Most people can understand why Truckload rates go up and down based on the lanes, and based on the time of the year. In the TL world it is all about capacity, so when capacity is low rates are high, when there is too much capacity the rates are low.
Then why is LTL pricing so complicated? Consider this, LTL carriers have a network of Terminals, scheduled Line haul operations, they know their capacity, and they can usually add or subtract capacity fairly quickly. So LTL pricing shouldn't be complex, it should be fairly simple, right?
To get an understanding of why LTL pricing is what it is today we first need a little history on LTL Pricing. Before 1979, all LTL prices were regulated by the government, every lane, class and commodity had a fixed price, and that was that. After de-regulation came about, competition begin to take hold in the LTL industry, and Carriers began to compete by offering discounts off the base rates that had been carried over from the days of regulations. This idea was fairly simple because initially all of the carriers had the same base rates, and now carriers were offering discounts on those prices. As time went on the LTL carrier community, without the customer’s knowledge, began to develop their own base rates so that a 5% discount resulted in very different prices from carrier to carrier. Most of these tariffs were based on the carrier's network of terminals, capacity, and whatever niche the carrier was targeting. Now there are as many tariffs as there are carriers, so you could have 80% discount with 10 carriers and you would get 10 different rates from each carrier for the exact same shipment.
LTL pricing has only become more complex as more competition entered the market and competition has grown fiercer. In economic theory there is a pricing model known as Dynamic Pricing, which in its simplest definition is a pricing model that will command the highest possible price that the market will bear on a particular product or service. The best example of this is in the Airline industry where it is very probable that nearly everyone on the same flight paid a different price for their ticket, even though the exact same service is being rendered to each person on the flight.
So what the LTL industry has done is to develop tariffs that will maximize the profit margins based on their Network Design, and the price changes in very fine increments based on weight, lane, freight class, and freight dimensions. Then when the LTL carrier negotiates their rates with the shipper, their goal is to design a pricing agreement that maximizes both revenue and profit based on the customer's shipping history and what the competition is offering the customer. What this means for the even the most savvy customer is that the best price the customer is able to get is still close to the maximum price based on what the market has offered i.e. competition, and what the customer is willing to pay. To further complicate matters, LTL pricing is also broken up into segments which are the discount, class exceptions, and accessorial charges, and this further complicates LTL pricing and further ensures that the Dynamic pricing model will hold.
There is an alternative approach however that will allow the shipper to circumvent the dynamic pricing model that LTL carriers offer. This is what I call an engineered pricing solution. An engineered pricing approach is where a shipper has a deep understanding every carrier's pricing structure, costing model, network design, on which lanes carriers need freight, what types of freight each carrier prefers and so on. A shipper can spend years studying every carrier and come to an understanding of how to engineer the best price, or the shipper can partner with a 3PL that has the knowledge and technology that will allow the customer to realize the best possible price on each and every shipment.
Thursday, October 20, 2011
Wednesday, October 19, 2011
Understanding the importance of Supply Chain Management.
It has been my experience that the term and concept of Supply Chain is an often miss-understood and miss-managed component of some businesses, even though the Supply Chain is a vitally critical component for every business.
For many companies in the U.S the supply chain has become longer and more complex while at the same time the typical product life cycle has become shorter and more rapidly changing. The competitive advantage enjoyed through product or service innovation is becoming shorter lived. This is because product innovations are very quickly replicated by competitors which make further innovation and more importantly execution of innovation even more necessary in order to stay ahead of the pack. A world class supply chain is how companies are able to sustain hyper innovation in a hypercompetitive market place. To give an example of how the speed of innovation has changed consider the Ford Model T which was produced from 1908-1927 with only minor changes to the original design. Today however, most car models receive a face lift, newer engines, newer transmissions, and all sorts of electronics upgrades about every four years. Just think of how quickly things change from one year to the next, and how quickly companies must be able to adjust to the changes in order to stay competitive.
So what is Supply Chain Management?
Supply Chain Management is the management of the flow of goods and information from raw material through the value-add transformation to the point of consumption. This is my definition, and I realize it needs some explanation. Think of a supply chain in this way; the IPhone while it was created, designed and marketed by Apple, it was not manufactured, shipped or distributed by Apple, nor did Apple directly provide the IPhone with a cellular network. So how did the idea ever make it from concept to the shelves? Well, Apple partnered with Foxconn in Malaysia to produce the IPhone, they partnered with carriers and 3PL's to move their product to each geographic market and distribute the IPhone. Apple also initially partnered with ATT in order to have a Cellular network on which the IPhone would operate. In the last decade Apple has shown that it has a core competency in engineering, developing, and marketing new and innovative technology that have become industry game changers such as the IPod, IPhone, and I pad. So Apple's core competency is on the market side of the Supply Chain, which means that Apple had to partner with other companies that had core competencies in the other segments of the supply chain, such as sourcing raw materials, manufacturing, shipping, warehousing, distribution, and product support. All of these key areas are what made the Apple successful. The IPhone is a great product, but what if Apple failed to secure a cellular network for the IPhone, or what if Apple failed to partner with an electronics manufacturer like Foxconn which could handle the production volume necessary, or what if Apples Logistics partners were unable to manage the movement of the IPhone across the ocean and to the stores. If any of these components of the supply chain had failed the IPhone might have had a different story.
