Supply Chain Strategy: Cost Savings by Optimizing Orders Upstream
Like anything in life, having a vision or a strategy is key to success. Then you must execute and measure that strategy and be willing to take the data and then pivot after analysis to always be trending towards your goals. This is no different in supply chain strategy. Many consumer goods companies today are wasting too much time and resources trying to figure how to consolidate orders manually or with their transportation management systems (TMS). The order management process requirements from big-box retailers such as Wal-Mart, Target and others is critical, particularly since they can make up more than 50 to 60 percent of a CPG company’s revenue. Freight costs and the ever-increasing demands from retailers on inventory levels continue to put pressure on consumer goods manufacturers to consolidate orders to fully maximize both store shelves and truckload levels.
How You Can Employ a Supply Chain Strategy to Optimize Orders Upstream and Realize Cost Savings
The Supply Chain Strategy Challenge
Today, some supply chain strategy occurs like the following scenario: The consumer goods customer service rep manages consolidated orders using spreadsheets, emails and traditional Transportation Management Systems (TMS) order consolidation capabilities. Here is an overview of the typical process:
- Order management receives multiple orders from a retailer covering multiple categories.
- After the initial order is received, the customer service team continues to wait for additional orders, based on retailer directed policy that will consolidate multiple orders into a single shipment.
Other policies include:
- The retailer may also provide information regarding the purchase order group number to ensure the orders sent are consolidated together to make up a delivery.
- The retailer may provide a specific time that orders must be delivered.
- The retailers may provide a window of time (4 to 5 days) that the order must be received.
This process can be tedious and time consuming. In addition, the customer service rep may receive emails from their own internal buyer specifying additional orders to be sent to consolidate into one delivery. All of these activities cause inefficiencies throughout the supply chain and in the order management process and are manually intensive in today’s fast-moving, demand-driven world. More importantly, the opportunity to ensure optimal full truckloads is lost. A supply chain strategy is required to optimize better.
Employ the Supply Chain Strategy to Optimize at Upstream Order Receipt to Catch Savings:
Customer service processes and your supply chain strategy in today’s market should be as automated as possible to ensure customer service levels are being met and are able to respond to the fast pace of retailer replenishment demands. TMS solutions have always been good at matching less-than-truckload (LTL) shipments either for multi-stop deliveries or even to the same delivery point. But, best-in-class order consolidation requires in-depth detail about the characteristics of the SKU, the quantity and the customer’s “ship to” location, which is why customer service reps spend more time than necessary building the shipment.
Therefore, the ideal time to solve this predicament is further upstream, at the time orders are received, preferably in your Enterprise Resource Planning (ERP) system. In this methodology, the advanced order building capability identifies the freight savings for order consolidation at the point of order entry, rather than using spreadsheets to group orders and then execute capabilities downstream where the decision-making is too late. Companies can use optimization technology in their supply chain strategy to identify the optimal orders that provide the best utilization of the shipment. This capability looks at each SKU’s dimensions, stack ability rules, compatibility rules, TI-HI, pallet sizes, trailer dimensions, axle constraints, top loading rules, customer specific constraints and delivery date min/max window. The automatic consolidations can even auto backfill if the truck is not full.
The outcome is automatic generation of the orders into one or more shipments respecting the retailer’s purchase order consolidation rules. Optimization technology has traditionally been thought of as an enabler for strategic decisions such as network design, route planning, master planning scheduling and transportation carrier selection. Real-time “Perfect Shipment” decision-making requires fast performance given the amount of daily orders sent from a retailer. The optimization process, therefore, has to occur in seconds, not minutes to determine optimal combination of sales orders into a shipment.
What Value can be gained when deploying this type of Supply Chain Strategy?
The benefits are very large and easily quantifiable. First and foremost, by using optimization to perform order sizing at the time the order is received, the manufacturer can identify freight utilization savings by optimally combining orders shipping to the same location. Consumer goods manufacturers using this optimization approach have generated savings from 5 to 15percent. Streamlining the order consolidation process reduces the time required to manually match orders using only tribal knowledge. And it allows customer service to spend more time servicing the customer, helping them manage inventory availability issues rather than trying to fix line items on orders in an effort to move, mix and match them in hopes of creating a good shipment with the time constraints laid out by the retailer. Next generation optimization technology is available to capitalize on this opportunity. Further, this technology adoption is most commonly embedded, not just integrated, with an ERP system. IT resources are scarcer than ever, and the CIO and his team always prefer any solution that can leverage IT resources in this manner. A few examples where leading consumer goods companies have innovated with this approach include:
- Interplant replenishments to enable full truckload shipments.
- Promotion orders to prioritize and combine with turn orders to ensure promotional demand is met on time, with full truckloads.
- Vendor Managed Inventory (VMI) replenishments (hundreds of SKUs) for both cube and weight opportunities.
Retailers are expected to continue to push consumer goods companies in terms of service level expectations, supply chain strategy, and demand responsiveness. The large cost savings await manufacturers using optimization technology that resides directly into the lifeblood of the company, order management. This technology enabler (embedded within ERP) shifts the paradigm by providing decision making upstream where there is advance time to deliver full truckloads. Customer service also benefits through greater automation and significant increases in data intelligence and graphical order management/load visualization. The best approach is to include a Quarterly Business Review (QBR) in the Transportation contract stating that you want to share the optimization Cost Reduction out of the Transportation Management System (TMS) after 90 days of optimizing your freight. Also include a fuel surcharge cap, points or negotiation. Never let the fuel surcharge be automatic. After the fuel surcharge negotiation, watch that the freight rates are not increased instead of the fuel surcharge.