2008 09 24 Best Practices in Transportation Benchmarking

The Best Analytical Minds in Supply Chain Management
Best Practices in Transportation Benchmarking September 24, 2008
Copyright 2008 Chainalytics, LLC.
Introductions
John Schnorf
Director CHAINalytics LLC
Chris Caplice
Executive Director Center for Transportation & Logistics, MIT
John Wooten
Senior Procurement Manager, Logistics The Clorox Company
Agenda
Introductions Why benchmark?

How the consortium began
Challenges in benchmarking transportation

The limitations of traditional benchmarking Econometric modeling and analysis
Member benefits
Reports and tools Real-life success story The Clorox Company Consortium membership
Questions
3 Copyright 2008 Chainalytics, LLC.
Who is Chainalytics?
Chainalytics formed in 2001 (HQ in Atlanta, GA)

Supply Chain Design
Supply Chain Analysis in 3 Focus Areas:

Supply Chain Design Transportation Planning Inventory & Portfolio Planning
Transportation Planning Inventory & Portfolio Planning
Top 100 Innovations (2007) Supply and Demand Chain Executive

Award for Model-Based Benchmarking
Great Supply Chain Partner Global Logistics and Supply Chain Strategies
Named for five years running: 2004-2008
Why Benchmark?
Logistics Cost As % of GDP

11 10.5 10 9.5
9
Total US logistics expense was nearly $1.4 Trillion in 2007

10.1 9.9 9.5
10.4
10.2 10.2
10.3 10.1 9.9 9.9
8.8 8.6
8.8
Logistics costs rose to over 10% of GDP for first time since 2000 Transportation costs account for 61% of total logistics costs (and 6.2% of GDP) Transport costs alone were up 16% in 05 and 9% in 2006 and 6% in 2007
8.5
8
7.5 7 6.5
Source: 19 Annual State of Logistics Report - CSCMP 5 Copyright 2008 Chainalytics, LLC.
Top 10 List Transportation Procurement Process

1. Benchmark your performance 2. Leverage your entire network 3. Leverage your private and dedicated fleet assets 4. Executive buy-in 5. Provide more information to carriers 6. Multiple Round Bidding 7. Optimize your responses 8. Standardize your charges (keep it simple for carriers)
9. Measure performance
10. Green Improved efficiency reduces costs
Am I Paying Fair Rates?

In 2003 there was no way to answer that question

Publicly available information was not sufficient
Neither accurate nor timely Not robust enough to capture idiosyncrasies of the freight
Traditional benchmarking does not capture cost drivers
Database models do not isolate the individual characteristics of the lanes that
determine the cost of service Metrics based approaches such as Activity Based Costing do not capture the impact of external market conditions
Poll Question
How Does Your Company Benchmark Transportation Costs? (Choose one that best describes your company)
Rely on carriers and service providers Compare with other shippers Measure against last years rates Research public information Dont benchmark, or dont know
Benchmarking Challenges
Shippers find challenges in bechmarking all aspects of transportation costs

* Analyzing other factors besides just lane rates
Finding information on other shippers' operations Gathering internal data to establish a baseline 7.0% 19.2%
15.7%
Having time to compare more than a subset of lane rates

All of the above
3.5%
50.8%
* Accesorial charges, tender accept/reject, carrier performance, fuel surcharges, etc.
47% of respondents said they rely on carriers and 3rd party providers to supply them with market information 47% depend on year-over-year comparisons to measure performance Only 6% benchmark with their peers at other companies
Model-Based Benchmarking
Chainalytics Created the Model-Based Benchmarking Consortium

A collaborative membership based organization for confidentially sharing transportation information for the purpose of benchmarking market costs
MBBC Goals
Build a representative model of the market Understand carrier cost drivers
Quantify impact of freight characteristics

Provide a bellwether to validate procurement performance Identify need and plan procurement Quantify value for sourcing events
10
Consortium Membership
Model Statistics
Nearly $11 billion in transportation spend Over 12 million loads 55 model participants varying in TL spend from $12M to $500M+ Models include:

