FTL Transport and Strategic Sourcing

Transport Market Trends

The global transport market, just like any other market, has to deal with a number of challenges. Apart from the requirement of having to be increasingly flexible for their customers, the challenges specifically surrounding the European transport market are:

  • Freight transport market is affected primarily by volatile energy market;
  • Road user charges could lead to a shift from road transport to rail and water transport;
  • Increasing labor costs in the Eastern European market;
  • M&A activity results in new networks with a broader scope of service;
  • Demand for optimized end-to-end supply chain services and improved service levels due to rising complexity and costs (fuel and labor);
  • Environmental concerns becoming more relevant and a rise of legislative pressure;
  • Increasing globalization driven by reduction in trade tariffs and barriers seek 3PL providers to expand geographical footprint and service coverage;
  • Transportation demand is expected to increase in Europe.

FTL Project

Hudicor conducted an FTL project for a global manufacturing company with a spend of €45 million. Historically the spend has been managed on a plant/division basis with limited consolidation over the divisions. This company has more than 10 different manufacturing plants spread over 3 different business units. The focus was on the European transport flows which represented more than 80% of the global spend. Key countries involved are Belgium, The Netherlands, France, Germany, Italy and the UK.

Strategic Sourcing Approach

Hudicor accompanied the global FTL category team throughout the strategic sourcing methodology with the aim to identify possible synergies and realize significant savings supported by a clear long-term category strategy.

Important building blocks of the strategic sourcing approach are cross-functional teams, deep internal and external analysis to identify the internal requirements and discover market opportunities, Total Cost of Ownership and fact-based analysis. All these elements enable to define a best-in-class category strategy and to identify all sorts of possible levers to realize these improvements in a sustainable way. To ensure these elementers are supported by the organization, frequent communication plays a key role.

Analysis Phase

During this phase, we analysed the historical spend to understand, among other things, the total expenditures, the current suppliers and the differences between the divisions.

A key finding necessary to pinpoint the potential was a detailed analysis of cost/km to benchmark the competitiveness of suppliers. This was an eye-opener that showed the potential that could be seized.

Additionally, a detailed understanding of the divisional needs of the internal clients was paramount to grasp the requirements. This was an opportunity to streamline several of these requirements across all divisions (e.g. safety rules). However, other requirements needed to remain division specific because of special customer requirements (e.g. delivery on slot).

The FTL transport market is a distinctive market with different types of players:

  • Fleet size: small suppliers with only 1-2 trucks versus mega fleets of thousands of trucks;
  • Assets: suppliers with their own assets versus suppliers with no own assets
  • Subcontractors: suppliers working with no subcontractors versus suppliers working only with subcontractors
  • Geography: local/national suppliers versus suppliers with a pan-European footprint
  • Type: suppliers offering only FTL versus suppliers that also offer multimodal options (e.g. sea, train,…)

Based on several interviews with a selection of incumbent and new suppliers, we determined there was significant interest in becoming a strategic supplier for this company. However, incumbent and new suppliers have a different reason for this:

  • Existing suppliers able to enlarge their footprint on other lanes/countries by more visibility on what flows are present;
  • New suppliers that wanted to enter the supplier panel.

Strategy and Go-To-Market Approach

Based on our analysis, we identified sufficient competition and opportunities in the market, which creates an interesting play field for procurement. Transport has a direct impact on internal costs and client relations which makes it important for the success of the company towards its customers.

Hence, the logical next step was to go to market and launch a competitive bid. This was an intensive phase in the project work-wise, but it was extremely interesting and, more importantly, accompanied with rewarding results. More than 150 suppliers participated in the tender which covered more than 2000 lanes. After the first round of offer analysis, a second round was launched with clear target costing. Finally, a volume allocation model was developed to assign lanes to suppliers considering their volume constraints.

All these efforts created the opportunity to realize significant savings (TCO) within the range of 10%. Apart from the savings, this project resulted in other benefits: reduced supplier panel, long-term contracts with the strategic suppliers reducing yearly price discussions, reduced workload, commitment from strategic suppliers on certain volumes, risk mitigation for certain crucial lanes, new opportunities for multi-modal options, evaluation of make-or-buy scenarios and the new option of super trucks for intercompany flows.

Lessons learned:

  • Before going to market, conduct a deep internal and external market analysis as part of the strategic sourcing project. This makes the difference and it is crucial to ensuring maximal benefits;
  • Work cross-functional: the co-operation of procurement and operations was paramount to realize the expected benefits;
  • Concering the RFX: ask for detailed cost breakdown of TCO components and work with target costing;
  • Introduce new suppliers into the supplier panel to challenge incumbent suppliers;
  • Install longer-term contracts with index-based pricing model (e.g. fuel);
  • Frequently communicate with your internal clients during the project, but also when testing new suppliers. A close follow-up is needed to mitigate small issues immediately;
  • Segment your supplier panel (strategic suppliers, preferred suppliers, spot, …);
  • Provide strong guidance to operations to execute the recommended allocation of lanes to suppliers (cascading principle) to steer compliance.

Conclusion

The introduction of strategic sourcing as a procurement approach for the FTL road transport category enabled the company to transform its sourcing strategy from a reactive short-term approach to a proactive long-term strategy. Now the company is maximising the volume leverage of the group at an optimised total cost, which is always a goal of the procurement department.

This is insight was provided by Peter Courtheyn (Associate Partner).

Interested to discover more? Feel free to contact Peter at peter.courtheyn@hudicor.com.