In my definition above, I not only mentioned the flow of goods, but also the flow of information. In order to manage a supply chain one must have access to all of the information. The information moves back and forth from the market to the origin. The information of inventory in process, in transit, and in inventory must be available in order to execute product replenishment at the store level at the lowest possible cost. While information from the market side about things such as promotions and sales or changes in future demand must be communicated back through the chain in order to prevent stock outs or excess inventory. The flow of information must be constantly flowing back and forth between the market side and the source side in order for the supply chain to operate at the lowest total cost with the least amount of stock outs or excess inventories.
To sum it all up, Supply Chain Management is managing all of the pieces that must come together in order to execute a go-to-market strategy. That includes managing the sourcing of raw materials, suppliers, production, transportation, warehousing, distribution, marketing, and the information that needs to be managed and shared in order to make each segment of the supply chain in order to achieve the highest possible market responsiveness, lowest total cost, and highest possible profit margin for each SKU.
I realize that this is a real quick overview and does not touch on many areas, but I will keep posting additional articles that will touch on each area in a more in depth way.
For many companies in the U.S the supply chain has become longer and more complex while at the same time the typical product life cycle has become shorter and more rapidly changing. The competitive advantage enjoyed through product or service innovation is becoming shorter lived. This is because product innovations are very quickly replicated by competitors which make further innovation and more importantly execution of innovation even more necessary in order to stay ahead of the pack. A world class supply chain is how companies are able to sustain hyper innovation in a hypercompetitive market place. To give an example of how the speed of innovation has changed consider the Ford Model T which was produced from 1908-1927 with only minor changes to the original design. Today however, most car models receive a face lift, newer engines, newer transmissions, and all sorts of electronics upgrades about every four years. Just think of how quickly things change from one year to the next, and how quickly companies must be able to adjust to the changes in order to stay competitive.
So what is Supply Chain Management?
Supply Chain Management is the management of the flow of goods and information from raw material through the value-add transformation to the point of consumption. This is my definition, and I realize it needs some explanation. Think of a supply chain in this way; the IPhone while it was created, designed and marketed by Apple, it was not manufactured, shipped or distributed by Apple, nor did Apple directly provide the IPhone with a cellular network. So how did the idea ever make it from concept to the shelves? Well, Apple partnered with Foxconn in Malaysia to produce the IPhone, they partnered with carriers and 3PL's to move their product to each geographic market and distribute the IPhone. Apple also initially partnered with ATT in order to have a Cellular network on which the IPhone would operate. In the last decade Apple has shown that it has a core competency in engineering, developing, and marketing new and innovative technology that have become industry game changers such as the IPod, IPhone, and I pad. So Apple's core competency is on the market side of the Supply Chain, which means that Apple had to partner with other companies that had core competencies in the other segments of the supply chain, such as sourcing raw materials, manufacturing, shipping, warehousing, distribution, and product support. All of these key areas are what made the Apple successful. The IPhone is a great product, but what if Apple failed to secure a cellular network for the IPhone, or what if Apple failed to partner with an electronics manufacturer like Foxconn which could handle the production volume necessary, or what if Apples Logistics partners were unable to manage the movement of the IPhone across the ocean and to the stores. If any of these components of the supply chain had failed the IPhone might have had a different story.
In my definition above, I not only mentioned the flow of goods, but also the flow of information. In order to manage a supply chain one must have access to all of the information. The information moves back and forth from the market to the origin. The information of inventory in process, in transit, and in inventory must be available in order to execute product replenishment at the store level at the lowest possible cost. While information from the market side about things such as promotions and sales or changes in future demand must be communicated back through the chain in order to prevent stock outs or excess inventory. The flow of information must be constantly flowing back and forth between the market side and the source side in order for the supply chain to operate at the lowest total cost with the least amount of stock outs or excess inventories.
To sum it all up, Supply Chain Management is managing all of the pieces that must come together in order to execute a go-to-market strategy. That includes managing the sourcing of raw materials, suppliers, production, transportation, warehousing, distribution, marketing, and the information that needs to be managed and shared in order to make each segment of the supply chain in order to achieve the highest possible market responsiveness, lowest total cost, and highest possible profit margin for each SKU.
I realize that this is a real quick overview and does not touch on many areas, but I will keep posting additional articles that will touch on each area in a more in depth way.
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