By Mike Regan, Co-Founder
Initially Published in Logistics Management on September 12, 2018
Recently I had a challenging call from Jim, a friend and the CEO at a company that has struggled with controlling their freight costs in 2018. Jim was ticked that his freight costs are running 23% over budget. So he asked: “How can I get our spending under control?”
I assured Jim that he has plenty of company. This has been the year that freight barged into the boardroom! It’s what happens when freight budgets are completely out of line with actual spending.
This call was particularly challenging because, reading between the lines, two things became readily apparent after listening to Jim vent:
Jim was questioning the competency of his transportation and logistics people.
And after asking me: “How could they make such a big mistake?” I got the message. Jim was looking for someone to blame for this predicament.
After listening, I said, “Jim, do you want some honest feedback? It’s probably not your people.”
He responded, “How can you say that?”
That led to an in-depth discussion about Peter Senge’s business classic, "The Fifth Discipline." In his book, Senge explains that, “when placed in the same system, people, however different, tend to produce the same results.”
So before blaming their people, executives need to ask, “Is there something wrong with the processes and systems we use to run our business?”
Using the Fifth Discipline principles, until Jim’s company addresses their real systemic and process-driven issues, swapping out people won’t make any difference. He could change out all of his people and still find himself in the same predicament a few months later. His transportation people didn’t create the environment that produced such a blown budget. That is why I stated, “It’s not the people. It’s the system and processes.”
If your company is in a similar situation, perhaps you can take Senge’s advice to heart: “True proactiveness comes from seeing how we contribute to our own problems.”
Applying the principles of the "The Fifth Discipline," a.k.a. “Systems Thinking,” to Jim’s transportation issues would require some significant changes. For example, the company would have to look at all the parts of their company, how they interact, how they affect each other, and assess how the decisions made in the sales, procurement, finance and operations areas of the company affect the company’s transportation costs.
So, if you are a C-Level executive who, like Jim, is concerned about how rising freight costs are impacting your company’s profitability, here are some tips.
First, study the impact of silos in your company and stop looking at the pieces of your business separately. If you want to get lower freight costs, your transportation professionals need to have a seat at the table where decisions affecting freight costs are being made.
Second, operationalizing this “seat at the table” philosophy will mean that your transportation people have input into decisions that affect freight costs being made in the following areas:
-Sales Policies and Practices – Decisions to increases discounts, implements an aggressive sales program, or changes the free freight factor on sales order minimums will affect freight costs!
-Operations and Inventory Policies – Changes in your operations or inventory policies can reduce order fill rates, resulting in multiple shipments or changing sourcing points to complete your customers’ orders, will affect freight costs!
-Procurement Practices – Implementing a third party direct-to-customer program, or changing sourcing points for obtaining inventory or production materials will affect freight costs!
Since all of these areas can affect freight costs, wouldn’t it make sense for transportation folks to have a voice in decisions affecting their freight budgets and responsibilities?
Third, if you want to tangibly demonstrate that transportation is more than an afterthought for you and your company, take the time to get at least a rudimentary understanding of how the transportation marketplace is impacting your company’s operations and profitability. Based on the feedback we have received, our C-Level presentations are having a positive impact on bringing C-Level executives up to speed on critical transportation issues. You can also check out our “Note to CEOs” blog series (posted here on Logistics Management) and gain insights into best practices for managing your transportation spend.
Instead of playing the “blame game,” why not try the “we’ll support you game” and provide your transportation and logistics people with the support they need to do their job well. Commit the resources needed to make transportation an integral part of your company.
Finally, to Jim and any other C-Level executives reading this blog: Own the problem! It’s not “them”—it’s you! If you want a better transportation budget for 2019, reach out for help, provide your transportation people with a seat at the table, and take the necessary steps to improve your systems.