Container shipments have doubled in cost. Container ships face extensive delays at major ports. There is a nationwide shortage of critical raw materials and a widespread shortage of truck drivers and warehouse workers. Truck drivers at some port terminals face spending most of a day to return a single empty container and to pick up a new loaded container. Manufacturers have seen a staggering 261% increase in coil steel costs in 2021.
Poorly-stocked stores and price inflation at a 30-year high greet consumers. Additional waves of Covid-19 infections seem to perversely (and inexplicably) heavily impact the most heavily vaccinated and locked down states rather than states without lockdowns and vaccine mandates. Warehouse workers are in short supply nationwide, and truck driver surveys show that truck drivers consider detention and delays at distribution centers the second most critical issue for truck owner-operators, behind only pay and parking issues.
With this as today’s turbulent environment and no resolution in sight, your company must refocus on resources, tools, relationships, processes, and planning to overcome supply chain problems and control your freight, production, and inventory costs. Industrial engineering for your supply chain is required.
Addressing Shipping and Inventory Costs Problems
In the sections following, we’ll call out the problematic cost components of the transportation and inventory challenge from the viewpoint of an importer or manufacturer with in-country distribution centers that operate as a multi-echelon inventory system. This model could, for example, refer to an auto parts manufacturer who imports both piece parts and finished goods by sea or air, with options for air, truck, or rail transshipment in-country transportation. We’ll offer ten ideas that you can adopt and adapt to your specific situation with this model in mind.
Cost Element Definitions
Inbound cost elements typically include shipment, transloading, and transshipment elements. Each of these elements can contribute to the entire inbound shipping cost.
Shipping costs, either inbound or outbound, can include freight, forwarder/broker fees, customs duties, packaging, labeling, consolidation, insurance, drayage, courier and documentation fees, pallet fees, demurrage costs, container management fees, and local delivery charges.
Transloading costs accrue when changing the mode of transportation between sea, air, truck, or train, as examples. Examples include:
- Transfer of automobiles from a two-level train to a roll-on/roll-off port terminal where the cars are transferred to an auto carrier ship
- Transfer of shipping containers unloaded from an ocean-going container ship by crane at a port terminal and then loaded by a second crane to trucks or an intermodal train
- Air cargo unloaded and transferred from air cargo pallets to wood warehouse pallets and then loaded to trucks
- Bulk commodity transfer of corn kernels from a rail car to a truck for delivery to an industrial hog farm
Transshipment costs are incurred when goods for a destination are first touched at a previous destination. Transshipment happens when goods are first shipped to a main DC, and then a portion of the goods are later reloaded and reshipped to other remote DCs. For example, in a multi-echelon inventory system, goods can be
- received first at a main distribution hub and later re-shipped to remote distribution centers,
- received directly at the remote distribution centers, or
- transshipped according to a policy that varies seasonally by distribution center
Differences will exist that make the transshipment policy decision non-trivial. Differences between the main and remote DCs, and between individual remote DCs, will exist in
- Local seasonal and annual demand
- Local storage capacity
- Inbound shipping cost
- Holding costs
Cost Reduction Ideas
With these cost elements in mind, we offer here several recommendations that could help guide your efforts to reduce your end-to-end shipping and inventory costs.
#1 Modernize Your Platform
Modern cloud-based systems and services available from service providers to handle orders, shipments, warehousing, returns, and everything in between, can reduce your overall costs, reduce stockouts, reduce product returns, and improve your perfect order fulfillment score. These same systems can also help you assess supplier performance and help you collect your shipping and inventory cost details more accurately.
Although sometimes challenging to phase in, modern cloud-based services can also help you track your stocking levels more accurately and make reorder point, reorder quantity, and safety stock optimization possible. These cloud-based services enable integration with your suppliers as well. Integration makes acting on orders possible and helps reduce order errors.
#2 Gather and Model Your Inbound Costs More Carefully
As an end-to-end system, look more carefully at your actual shipment, transloading, transshipment, and warehousing costs. Build analytical models and conduct a sensitivity analysis to extract insights about where you can find savings. Develop as-delivered inventory costs by product and source. Use those costs in optimization, simulation, and analysis.
#3 Optimize Inventory Flow Across Your National or Regional DC Network
Use stochastic demand forecast models, mathematical optimization, and machine learning tools to optimize the amount of product shipped to each distribution center. Optimize between amounts for local use and amounts for transshipment from major hubs to regional distribution centers. Consider all costs, from ordering and shipping cost, drayage, warehouse labor, holding cost (including the cost of capital, warehouse space cost, and spoilage), and transshipment costs such as trucking expense for transshipment or rebalancing. In addition, include lost sales and customer turnover costs resulting from stockouts and delayed shipments to customers.
Commercial Simulation and Optimization Modeling Tools
Commercial tools can offer a combination of classic Monte Carlo simulation, mathematical optimization, and machine learning to help you make transshipment decisions, as well as performing greenfield analysis to look for better distribution center locations or 3PL partner locations. Although you can task your operations or data science team to build custom simulation and optimization tools, their time will be better spent mastering and applying commercially available tools. You’ll get results sooner, and the ROI will be higher if your team directs its time toward solving your specific problems. Try to use the tools as delivered, out of the box. Avoid applying extensive customizations to the tools. Those customizations will be costly to maintain going forward.