TL Freight Spend
21%
Under $50M
$50-100M
25%
21%
$100-250M
33%
Over $250M
Dry van Refrigerated Intermodal Flatbed Short haul
Industry (% of volume)
9% 11%
Retail Consumer Goods
Covers USA, Canada and in to and out of Mexico Equivalent to ~ 2.5% of the total North American intercity truckload market
11
24%
13%
22% 21%
Food Mfg Beverage
Industrial
Whsl Distrib
Agenda


Member benefits
Questions
MIT-Center for Transportation & Logistics

Drive supply chain innovation and accelerate its adoption into practice.
Founded in 1973 as an interdisciplinary unit in the MIT School of Engineering
Conduct research in transportation, logistics and supply chain management

Engage over 60 faculty and research staff from 11 MIT departments & schools Work with more than 50 companies across the globe at 3 different centers: ZLC, CTL, CLI
Master of Engineering in Logistics (MLOG) MIT-Zaragoza Program in Logistics (ZLOG) ESD SM in Logistics ESD Ph.D. in Logistics Executive Courses
Three-tier partnership model
Exchange community Collaborations Communications
SC2020 Healthcare SC Security & Resilience Transportation Mgmt. Emerging Markets Energy/Carbon Demand Mgmt. SC Risk Mgmt. Scenario Planning Strategy Alignment Education Partners MIT AgeLab
Challenges to Benchmarking
Traditional Benchmarking
Identify like products or processes Compare costs for producing similar products/processes Rank each firms efficiency (cost per product) against others
Transportation Challenges
What is the product? Each shipper moves products on thousands of unique lanes Contract rates with carriers are usually proprietary Even similar lanes have big differences - policies, direction, etc.
Traditional Benchmarking does not tell you why or how . . .

Building an Econometric Model

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
CPL 1,028 1,300 511 889 1,164 1,059 1,072 784 1,174 615 1,004 1,198 1,045 1,031 968 736 731 798 1,379 658 891 904 1,035
Distance 703 961 322 685 797 747 621 570 874 398 753 913 897 670 558 483 469 521 998 357 477 740 755
How (exactly) does each factor impact cost?
$1,600.00 $1,400.00 $1,200.00 $1,000.00 $800.00 $600.00 $400.00 $200.00 $250 350 450 550 650 750 850 950 1,050
15

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
CPL 1,028 1,300 511 889 1,164 1,059 1,072 784 1,174 615 1,004 1,198 1,045 1,031 968 736 731 798 1,379 658 891 904 1,035
Distance 703 961 322 685 797 747 621 570 874 398 753 913 897 670 558 483 469 521 998 357 477 740 755
How can we describe this relationship?
1. Draw a best fit line 2. Write equation for the line (y= ax + b)
y = 1.0485x + 259.32
Fixed Cost per Load
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $250 350 450
Variable Cost per Mile
550
650
750
850
950
1,050
16

What about factors that impact cost per load, not per mile?
- We can model these as fixed, variable, or a combination - Allows for flexibility
Example: Outbound versus Inter-Plant Moves

Circled shipments indicate outbound moves to customers.
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $250 350 450 550
17
y = 1.0485x + 259.32
650
750
850
950
1,050

Example: Outbound versus Inter-Plant Moves

Circled shipments indicate outbound moves to customers.
Fixed Cost: Slope is same, Intercept is higher
$1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $250 350 450 550 650 750 850 950 1,050
Variable Cost: Slope is higher, Intercept is same
y = 1.0485x + 259.32
Impact of outbound move to customer could be . . .

Fixed cost of ~$100 per shipment Variable cost of ~$0.12 per mile
18

What about the forehaul / backhaul effect?

Introduce the concept of Regional Values
Capture impact of a truck entering / leaving an area Separates the geographic effect from all other factors (miles, etc) Can be estimated by ALL loads in/out of a region Eliminates need for lane by lane comparisons and allows for estimation of new lanes
19

