Outsourcing Execution in Transportation and Distribution

Outsourcing Execution in Transportation and Distribution

Paulo Mendes (Pontifical Catholic University of Rio de Janeiro, Brazil) and José Eugenio Leal (Pontifical Catholic University of Rio de Janeiro, Brazil)
DOI: 10.4018/978-1-4666-2008-7.ch006
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Abstract

Outsourcing can be a very effective strategy to increase operational performance and improve customer service; at the same time, that minimizes capital investment, freeing up capital to other important projects according to the company strategy that will increase revenue and profitability. However, when outsourcing is not performed in the right way, as there are several examples in the marketplace, it can also decrease performance and hurt customer service, reducing company competitiveness. Therefore, it is critical to establish a robust Outsourcing Execution Process to reduce risks of vendor failure due to lack of operational capability, performance management, and conflict of culture between 3PL and the company, just to enumerate a few possible real life problems. This chapter provides a broad and updated introduction of transportation and distribution operation, and based on literature review and practical experience from the authors, several best practices are reviewed to support outsourcing execution in transportation and distribution operation.
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Introduction

Current Challenges in the T&D Operation

Transportation and distribution are two critical areas in the supply chain for the majority of the companies due to their impacts in both cost and customer service. Research done by the Aberdeen Group (2011) with 123 transportation and procurement professionals confirmed that the transportation cost relative to overall supply chain performance and the ability to meet increased customer service demands are the top two business pressures for improving integrated transportation, as illustrated in the Figure 1.

Figure 1.

Business priorities for integrated transportation (Aberdeen Group 2011)

In response to these challenges, 53% of survey respondents are seeking to gain better visibility to costs and over 51% are investing in technology to gain better shipment status visibility. Overall, 65% are looking to invest in process or technology enhancements in transportation management over the next 12 months.

Another study done by Aberdeen Group (2011) to analyze transportation spend in more detail, shows the top four strategic actions companies are implementing to control overall transportation costs, being the capability to automate and analyze freight spend, and the collaboration with other supply chain stakeholders the two top strategies, as detailed in the Figure 2.

Figure 2.

Strategic actions to improve transportation spending (Aberdeen Group 2011)

There are other challenges faced nowadays by several companies around the world that increase the complexity of the transportation function, such as:

  • Traffic restrictions in large cities of countries like China, Brazil, and Philippines just to enumerate a few of them. These traffic restrictions impose hard constraints for the transportation and distribution processes both in terms of truck size as well as on time limitations to drive into restricted areas during the day.

  • Maximum legal working hours for drivers like the “hours of service” regulation implemented in USA a few years ago. The hours of service put limits for when and how long commercial motor vehicle (CMV) drivers may drive. These regulations are based on an exhaustive scientific review and are designed to ensure truck drivers get the necessary rest to perform safe operations, in order to continue the downward trend in truck fatalities and maintain motor carrier operational efficiencies.

  • Increase in maximum legal load limits to reduce wastage impact on roads and avenues. More and more states and municipalities are using mobile weight machines to dynamically control truck load weights during the routes.

  • Increase in fuel price volatility. Figure 3 shows the variability of fuel price in USA in the last 2 years:

Figure 3.

Gas price evolution (DiselNet, n.d.)

  • Shortage of drivers and helpers in emerging countries like Brazil and China due to economic (GDP) expansion, as well as increase in labor costs over the last years.

  • More stringent environmental restrictions to reduce truck emissions and carbon impact. Table 1 shows the evolution of the European emission regulations over the last decades.

Table 1.
Gas price evolution (DiselNet, n.d.)

This chapter is structured in following way: The Literature Review section presents a literature review on topics related to Transportation and distribution of goods, IT applied to T&D, the interface between transportation and logistics and performance measurement of the distribution service. The Methodology section presents methodologies suggested to handle the T&D problem providing outlines to help the decision related to outsourcing the service. The following section completes the methodology trough a discussion of problems arise when applying the methodology. The Conclusion section presents a practical example of application of the methodology and the conclusions of this chapter.

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