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Strategy for the Capacity Crunch

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Shipping capacity is arguably the tightest for CPG manufacturers.

“The pool of willing drivers is smaller, and they can charge more as a result,” says Andrew Lynch, President and Co-founder of Zipline Logistics.

Time Is Money (Even at the Loading Docks)

Carriers are avoiding certain grocery distributors and retailers because of lengthy dwell times.

Since the advent of the Electronic Logging Device (ELD) mandate in 2017, 77% of carriers say they’re more selective in the shippers/receivers they go to. Likewise, 80% say there are facilities that they absolutely won’t load out of due to lengthy wait times.

Under the ELD mandate, all trucks must use the devices to track their hours-of-service (HOS), location, and speed. According to the HOS rule, drivers can be on duty for 14 hours a day (which includes fuel stops, food breaks, and wait times at loading docks). Drivers cannot drive more than 11 hours, which includes a break, so active drive time is actually limited to 10 hours.

In the 2018 ELD Update Report from Zipline Logistics, drivers cite a major disconnect between shippers / receivers and the ELD mandate. Many drivers voiced a suspicion that some manufacturers don’t understand (or care about) the effects of the regulation.

The report highlights grocery retailers and distribution centers for their significant wait times. Lynch explains, “If a driver sits for four hours after he’s driven for six hours, then he has to shut down and wait until tomorrow to pick up his next load.” One driver commented that there are locations known to have little to no regard for a drivers’ HOS. Another echoed this sentiment: “Anyone that can’t unload or load on-time, why go to them and waste hours? Time is money.”

To remove the gridlock, CPG manufacturers should be aware of the driver’s issues and actively work to ensure delays don’t happen at their facilities.

Foodservice Strategy for Capacity

An effective foodservice distribution strategy is dependent upon manufacturers reviewing their Total Fulfillment Costs for shipments. It’s critical to take a look at shipments of various sizes and to various geographies to get ahead of the capacity issues facing the foodservice distribution industry.

Shippers everywhere are feeling the capacity crunch. With causes as diverse as a strong economy, an aging driver workforce, government regulations, and a stable construction industry, limited capacity is affecting pickup and delivery procedures for food manufacturers and their distributors.

Dave DeWalt, a self-proclaimed “foodservice lifer,” has worked in the industry since 1972. In 1996, he started Franklin Foodservice Solutions to bridge the gap between food manufacturers’ marketing and sales decisions and supply chain realities. We asked Dave to share his experiences with today’s supply chain challenges and provide advice to manufacturers on ways to introduce more profitable pricing and order policies on outbound shipments.

 

 

 

 

Shrinking Capacity and Rising Costs

As transportation capacity has shrunk, manufacturers and distributors have taken a hard look at the economics of CPU (customer pickup order) versus delivery. Traditionally, many distributors have preferred to pick up from the manufacturer since they can move freight at a lower cost than the manufacturer’s freight rate or delivered price.

But when distributors’ costs go up, the CPU margin shrinks. In response to the shrinking capacity and rising costs, some distributors have threatened to billback manufacturers for “negative lanes,” while others have recommended that manufacturers consider increasing the delivered price.

To get in front of the growing transportation issue, DeWalt advises manufacturers to study their Total Fulfillment Costs for shipments of various sizes and to various geographies. He then helps manufacturers to:

  1. Establish price and order policies that maintain customer incentive to pick up or increase delivered order size.
  2. Ensure that future freight cost increases are covered by their price structure.
  3. Investigate opportunities to shift delivered volume to redistribution.

Recently, DeWalt worked with a food manufacturer who wanted to get ahead of the capacity issue.

To find the best solution, DeWalt and the manufacturer went to the facts: “Look at your fulfillment costs and price structure – What does it cover? What doesn’t it cover?” he advises. To start, DeWalt analyzed the manufacturer’s last twelve months of shipment and CPU data.

Then, he mapped out geographic locations of the key CPU customers, calculated actual freight costs and delivered freight rates for each market. This data provided visibility into customers’ inbound costs and showed what markets were at risk of customers switching to delivery.

Armed with this data, the manufacturer could model various transportation combinations, including number of brackets, bracket definitions and price premiums.

Using an existing redistribution program, they then created a “Redi vs. Direct” P&L by order size to show the financial impact of moving volume from direct to redistribution. “If you don’t have a redistribution program, it’s time to understand what small order activity is costing you,” says DeWalt. There is always a lot of activity and cost around small orders and offloading to a redi program can create savings.

DeWalt worked with the manufacturer to establish a new price structure and policies that supported their goals. This new structure:

  • Added a “Maximum TL Bracket” – giving customers incentives to max out TL orders
  • Adjusted Freight Premiums across Brackets to
  • Reflect future freight costs
    Ensure CPU Margin for key distributors
    Provide sufficient Gross Margin for the redistributor
  • Reduced number of “Less than Minimum” orders and shifted them to redistribution service

The result has been positive for both the manufacturer and their distributor customers. Now many manufacturers can roll out new price structures in response to shrinking capacity.

This article originally appeared in the Smoke Jumpers magazine. Subscribe for your free copy today!