Explains 70-80% of Variability
Volume Effect
Border Effect Network Density Effect
New Region Definitions (Explains 8-10%)
Explanatory Variables Constant ($/load) Distance ($/mile) Outbound Move to Customer ($/load) Multi-Stop Load ($/load) Spot Market Move ($/mile) Weekly Corridor Volume loads >=52 and < 250per year ($/load) Monthly Corridor Volume loads >=12 and < 52per year ($/load) Quarterly Corridor Volume loads >=4 and < 12per year ($/load) Annual Corridor Volume loads <4 per year ($/load) Border Flag - from US to Canada ($/load) Border Flag - from Canda to US ($/load) Rural Origin Location ($/load) Rural Destination Location ($/load) City Origin Location ($/load) City Destination Location ($/load) 53 Foot Trailer Flag ($/mile) Frozen Van ($/mile) Refrigerated Container ($/mile) TOFC Load ($/mile) Regional Values ($/load) Intermodal Directional Paths ($/load) Adjusted R2 Goodness of Fit
LHD The Best Analytical Minds in Supply Chain Management LHR LHI LHF SHD SHR SHF $ 9 $ 425 $ 161 $ 63 $ 268 $ 220 $ 148 $ 1.09 $ 1.27 $ 0.64 $ 1.40 $ 1.28 $ 1.42 $ 1.19 $ 22 $ 73 $ 25 $ 53 $ 36 $ 46 $ 35 $ 36 $ 13 $ 28 $ 5 $ (82) $ 0.27 $ 0.25 $ 0.15 $ $ 11 42 $ 10 $ 28 $ 29 $ 18 $ 18 $ 64
Results from 2008 Model
Note that a wide variety of factors $ 22 $ 79 $ 51 $ 25 $ 35 $ 114 can be modeled. $ 93 $ Able to 143 $ out policies, 62 $ 114 37 $ price 79 $ 50 $ practices, and characteristics. 125 $ 130 $ 47 $ 209 $ 102 $ 81 $ 65 $ $ (386) $ Accurately costs shipments 757 $ 789 $ across North America - regardless (264) $ 8 $ of whether you have 7 $ (2) $ (3) shipments 1 $ 6 $ 3 $ 6 $ there. $ 16 $ 52 $ (72) $ 27 Provides input on$WHY$and HOW 28 25 $ 52 $ 0.03 $ MUCH various factors influence (0.05) costs. 0.35 $
X 95% $ 0.03 X X X 94% 93% X 88% X 71% X 79% X 74%
Impact of Fuel Surcharge Policies

$4.75
National DOE Cost per Gallon
$4.25
The last time fuel was At $1.20 per gallon was in March 2002!
$3.75
$3.25
$2.75
$2.25
2007
2006
2008
Parameters for TL FSC programs:
Base or Peg Rate established base line cost of fuel per gallon Escalator step change increase in fuel costs that trigger an increase in surcharge Surcharge amount paid to carrier in dollars per mile
Current benchmark values

Min Base ($/gal) $ 0.932 Escalator ($/gal) $ 0.010 Surcharge ($/m) $ 0.006 1st Qrtl $ 1.153 $ 0.050 $ 0.010 Med $ 1.200 $ 0.050 $ 0.010 3rd Qrtl $ 1.210 $ 0.060 $ 0.010 Max $ 2.330 $ 0.070 $ 0.020
Current weighted average in data: $1.20 Base with $0.054 escalator

Polling Question
How much are you paying carriers in fuel surcharge today?

Less than $0.25 per mile Between $0.26 and $0.50 per mile Between $0.51 and $0.75 per mile Over $0.75 per mile I really dont know how much
22
Impact of Fuel Surcharge Policies

How does the shippers FSC program influence line haul rates?
Surcharge minimal effect Base Rate minimal effect - limited range of values in data set Escalator large effect - evenly split between 5 and 6 cents
How much of an effect will having a 6 cent escalator impact costs?
Including this variable in the econometric model allows us to find out.

Results of the model are that . . .
Shippers with a 6 cent escalator paid 12.5 cents per mile more in linehaul. However, at $4.00 per gallon, they pay 9.4 cents per mile less in FSC.
(Assumes Base = $1.20 and Surcharge = $0.01)
We can quantify the cost impact of virtually any policy or practice!

