Ch00fm-pgs-Martichenko/Goldsby

The Waste of Transportation
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So while transportation is necessary to support our ability to make product
in one place and sell it in another, there is inherent waste in the way most
companies deploy and employ transportation assets. Waste is found in having
many more assets required to cover transportation demand and in using the
existing assets unproductively.
TRANSPORTATION AND LOGISTICS TRADE-OFFS
As indicated, transportation consumes well over half of a company’s total
logistics costs. Given that it is such a “big-ticket” cost, many companies try to
minimize it with little or no regard to other related costs. This inclination is also
pushed along by the fact that transportation cost is among the easier costs to
tabulate, especially if a company hires out for most or all of its transportation
services. One must only add up the freight bills over the course of the year to
determine the annual freight expenditure. So, the cost is very big and very
visible. In addition, transportation is often viewed as a nonvalue-added activity,
a necessary evil associated with making here and selling there. And that is why
so many companies place the mandate on the traffic manager to reduce the
freight expense year after year.
Unfortunately, when the traffic manager is not accountable for other logis-
tics-related costs, it is easy to cut costs in transportation only to see other
expenses spring like leaks in a dam. Lower cost carriers might be lower cost
carriers for good reason — outdated equipment, poorly trained drivers,
underinsured provisions. And these reasons often lead to unreliable service and
the late deliveries characteristic of transportation variance. In the wake of these
issues, you have unsatisfied (if not irate) customers and cost recourses in in-
ventory, warehousing, and administration as you try to correct all the ill will
created by service failures and unfulfilled promises. Yet these costs are not as
visible and, therefore, are less easily managed. So, the mandate comes down
to the traffic manager yet again: Cut another 3 percent from last year’s trans-
portation expenditure. And the unfortunate cycle continues.
Along with understanding the “big picture” cost trade-offs is the systems
approach to management, with recognition of total network optimization. A
company’s logistics network is composed of its inbound and outbound links.
These links represent the company’s connections with suppliers and customers
(see Figure 4.2). Oftentimes, companies will only concern themselves with the
outbound flow of materials, leaving inbound management in the hands of suppliers
or production planners in the company. Suppliers are frequently glad to provide
this service and will either: (1) embed the cost of freight in the cost of materials
and refer to transportation as “free” (FOB destination), (2) include transporta-

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Lean Six Sigma Logistics
tion as a separate line item on the invoice (the supplier negotiates service and
pays for it directly, or FOB destination paid and billed back), or (3) has the
transportation service billed directly to the customer (FOB origin-collect).
Regardless of who pays the carrier, customers should rest assured that freight
is never “free.” In fact, it can be a convenient way to embed price increases,
enhancing the supplier’s margins. As a result, more companies are taking control
of their inbound transportation flows and assuming the costs directly. However,
the best solution is for the party that has the best contracts with carriers (prob-
ably based on volume) and the party that can best operate over a specific lane
to negotiate the service. But freight should not be used as a means to cover
inefficiencies in a supplier’s operations.
Another temptation that many shippers face is the urge to locate the lowest
spot-market price for each and every shipment. The Internet has fostered this
temptation with the emergence of electronic transportation marketplaces (ETMs).
These marketplaces were the darlings of many a venture capitalist in the early
2000s and promised that transportation capacity could be traded like a share on
the commodities exchange. What the ETMs failed to realize, though, was that
most shippers did not view transportation as a commodity service; it is too
important and exposes the shipper to too many risks when service is negotiated
in a faceless transaction.* Shippers wisely search for long-term relationships
rather than flip though the matchmaking dating services that characterize most

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