Procurement is not necessarily about bean counting, according to a presentation delivered at yesterday’s virtual Chief Supply Chain Officers summit, organised by SCM World. It argued that a new “holistic” procurement approach to logistics can not only save on costs, but also provide value to shippers and carriers alike.
US food producer Pinnacle Foods described how its procurement strategies extended far beyond simply negotiating on freight rates and other pricing, and includes constant monitoring of the service that carriers provide to the company.
Pinnacle’s vice president of fulfilment, Robb Lillibridge, said: “When we look at our procurement approach there is a specific process rigour which leads to a strategic approach for suppliers to deliver advantage – it is way beyond simply looking at the lowest price approach. By involving procurement in logistics we mirror up the best price along with the rigour behind it to ensure that service is constantly delivered.
The session moderator, SCM World head of faculty Kevin O’Marah, added: “It’s not just about buying lanes and capacity – this is about looking holistically at the whole supply chain.”
Pinnacle has been advised on much of its work by procurement consulting group Procurian, which Mr Lillibridge described as “an extension of Pinnacle’s own procurement team”.
Procurian’s Global Logistics practice, lead by Ed Sands, described how its approach differed in style and substance from the common conception of procurement. “A typical procurement approach in the past would look at old price versus new price; identify the savings and target the bulk of the cost.”
Broadly costs were broken down into three key areas: linehaul typically represents about 60%, accessorials [supplementary items] 10% and fuel the remainder. Mr Sands said this latter category had, in the past, been off-limits to procurement teams dealing with road hauliers.
“In the case of attacking fuel costs, in the past that has been more or less off-limits; it’s an area where [carriers] tweaking the miles-per-gallon calculation for customers might have been done once every five years, if at all. But that area is now “in play”, and we are working with our clients to make sure everything is in play and to take a holistic approach, and no longer look at fuel costs as an explainable variant.
“When fuel starts to represent 30-35% of your underlying network transportation costs, it’s not acceptable to senior management to say that we can’t do anything about it, because it’s simply too big. A strategic approach will look at wholesale fuel prices versus retail, or perhaps look at intermodal conversion – understanding your fuel programme and looking at how you properly and fairly compensate your carriers on those costs; but also so that fuel doesn’t become a profit source for your carriers.”
Key to this is supply chain visibility, the speakers maintained.
Mr Lillibridge added: “Accessorial costs are a direct reflection of order complexity – if we can capture that information we can start working with our customers to drive out inefficiencies, such as by changing ordering patterns. It’s crucial to isolate the costs and then look to drive the inefficiencies out.”
“How receptive are Pinnacle’s customers to have these conversations?” Mr O’Marah asked.
Mr Lillibridge answered that customers were “excited” about being able to share that information and lower the costs to themselves, and added that it also helped the company’s transport suppliers.
“We also want to be fair to our suppliers. If we can isolate certain costs such as fuel, and make it more a market-based fuel price, instead of the old tradition of using Department of Energy metrics, we can focus on the other areas of cost with our suppliers such as MPG improvement.
Savings a few cents per mile on networks which are hundreds of millions miles per year “is a lot of money,” added Mr Sands.
“It’s a fair programme to our carriers because they are rightly compensated for their fuel costs but through a collaborative means – it creates a level-playing field for your carrier base, whether you are talking about small, medium or large companies, it isolates that big component of cost and allows you to work with your suppliers in wringing out other inefficiencies,” Mr Lillibridge concluded.
The logical consequence is that it leads to genuine collaboration, said Mr O’Mara. “Collaboration hangs on fairness, which is a meaningful benefit.”