Agenda


Member benefits
Questions
Benchmarking Report Output

25

Detailed breakdown of how each lane compares to the market

Origin State FL FL MO OK OK IN OK OK MO FL CA CA IN MO CA FL FL IN OK CA PA CA OK CA PA MO CA Origin Dest Distance Annual Service Move Contrac Actual Region State Dest Region (miles) Volume Type ment t Type RPM FL_TAM GA GA_ATL 474 12 S OB CC $ 0.71 FL_TAM NC NC_RAL 662 8 S OB CC $ 0.83 MO_SPR MN MN_RCH 566 6 S OB CC $ 1.39 OK_TUL TX TX_HOU 485 6 S OB CC $ 1.85 OK_TUL IA IA_DES 462 8 S OB CC $ 1.47 IN_IND MI MI_RAP 299 11 S OB CC $ 1.80 OK_TUL MO MO_STL 403 13 S OB CC $ 1.53 OK_TUL IL IL_CHI 701 8 S OB CC $ 1.46 MO_SPR TX TX_HOU 660 8 S OB CC $ 1.65 FL_TAM TN TN_MEM 823 16 S OB CC $ 0.78 CA_SAC CA CA_SDI 542 17 S OB CC $ 1.22 CA_SAC AZ AZ_TUC 918 8 S OB CC $ 1.58 IN_IND OH OH_CLE 321 21 S OB CC $ 1.78 MO_SPR CO CO_DEN 759 8 S OB CC $ 2.04 CA_SAC NV NV_VEG 613 13 S OB CC $ 1.61 FL_TAM AL AL_BIR 608 30 S OB CC $ 0.72 FL_TAM LA LA_ALE 823 19 S OB CC $ 0.91 IN_IND MN MN_RCH 617 19 S OB CC $ 1.29 OK_TUL TX TX_ANT 426 19 S OB CC $ 1.99 CA_BAK OR OR_POR 978 10 S OB CC $ 1.76 PA_HAR WI WI_MIL 817 21 S OB CC $ 1.03 CA_SAC UT UT_SLC 683 11 S OB CC $ 2.37 OK_TUL CA CA_SAC 1,825 8 S OB CC $ 1.31 CA_SAC AZ AZ_FLA 813 13 S OB CC $ 1.84 PA_PHI NC NC_RAL 456 40 S OB CC $ 1.09 MO_SPR IL IL_CHI 512 30 S OB CC $ 1.41 CA_BAK UT UT_SLC 751 17 S OB CC $ 1.84 Actual CPL $ 336 $ 549 $ 786 $ 899 $ 680 $ 538 $ 616 $ 1,023 $ 1,088 $ 644 $ 660 $ 1,450 $ 571 $ 1,550 $ 989 $ 440 $ 750 $ 799 $ 849 $ 1,723 $ 842 $ 1,621 $ 2,390 $ 1,494 $ 496 $ 722 $ 1,383 Actual Annual Cost $ 4,032 $ 4,390 $ 4,717 $ 5,396 $ 5,443 $ 5,914 $ 8,008 $ 8,184 $ 8,700 $ 10,304 $ 11,220 $ 11,603 $ 11,995 $ 12,404 $ 12,856 $ 13,200 $ 14,258 $ 15,173 $ 16,124 $ 17,233 $ 17,687 $ 17,829 $ 19,118 $ 19,427 $ 19,860 $ 21,672 $ 23,514 Est. RPM $ 0.77 $ 0.93 $ 1.44 $ 1.58 $ 1.36 $ 1.79 $ 1.44 $ 1.28 $ 1.57 $ 0.86 $ 1.43 $ 1.50 $ 1.81 $ 1.85 $ 1.75 $ 0.83 $ 0.93 $ 1.31 $ 1.76 $ 1.61 $ 0.99 $ 1.72 $ 1.19 $ 1.58 $ 1.16 $ 1.50 $ 1.81 Est. CPL $ 367 $ 617 $ 813 $ 765 $ 629 $ 534 $ 580 $ 894 $ 1,038 $ 711 $ 774 $ 1,374 $ 580 $ 1,404 $ 1,072 $ 507 $ 764 $ 808 $ 748 $ 1,579 $ 805 $ 1,177 $ 2,172 $ 1,286 $ 529 $ 767 $ 1,356 Est. Annual Diff. Cost Diff. CPL Percent Status $ 4,399 ($31) -8% BELOW $ 4,935 ($68) -11% BELOW $ 4,879 ($27) -3% BELOW $ 4,587 $135 18% ABOVE $ 5,028 $52 8% ABOVE $ 5,878 $3 1% AT $ 7,542 $36 6% ABOVE $ 7,152 $129 14% ABOVE $ 8,304 $50 5% ABOVE $ 11,370 ($67) -9% BELOW $ 13,162 ($114) -15% BELOW $ 10,990 $77 6% ABOVE $ 12,178 ($9) -2% AT $ 11,234 $146 10% ABOVE $ 13,932 ($83) -8% BELOW $ 15,203 ($67) -13% BELOW $ 14,507 ($13) -2% AT $ 15,356 ($10) -1% AT $ 14,207 $101 13% ABOVE $ 15,791 $144 9% ABOVE $ 16,912 $37 5% ABOVE $ 12,949 $444 38% ABOVE $ 17,380 $217 10% ABOVE $ 16,724 $208 16% ABOVE $ 21,146 ($32) -6% BELOW $ 23,020 ($45) -6% BELOW $ 23,054 $27 2% AT
26

