This podcast is a recording of a presentation Curtis Greve made at the June 2010 GBQ Redbank Executive Breakfast Series in Columbus Ohio. In this presentation Curtis discusses the threats and opportunities posed by three external drivers every company will face in the next five to ten years:
- Dramatic increases in transportation costs and the resulting changes that will be required in supply chain networks
- Reverse logistics networks and how companies can increase their bottom line profits by as much as 4% or more
- Continued demand for development of sustainable solutions and how sustainability can dramatically increase profits
Curtis points out that most companies will agree these three drivers are going to happen. Business executive also realize that these elements will have a negative impact on their business if they don’t address the situation, yet few are doing anything about it. How a company deals with these inevitable changes will determine if they will thrive or if they will find themselves at a significant disadvantage that could result in their ultimate demise.
The Reverse Logistics Podcast
There is a common mistake that many companies make that costs them additional transportation dollars, that could easily be avoided. That mistake is that they use UPS, FedEx, or other expense shipping options to get product back from their customer and/ or send returned goods back to their suppliers. This usually happens because nobody really thought about the mode of transportation used for returns.
Many companies will ship product back using the same mode of transportation that was used to deliver the product. This is especially true for e-commerce and catalog retailers. If the shipping requirements for outbound orders are first class, overnight, or similar forms of special delivery, many companies instruct their customers to return product using the same mode of transportation. The majority of the time this is a big waste of money.
There is a big difference between outbound orders and returns. The difference is that nobody cares how long it takes for returns to get FROM the customer back to the company. If an item that is returned takes two or three extra days, nobody cares. Unless there are special handling requirement due to the type of item that is returned, set up transportation using the cheapest method available.
Of course, like everything else, one size doesn’t fit all. Many will have some SKU’s that should be shipped back using the more expensive options. However, for the majority of SKU’s, the cheaper transportation options will do just fine. Retailers, distributors and manufacturers should all have systems that can tailor transportation directions based on SKU. This is usually a fairly easy thing to do but can result in significant transportation savings.
Attention manufacturers, OEM’s, and retailers, you can work together to reduce the cost of transporting returned goods from the retailer to the manufacturer simply by working together. Most retailers do a lot more business with carriers than do their suppliers, manufacturers, and OEM’s. As a result, retailers are able to negotiate better LTL, Truckload, and small package rates.
However, many times when it comes to who pays transportation bills for goods moving from the retailer to the manufacturer in the reverse logistics pipeline, the manufacturer end up paying the carrier directly, at a higher rate. This is often the default assumption, but it doesn’t have to be.
If you are a supplier or OEM that does this, I have a great tip for you. Go to your retail customer and ask them to pay for shipping and bill you. Of course you will want to see what their transportation rates will be, but for the vast majority of suppliers, they will see a significant savings.
Savvy manufacturers often encourage their retail customers to work with them on this by agreeing on a mark up on the rates paid by the retailer, which is still lower than they would pay with their rates. With this arrangement the retailers make the spread between what they pay the carrier and what they bill their supplier. This also helps by providing the retailer more volume with their favorite carriers that the retailer can leverage to get better rates in the future on all their freight. The manufacturers saves big because they can dramatically reduce their transportation costs on returns by using the retailers rates which will be much better than what they can typically get from their carriers.
The Oracle of Omaha, Warren Buffett, is leading the financial markets to realize that transportation companies are undervalued and have huge growth potential over the next few years.
According to CNBC:
…the Dow Jones Transportation Avg [.TRAN 3799.43 9.54 (+0.25%) ] shot higher on Monday as investors gobbled up railroad stocks after Warren Buffett’s bullish bet on BNI….
…Buffett’s bet is so bullish that the momentum “generated a sharp breakout that ruptures a down trend in the DJ Transportation Index set in on Oct. 20,” writes the WSJ.
Carrier’s are over capacity by almost 12% right now. As stated in a previous post, NOW is the time to renegotiate your transportation contracts to lock in great rates for as long as you can get them. Buffett’s move supports this.
From an investment standpoint, the best time to buy into a company is when it is at it’s worst and if you talk to any transportation executives they will tell you it doesn’t get much tougher than right now. The Oracle’s timing is perfect, of course.
Buffett’s buy into rail also says something about what he see coming in terms of fuel prices and rail expansion. As fuel prices rise, driver shortages worsen, and carriers rationalize their fleets, the value of rail will only increase and inter-model services will grow in value. Perhaps he also sees government money going to build infrastructure in the near future as well. Don’t forget, he does have a seat at “The Table.”
It seems kind of surprising that other supply chain companies aren’t making similar moves to position themselves for the next ten years. Wonder what CH Robinson, UPS, and Fedex are thinking about this? Is it lack of strategic insight or the fact that they may not have Warren Buffet’s money, or both?
You’ve probably heard a lot of people say “now is the time to buy a house”, or “you will never get a better deal on a car than you will right now.”
Let me add one to the list. Now is the time to negotiate new long term rates with your carriers. In fact, there has never been an opportunity if you are buying transportation, like there is today. You will find that many carriers will jump at the chance to sign up for three and sometimes five year contracts for less than a buck a mile.
If you have a private fleet, now is the time to think outsourcing. In 90 days you could have your fleet outsourced and realize savings of up to 50% of costs you were paying. Carriers are fighting to survive and they are not only willing to give unbelievable rates and terms but they will buy or help sell your equipment, negotiate revenue sharing on back hauls, and will be using the newest, most fuel efficient equipment in many cases, all of which puts money in your pocket.
Carriers are having a tough time. Many are seeing volumes down as much as 80%. According to industry experts, bankruptcies are at record levels for carriers and the survivors are looking to simply survive. They are getting pressure from all sides, including their bankers who are pushing them to go after long term contracts that provide steady, reliable income until things get turned around.
All of this spells opportunity for you. If you have a private fleet, now is the time to consider outsourcing. If you outsource today, now is the time to renegotiate and lock in record setting low rates for the next three to five years.
You could dramatically reduce the cost of transportation this year.