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Lanes and volumes exposed to all participants
All standardized accessorial and FSC agreements predefined
Services and special equipment requirements fully defined and visible at lane level where applicable
Carriers provide rate and volume capability
Lane level
Origin facility level
Global constraint
Shipper awards on targeted planned volumes and intended splits at the lane level
Percentage based lane splits
Load count based splits
Best Practices in Transportation Procurement Methodology: Multi-Round Bid
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Less than 10% non-incumbents invited to event
Used as an opportunity to incent carrier behavior
Carriers performing well on KPI/Performance Metrics receive same or more volume
Underperforming carriers have less volume awarded
Carrier’s historical % of spend frequently protected
However, be prepared to allow significant lane level churn in awards
It’s a highly fragmented market for both shippers and carriers
Carrier’s strong lanes this bid cycle may differ from last bid cycle
Use optimization tool if the network is large or constraint scenarios are complex
Avoid the temptation to award existing incumbent carrier at the lane level if another established carrier who knows your business is providing a more cost effective rate or volume commitment
Best Practices in Transportation Procurement Methodology: Multi-Round Bid
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Best Practices in Transportation Procurement Fuel Surcharge Treatment
DOE Diesel Projections vs. Actual Market Rates
Fuel is unpredictable. Implement fair and
equitable FSC programs.
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• Establish a known base fuel cost
• Escalator based upon existing and/or planned improvements in overall fleet MPG targets
• $0.01 per mile is the typical surcharge
• Percentage based is still the norm in Intermodal
• May consider FSC minimums in the case of Short Haul activity
Fuel Surcharge Programs Chainalytics FMIC Membership
Click to edit Master title style Agenda
Optimizing Fuel Surcharge Structure
Managing Carrier Relationships Under Tightening Capacity
Introduction
Best Practices in Transportation Procurement
Summary and Q&A
16
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Historic base rates were essentially “at market” when compared to similar FMIC shippers
Fuel surcharge program was “% revenue” based and analysis indicated that this led to an all-in market position of roughly +6% on $75MM annual outbound flat bed spend
What we did at JMC:
What happened at JMC?
1-2 Months
Developed Formal
Procurement Strategy
Defined Strategic Carrier
Management Program
Conducted Transportation
Network Procurement
Event
Implemented Rates and
Commitments
Established Procurement Compliance Framework
3 Months 1-2 Months
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• Base rates came in at 1.3% savings to baseline (which were essentially “at market”)
• All-in savings with re-bid base rates and new FSC program projected at 8.1% savings
• JMC estimated savings after post bid-adjustments ≈ $6 Million
What were the results?
Round
2010 Base
Spend
Fuel @ DOE
$3.976/gallon
Total All In @
DOE
$3.976/gallon Loads Lanes
1 59,997,284 21,574,747$ 81,572,031$ 47,799 868
2 59,994,870 21,574,747$ 81,569,617$ 47,799 1,180
Date Scenario Round Solution Spend
Solution Fuel @
DOE $3.976/gallon
Total All In @ DOE
$3.976/gallon Description Unawarded 2010 Baseline
2010 Baseline
%
2010 Baseline
+ Fuel
2010 Baseline
+ Fuel %
03/11/11 01 1 $49,023,703 $15,029,845 $64,053,548 Round 1: Unconstrained 0 $10,973,582 18.3% $17,518,483 21.5%
03/12/11 02 1 $55,837,016 $15,029,845 $70,866,861 Round 1: No Brokers 4 $4,160,268 6.9% $10,705,170 13.1%
03/12/11 03 1 $55,127,913 $15,029,845 $70,157,758 Round 1: Grow and Maintain Only 0 $4,869,371 8.1% $11,414,273 14.0%
03/14/11 04 1 $52,583,430 $15,029,845 $67,613,275 Round 1: Limit Brokers - 50% Spend + Cap TPSL 0 $7,413,854 12.4% $13,958,756 17.1%