Rate Estimator Tool -Lane analysis for new lanes -Includes Fuel Surcharge Calculator -Optional fields
Required Input Optional Input Origin Dest Annual Postal Origin Postal Dest Dist Lane Pvt/De Code Country Code Country (Miles) Vol d Flag 57078 US 76160 MX 2372 43 47603 US L4L4S6 CA 671 2 44309 US 30705 US 612 2 30105 US 29536 US 422 5 1 40165 US 48089 US 405 2 47630 US M9L1V7 CA 677 1 37408 US 98188 US 2497 2 94005 US 90031 US 365 4 28358 US 90031 US 2514 4 49355 US 08016 US 715 16 49355 US 08016 US 715 2 49355 US 08701 US 770 2 49355 US 08016 US 715 16 67005 US 18031 US 1284 2 67005 US 60115 US 677 1 1 Spot MKT Flag MultiOutbou Stop nd Flag Flag 1
Enter Fuel Surcharge Options 1. Enter a percent of linehaul, or 0% 2. Enter program info below Fuel Surcharge Your FSC Base Fuel Cost $1.20 $/gal Surcharge $0.01 $/mile Increment $0.050 $/gal Plan Fuel Price $2.900 $/gal FSC $0.3400 $/mile
Estimated Results
1 1
Addition al Optional Optional Origin Corridor Per Load Per Mile Regional Volume Charge Charge Effect 85 $138.97 1 $106.25 12 $62.60 250 $0.00 52 $105.08 1 $106.25 1 $45.38 12 $94.18 12 ($0.38) 12 $183.60 12 $183.60 4 $183.60 12 $183.60 1 $53.56 4 $53.56
Dest Regional Effect $253.18 $117.77 $128.18 $95.16 $63.77 $134.04 $478.05 $0.00 $0.00 $430.78 $430.78 $480.53 $430.78 $441.61 $19.28
Volume Effect Est. CPL Est. RPM $39.19 $3,162 $1.33 $155.85 $1,220 $1.82 $66.98 $968 $1.58 $0.00 $563 $1.34 $39.19 $752 $1.86 $155.85 $1,243 $1.84 $155.85 $3,553 $1.42 $66.98 $588 $1.61 $66.98 $2,960 $1.18 $66.98 $1,510 $2.11 $66.98 $1,735 $2.43 $119.12 $1,675 $2.17 $66.98 $1,510 $2.11 $155.85 $2,132 $1.66 $119.12 $939 $1.39
Est. Est CPL w/ RPM FSC w/ FSC $3,968 $1.67 $1,448 $2.16 $1,176 $1.92 $707 $1.68 $890 $2.20 $1,473 $2.18 $4,402 $1.76 $712 $1.95 $3,815 $1.52 $1,753 $2.45 $1,978 $2.77 $1,936 $2.51 $1,753 $2.45 $2,569 $2.00 $1,169 $1.73
27

Market Report -Includes rate trend analysis -Surcharge analysis
28
The Clorox Company

Global marketer and manufacturer of leading consumer brands Products sold through mass retailer channels, including grocery,
home improvement, convenience, hardware automotive care

and club stores Leading category brands in:
Laundry products, home cleaning products, charcoal, cat litter, water
filtration, salad dressings, barbeque sauce, auto care products, food storage and trash bag products Member of Chainalytics Model-Based Benchmarking Consortium
Copyright 2008 Chainalytics, LLC. 29
How Clorox is Using MBBC Results

