Transporting now the greatest worry of supply chain leaders

July 27, 2015 Ken Klaver

freight audit.ControlPay

Consider the following scenario: your company’s new snack-food offering is a major hit. Manufacturing is humming, inventory is robust, you’ve locked in distribution, and forecasts appear spot-on. In every respect, this would be a supply chain success story, except for one: consumers can’t get enough of the product. Literally. Trucks are chronically late, capacity is insufficient, and missed delivery windows are exasperating retailers.

It may be little consolation, but you would hardly be alone. Consumer packaged goods (CPG) companies are having a progressively tougher time getting their products to customers.

More than 80 percent of the leaders interviewed cited transportation as their top-of-mind concern.

That states the A Hard Road: Why CPG Companies Need a Strategic Approach to Transportation report in July 2015. The research described in this report was sponsored by the Grocery Manufacturers Association’s Supply Chain Committee and was performed by BCG in partnership with GMA. 

 Highlights: A Hard Road: Why CPG Companies Need a Strategic Approach to Transportation

Shortages of truckload capacity pose significant challenges to transportation buyers. Meanwhile, according to the US Bureau of Labor Statistics, driver turnover is more than 100 percent, and recruitment is difficult for carriers. Delays and congestion worsen each year, threatening delivery times and further straining capacity. Intermodal transit, a crucial relief valve, continues to fall short of its promise, frustrating shippers by its lack of speed and reliability. SKU proliferation, channel fragmentation, and the unrelenting demands of retailers are only adding to the pressures. Not only are these challenges likely to persist, but their convergence creates a more fundamental, structural change in the overall transportation system.

On the whole, the CPG industry spends about $15.5 billion each year on transportation, which has up to a 5 percentage point impact on the bottom line. In the past, CPG executives didn’t have to give transportation much thought. Cyclical bumps such as fuel price ups and downs created cost headaches, but on the whole, logistical snags amounted to minor management issues. Today, the problems are systemic and structural. Increasingly, leaders must make uncomfortable trade-offs: pay more to fulfill service level expectations or seek cost efficiencies, often at the expense of speed and reliability.

Transportation costs are eroding supply chain cost savings. Since the last BCG/GMA study in 2012, freight spend have risen by as much as 14 percent, reversing the effects of all supply chain cost-saving efforts. Indeed, only a third of CPG companies have been able to trim transportation costs in the past two years.

The recent drop in fuel prices provides little comfort, as savings will be offset by further rises in other transportation costs. For example, an overwhelming 83 percent of respondents to our survey expect line haul rates, which make up more than 70 percent of transportation costs, to rise. (See Exhibit 1.)

Optimizing Transportation: The Need for SPEED

As a supply chain issue, transportation used to be neatly siloed, a straightforward and predictable function. But the complexities and magnitude of today’s external challenges are far beyond supply chain leaders’ traditional purview. Leading CPG companies recognize that such challenges call for a more proactive approach, as well as more integrated thinking and solutions. These companies are assessing their transportation strategy regularly, integrating it into their supply-chain business planning processes. More than ever, they know that they need to be able to adapt to shifting constraints and a dynamic environment in a more systematic manner.

Clearly, there is no single solution. But a number of tactics, some already familiar, can go a long way toward mitigating the pressures and significantly improving transportation performance—especially when deployed as part of an overall strategic plan. To the industry, these tactics represent a potential cost savings of 7 percent of spending on transportation, or roughly $1 billion. Individual companies are already realizing cost savings and other tangible benefits.

To zero in on the critical factors and most helpful tactics, it’s helpful to consider the repercussions of a transportation interruption. For example: How much would sales decline, if at all? And to what extent would customer relationships be hurt? Would shelf placement be affected? Is there a limited selling season or other constraints? Collectively, the tactics are part of a framework of five levers that BCG calls SPEED: selection, partnerships, efficiency, engagement, and design. (See Exhibit 2.)

Weighing All the Options

The five levers that constitute the SPEED framework vary in ease of implementation and impact. (See Exhibit 3.) Among the highest-value components are network design, drop trailers, and order consolidation. Moreover, some levers are better suited to replenishment freight and others to customer freight.

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