04/07/11 05 2 $50,370,273 $15,029,845 $65,400,118 Round 2: Unconstrained - Round 2 Rates Only 0 $9,624,598 16.0% $16,169,499 19.8%
04/07/11 06 2 $55,523,215 $15,029,845 $70,553,060 Round 2: Carrier Capacity Constrained 0 $4,471,655 7.5% $11,016,557 13.5%
04/07/11 07 2 $58,802,400 $15,029,845 $73,832,245 Round 2: No Pure Brokers Carrier Capacity Constrained 4 $1,192,470 2.0% $7,737,372 9.5%
04/07/11 08 2 $57,903,155 $15,029,845 $72,933,000 Round 2: Grow and Maintain Only - Capacity Constrained 1 $2,091,716 3.5% $8,636,617 10.6%
04/13/11 09 2 $57,677,525 $15,029,845 $72,707,370 Round 2: Forced 22 Carriers at 50% of Historic Spend 1 $2,317,345 3.9% $8,862,247 10.9%
04/13/11 10 2 $57,650,996 $15,029,845 $72,680,841 Round 2: Scenario 09 + Limit to 75 Carriers 1 $2,343,875 3.9% $8,888,777 10.9%
04/13/11 11 2 $57,808,340 $15,029,845 $72,838,185 Round 2: Scenario 09 + Brokers 25% Facility Cap 2 $2,186,531 3.6% $8,731,432 10.7%
04/13/11 12 2 $57,713,128 $15,029,845 $72,742,973 Round 2: Scenario 09 + Rank 4 25% Facility Cap 1 $2,281,742 3.8% $8,826,644 10.8%
04/15/11 13 2 $57,808,339 $15,029,845 $72,838,184 Round 2: Pure Brokers and Rank 4 25% Facility Cap 1 $2,186,531 3.6% $8,731,433 10.7%
04/20/11 14 2 $59,281,882 $15,029,845 $74,311,727 Round 2: Scenario 13 + Various 1 $712,988 1.2% $7,257,890 8.9%
06/15/11 15 2 $59,195,185 $15,795,339 $74,990,524 Round 2: Scenario 11 + FINAL ADJUSTMENTS 0 $799,686 1.3% $6,579,094 8.1%
Baseline
Savings
Click to edit Master title style Agenda
Optimizing Fuel Surcharge Structure
Managing Carrier Relationships Under Tightening Capacity
Introduction
Best Practices in Transportation Procurement
Summary and Q&A
19
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What were the major challenges? Supply and Demand Cycle
We undertook this
procurement event at
the start of 2Q 2010.
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Organization
Skeptical of multi-round procurement event
Belief that business was unique or fundamentally different
Strongly held belief that modification of FSC program was a deal breaker
Carriers
Had not historically dealt with procurement events with JMC Steel Group
Many smaller carriers were passing FSC to owner/operators “as is.” Without business process change the reduction in FSC might be problematic
Many smaller carriers had low technology sophistication. Using a web-based procurement portal required more carrier support than usual
Some felt empowered to “not play ball” due to the demand cycle
What were the major challenges? Organization and Carriers
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Scope and breadth of our data
Initial usage of TMS data to drive a procurement event
Defining the ‘right’ solution mix
Reliance on top few carriers vs. opportunity with new carriers
Implementing new rates and FSC into our TMS
Measuring the results
Easy on FSC impact
Challenging on linehaul rates
What were the major challenges? JMC Perspective
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Optimizing Fuel Surcharge Structure
Managing Carrier Relationships Under Tightening Capacity
Introduction
Best Practices in Transportation Procurement
Summary and Q&A
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Go to market on a routine, scheduled basis
Use the procurement event as the primary tool for awarding good carrier behavior
Keep FSC escalators aligned with fair fleet average MPG targets
Fair and equitable treatment of carriers during pricing review is the surest hedge against inevitable demand spikes in the carrier market
View procurement process as a healthy part of your relationship with your partners and carriers
Summary
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Questions?
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Tony Heldreth Vice President, Logistics
JMC Steel Group [email protected]
312-275-1608
Mike Eaton Principal, Transportation Practice
Chainalytics [email protected]
678-384-3613