Assessment of base rates Identify low hanging fruit opportunities
Use results as an internal communications/reporting tool

Analysis of new demand or changing requirements Guide the procurement process Qualitative analysis of business processes Supporting supply chain modeling/analysis Estimate savings potential in routing decisions Analyze lanes to better understand trends
Collaborate with strategic carriers

Network with peer companies (MBBC Summit)
30
Procurement Value Assurance

Measure effectiveness of procurement process

Did rates improve year-over-year as well as against the market? Did we achieve expected results? Can we sustain savings over time?
Continual monitoring of performance against plan

Post-bid event audit against actual results Develop score carding to capture leakage Diagnose causes and adjust
Periodic meetings to address issues

Meetings with internal teams Meeting with carriers
31
Membership Process
Annual membership - participate in 2 models per year We collect data from members every October and April
Transaction level, shipment history Data collection takes 5-6 weeks Modeling and creating reports takes 5-6 weeks
Reports are published early January and July MBBC Summit Lane Matching LTL benchmarking Ocean container benchmarking
Questions?
Chainalytics Contact:
John Schnorf
jschnorf@chainalytics.com 770-433-1566

2008 09 24 Best Practices in Transportation Benchmarking

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The Best Analytical Minds in Supply Chain Management

Best Practices in Transportation Benchmarking September 24, 2008

Copyright 2008 Chainalytics, LLC.

Copyright 2008 Chainalytics, LLC.

Introductions Why benchmark?

Challenges in benchmarking transportation

Chainalytics formed in 2001 (HQ in Atlanta, GA)

Supply Chain Analysis in 3 Focus Areas:

Top 100 Innovations (2007) Supply and Demand Chain Executive

Copyright 2008 Chainalytics, LLC.

Logistics Cost As % of GDP

Total US logistics expense was nearly $1.4 Trillion in 2007

10.3 10.1 9.9 9.9

Top 10 List Transportation Procurement Process

Copyright 2008 Chainalytics, LLC.

Am I Paying Fair Rates?

In 2003 there was no way to answer that question

Traditional benchmarking does not capture cost drivers

Copyright 2008 Chainalytics, LLC.

Shippers find challenges in bechmarking all aspects of transportation costs

Having time to compare more than a subset of lane rates

* Accesorial charges, tender accept/reject, carrier performance, fuel surcharges, etc.

Chainalytics Created the Model-Based Benchmarking Consortium

Quantify impact of freight characteristics

Copyright 2008 Chainalytics, LLC.

Dry van Refrigerated Intermodal Flatbed Short haul

Food Mfg Beverage

Copyright 2008 Chainalytics, LLC.

Introductions Why benchmark?

Challenges in benchmarking transportation

MIT-Center for Transportation & Logistics

Conduct research in transportation, logistics and supply chain management

Exchange community Collaborations Communications

Traditional Benchmarking does not tell you why or how . . .

Building an Econometric Model

How (exactly) does each factor impact cost?

Copyright 2008 Chainalytics, LLC.

Building an Econometric Model

How can we describe this relationship?

Fixed Cost per Load

Variable Cost per Mile

Copyright 2008 Chainalytics, LLC.

Building an Econometric Model

Example: Outbound versus Inter-Plant Moves

Building an Econometric Model

Example: Outbound versus Inter-Plant Moves

Variable Cost: Slope is higher, Intercept is same

Impact of outbound move to customer could be . . .

Copyright 2008 Chainalytics, LLC.

Building an Econometric Model

What about the forehaul / backhaul effect?

Copyright 2008 Chainalytics, LLC.

Building an Econometric Model

Border Effect Network Density Effect

New Region Definitions (Explains 8-10%)

Results from 2008 Model

Copyright 2008 Chainalytics, LLC.

Impact of Fuel Surcharge Policies

National DOE Cost per Gallon

Parameters for TL FSC programs:

Current benchmark values

Current weighted average in data: $1.20 Base with $0.054 escalator

How much are you paying carriers in fuel surcharge today?