#4 Look for Reshoring Opportunities
With your inbound cost models in place, search for alternate onshore suppliers who might be able to provide a net as-delivered cost. Suppliers who own a vertically integrated onshore supply chain will be least sensitive to supply chain disruption and cost increases.
You can also consider expanding your onshore production capacity or adding new production facilities. For example, Supply Chain Dive reported that Tempur Sealy opened three new US manufacturing facilities in 2020-2021 and broke ground on another facility that will open in 2023.
#5 Look to Vary Your Shipping Modes in Your Network
Extend your optimization to include alternative transport modes. For example, it may optimize costs and fulfillment performance to use inbound air freight to a high-velocity inventory location while at the same time using ocean containers transloaded to trucks for delivery to DCs with fewer inventory turns.
#6 Update Your Green Field Analysis
Extend your modeling and optimization effort and use simulation to examine the possibility that an additional DC might reduce your total inventory and transshipment costs. For example, you may be able to shave many miles off your deliveries by placing a DC with more capacity (or using a 3PL service) nearer to a high-turn area. In some cases, a new DC could receive full container shipments directly to avoid a greater number of smaller transshipments from another DC.
#7 Rebalance Your Just-in-Time and Safety Stock Levels
With rising delays at major ports, especially ports like Long Beach and Los Angeles in the United States, it’s probably time to rebalance your inventory levels between just-in-time and safety stock inventory levels. Here again, commercially available inventory simulation and optimization tools can help, particularly with modeling the stochastic (random) delays you see on inbound shipment delays. Lowering your just-in-time levels will increase your chance of stockouts and loss of sales and customers while increasing your safety stock levels will directly increase your inventory, spoilage, and redundancy costs.
It is essential to respond quickly to changing sales, sales forecasts, shipping delays, and net inventory position changes to avoid stockouts and high inventory holding costs. A real-time cloud-based inventory system that provides an in-depth assessment of your actual inventory position, alongside updated sales forecasts and shipping information, will help manage this balancing act.
#8 Shop around for Your Logistics Provider
Suppose you have outsourced your logistics, including handling duties, taxes, paperwork, labeling, consolidation, and shipping. In that case, you may want to compare the services you receive and the costs you pay for those services with offerings from other logistics providers. Changing providers can be painful, but you might find that different providers offer better cloud services, better reporting, better tracking and visibility, better performance, and lower costs. In addition, some providers offer additional services, such as handling prepaid taxes and duties in-country and delivery for FBA (fulfillment by Amazon) in Europe.
#9 Visit Your Loading Docks
Visit loading docks in your DCs and manufacturing facilities to understand problems and issues that affect your costs. You might be amazed at the simple things you can fix that will increase productivity and reduce cost. You may find problems like
- Docks without load levelers
- Too many docks at the wrong height
- Shortage of hand trucks
- Non-palletized goods that require manual unloading with hand trucks
- Insufficient space for marshaling outbound transshipments
#10 Track Touches
Pick a few high-cost high-turn products and track touches on a batch of those products over their lifetime. First, follow the batch from inbound cargo, either containerized or breakbulk, as received at a DC or factory. Next, follow the batch, step by step, as the products move to storage, come off the shelf by forklift. Continue to track touches until the products are consumed in production or shipped to customers.
Through this industrial engineering process, you may find that there may be changes in packaging, shipping, labeling, tracking, or handling that you can make to reduce the number of touches involved. These changes can often improve productivity and reduce cost.
Real-World Touch Reduction
As a real-world example, a housewares manufacturer in Dayton, Ohio, purchased small wooden parts from a forest products producer in Houlton, Maine. Initial deliveries arrived by railcar in burlap bags that typically weighed in at 80 pounds. The bags were off-loaded to a flatbed truck, then hand-carried from the truck into a secondary warehouse and laboriously stacked on pallets. The pallets were then loaded by forklift onto a short LTL truck and delivered to the factory. At the factory, the bags were opened and emptied into fiber drums. Next, the drums were palletized and moved to near-production storage. From there, the wooden parts were processed into housewares products and shipped from the factory to distributors.
New arrangements were made with the forest products producer. Subsequent shipments were sent directly to the factory by truck in fiber drums on pallets. The pallets were unloaded at the factory’s truck dock and carried by forklift to near-production storage. Although the per-unit packaging and shipping cost was slightly higher, this shipping method freed up nearly a third of the space in the secondary warehouse and significantly reduced labor hours, both at the secondary warehouse and the factory. The labor reduction yielded significant ongoing cost savings.
Going forward, challenge your suppliers, logistics service, warehouse staff, production team, and logistics team to find other economies and performance improvements. Continue to develop your machine learning models to improve your demand forecasting and to improve your ordering policies. Continue to look for alternate suppliers so that you can move away from weaker suppliers.
So What Next?
The data you need to help you with controlling your inventory costs is available in your systems. To sum up, analytics are easy to assemble, visualize, and interpret with a powerful analytics tool like Glimpse.SX.
In the White Paper we’ll take a deeper dive into the valuable assortment of analytical tools that would help cost savings. In addition, we’ll show how we can quickly configure Glimpse.SX tools to gather, cleanse, and transform data from any number of MRP, ERP, CRM, or WMS systems. Intelligent business rules implemented as microservices in the cloud bring data into Glimpse visualizations.