Another Look at How VMI Helps Suppliers Reduce Transportation Costs

By Doug Bethea, Vice President Consumer Goods Solutions, Datalliance

Outbound transportation costs continue to be a big issue for CPG companies – really for the entire grocery/drug/dollar retail supply chain.

In a 2015 Supply Chain Benchmarking Study conducted by Boston Consulting Group (BCG) and the Grocery Manufacturers Association (GMA), more than 80% of the CPG company leaders interviewed cited transportation as their top of mind concern.

GMA and BCG published a report based on the survey in June of 2015 titled “A Hard Road: Why CPG Companies Need a Strategic Approach to Transportation”. Here’s a brief excerpt from that report (which you can download from the GMA website here):

In that report they said:

“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 systematic 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.”

And it was rather shocking to me when I read in that same report the following:

Transportation costs are eroding supply chain cost savings. Since the last BCG/GMA study in 2012, freight costs 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 underline is mine as that sentence was a real eye-opener for me.)

Now the issues around transportation are many and I won’t claim VMI can address all of them. But VMI can certainly address some of them – especially better utilization of transportation capacity and therefore reduction of the cost of using that capacity. That cost being both bottom line profitability and carbon footprint, by the way.

These are covered in more detail in a Datalliance paper titled quite simply: “How VMI Helps Reduce Outbound Shipping Costs for CPG Companies”, but here is a quick review of the ways in which Datalliance VMI does that:

  • Truck load optimization: making maximum use of every truck obviously means fewer truckloads paid for and few trucks on the road
  • Consolidation of VMI and non-VMI orders: same basic benefit…
  • Multi-stop truck load building: One fully loaded ‘milk run’ FTL truck costs a lot less that several individual LTL shipments delivering to those same locations
  • Supplier product availability checking: when optimized FTL orders include product that is not available, the result many times is an LTL shipment not only for the current shipment but possibly another LTL to ship the product left off the first time

If you haven’t read that paper, you can read it here.

Anyway… I think Tracee Abu, who was Henkel’s Manager of Customer Supply Chain, said it well when she said:

“VMI has a number of benefits to our own operations and profitability. It gives us the demand visibility we need to optimize customer shipments. That means lower transportation costs and improved sustainability because we send out fewer trucks. It also enables us to drive other efficiencies such as case picking and ordering in full pallets and layers.”

You can download the full Henkel VMI success story here.

Well said, Tracy!

About the Author

Doug Bethea is the Vice President Consumer Goods Solutions at Datalliance. He has spent more than 35 years in a variety of leadership roles spanning supply chain, customer logistics, information technology and sales. Today, he works closely with suppliers and retailers on new development initiatives that are driving the industry to the next generation of Vendor Managed Inventory (VMI) solutions. You can follow Doug on LinkedIn at linkedin.com/pub/doug-bethea/b/a51/52

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