Optimizing Transportation Logistics

Optimization is an oft-used word, that has lost its meaning.  If all the trucks in a fleet are assigned, some would say that the schedule has been optimized.  In a sense, they’re right when they say it has been optimized, since there are degrees of optimization. 

However, the industry is being buffeted by the twin challenges of stubbornly high fuel prices and increasing government regulations of drivers, traffic, and engine emissions.  While a few tenths of a mile per gallon changes in engine efficiency don’t seem like much to policymakers, in fact that translates into a significant burden on the transportation sector.   

The trucking industry spent $111B on fuel in 2007, and about $135B in 2008.  Given the increase in regulation expected from Washington, increased inflation, and a slow economy means fleet owners will be squeezed as those fuel costs can only increase. 

While these external factors cannot be ignored, there is a way to make sure you’re wringing everything out of every ounce of fuel.  The best optimization must be done with software that uses advanced mathematics.  There are packaged software products from vendors such as I2, Manugistics, and Manhattan that do true optimization (by the way, this is not an exhaustive list).  While each situation varies, 3-8% savings is achievable.  That translates into roughly $4B to $10B in savings across the industry. 

However, implementing these applications takes executive commitment and determination.  Implementations can take several months of tuning after the implementation and integration into an existing operation.  There are guidelines for optimization that will help keep your effort going forward.  Just understand that these efforts can’t just be installed and forgotten. 

There is another topic that is very important to understand, and that is the issue of business rules.  The basic rule is that for every business rule (a.k.a. constraint) you introduce, you incur a cost.  One client had a business rule that would allow drivers to choose the load they would carry for the first load of their trip.  Given that it was how their business operated, the rule was introduced.  However, it introduced 0.5-1% in additional operating costs. 

The other thing to remember is that you need to model all your business rules.  If you have operational rules that you don’t model in the system, your dispatchers will constantly be overriding the system because it does not do what they expect.  While some of that is a training issue, it could also be a mismatch between the way your business operates and how your operation was modeled in the system. 

Transportation optimization is difficult work.  Manual systems are inadequate, and automated systems require expert guidance.  However, the effort is worth it in reduced operating costs and happier drivers.

Value of Integration and the Complex Sale

How can you sustain an integrated, unique value proposition during a complex sale, especially when the RFP process by design is commoditized?  For example, suppose you are selling call center services.  Call centers are often viewed as commoditized services, where basic capabilities are assumed and customers evaluate vendors primarily on cost.  So, you receive an RFP that asks for 100 seats of English language for customer care and that there is no restriction on where you can source the labor.  Well, what do you do?

In a sense, it’s a trick question.  At this stage in the process, you should get ready to accept a commodity-type deal.  Creating an integrated value proposition on a complex sale happens before the RFP has been issued.  After all, an RFP is the embodiment of manifest demand.  Somebody has already decided on the “complete” solution and approach, and all they need now is to procure specific capabilities to realize the overall vision.  While most RFPs include a “Value Add” section, that at best gives your proposal a few points in the evaluation criteria but is not decisive. 

Let’s assume you did not make that mistake, you’ve engaged early, and have established an integrated value proposition.  To return to our earlier example, let’s assume that the 100 seat customer care call center is part of an ordering business process which includes e-commerce as well as order fulfillment.  You have clearly established the value of integration.  You have crafted a compelling top-level value proposition.  What’s next?

At this stage, the procurement team will get involved.  They will work with a department who has a budget who does not care about an integrated value proposition (which by definition extends across multiple departments).  There may a master budget, but getting involved with that process could make a complex sale even more complex.  How can you sustain the top-level value proposition while you sell at the department level?

First of all, someone within the organization needs to own the top-level value proposition.  There is added complexity for this type of sale, where you must sell at two levels: the upper part of the organization that owns the top-level value proposition and the department that owns the budget for the current procurement activity (such as the call center).  The scoring criteria should be adjusted to reflect that integrated value is a key evaluation criteria.  

Selling in this way isn’t easy, but it is a trend in the market and it does help you create stronger value propositions and create higher-margin deals.  Plus, it raises the likelihood that you will win.

Creating Value in the Value Chain

As companies have sought to reduce costs or increase revenues, service suppliers have focused on their part of the value chain to increase their offering's inherent value.  Business Process Outsourcing (BPO) vendors have made their particular contributions through becoming very efficient, whether it be 3PL order fulfillment suppliers, Finance and Accounting (F&A) providers, or others.  Off-shoring is one way these companies have become efficient through delivering labor arbitrage savings.  Further, these offshore service providers have become very good at breaking down processes and then taking over those activities that can be done cheaply and effectively in their service factories.

Software vendors have taken a different tack.  While there are still many single-function software offerings, increasingly attacking more parts of a given business process can be served by one or more integrated offerings.  Siebel has done very well by taking a number of service chain functions and integrating them together, such as warranty and customer relationship management.  While there are still pure-play warranty software products, customers are starting to feel the value of integration that a product such as Siebel offers is greater than the value of a series of best-of-breed solutions.

Here is the real question - if that is the case, have we as an industry arrived at the point where we can only expect incremental overall improvements with the lion's share of the expected benefits realized through integrated software solutions?  While software products yield great advantages and need to be part of an overall solution, my answer to how increased value is realized is not just a particular piece of software, but rather how that software can become part of a mosaic of platforms, software, and BPO solutions focused on a business-focused outcome.

Let's take the perspective of our customers for a moment.  If we as service providers implement the exact same solution for each of our customers, we have by definition removed one lever they could use to create unique competitive advantage.  Ever increasing complexity in software solutions tends to move our customers toward the same end state and same value equation.   Put another way, our customers will invest a lot of money to gain an advantage on their competitors, only to find that their investment has only allowed them to keep pace.

Service providers need to take the time to craft a unique solution for each customer based on the building blocks available through standardized offerings.  That is the "secret sauce" that successful vendors will bring to their customers.  Success will be measured through improved performance of our customers, and more business for service providers.