Logistics Excellence: Cash and Profitability in Transportation

COVID-19 has brought pain to millions and wreaked havoc with many, if not most, global supply chains. The invisible is now visible. The pandemic has revealed several layers of supply design and execution failure. Legacy costs and service pressures in Chemical Process Manufacturing, CPG, and durable consumer goods have been compounded by labor surprises, raw material availability, ocean challenges and precision railroading. The uncertainty is increasing inventories and lengthening supply chains.

Underlying geopolitical uncertainty has not waned and the very real global recessions we have entered cast a long shadow. Given all of these challenges, rail is still going to remain the most economical method to move material. Most regions have seen flat or reduced rail volumes as the full impact of the recession may be a quarter or more away. The second quarter has been a disaster in performance.

Since the first moves into China during the early 90s, the focus has been on supply chain optimization to minimize costs, reduce inventories, and drive up asset utilization. This strategy removed buffers and capacity flexibility to absorb disturbances like COVID-19 and illustrates that many companies are not fully aware of the vulnerability of their supply chain relationships to global shocks.

Companies slashed spending and froze capex but slashing and freezing is not optimizing.

By making short term COVID-19 driven changes to support sourcing and manufacturing changes for new production; and a more strategic approach to the next 30 months, your company will proactively mitigate risk as well significantly support EBITDA. The strategies presented in this article will help you immediately accelerate changes in sourcing and manufacturing, build flexibility and nimbleness in your supply chain and proactively address today’s challenges.

Today's Challenges - Why You Should Be Concerned

Prior to COVID-19, achieving rail logistics excellence was a significant challenge in most companies. This is because in many companies, logistics is treated as an afterthought. Given the sheer volumes and complexity of transportation modes, many companies spend two to three times the benchmark on logistics, in addition to tying up considerable capital in inventory. This is apparent at both commodity and specialty products providers.

The nature of manufacturing can be complex and often includes synchronized processing of units that ultimately ship product to customers or intermediates to other sites. However, in most cases, logistics planning is not well integrated into the SIOP process. To compensate, manufacturing plants heavily rely on experienced planners at the plant level to ensure they have enough rail or truck supplied raw material and feedstocks, and the right carriers available for customer shipments.

In general, rail spend is not well managed. Rail assets are treated as a commodity with little to no focus on optimization and overall spend. A typical plant will have an abundance of rail cars sitting for “just in case” scenarios, or in many cases for bulk storage due to poor planning. What companies fail to realize is rail cars are expensive. In addition to lease costs, rail service providers charge hefty demurrage, accessorial and movement changes. Similar dynamics apply to trucking and ocean freight. Without a good overall planning and optimization process, your company is likely spending too much.

To improve profitability, most rail service providers have moved to a Precision Railroading Model by optimizing rollingstock assets including locomotives, railcars, and crews. While their profits have skyrocketed, companies are now forced to absorb the higher costs and longer car cycle times.

Footprint countermeasures will also trigger new logistics challenges. Ocean Freight movement is going to become more complicated as new material sources in new locations come on-line with different levels of port infrastructure and infrequent ocean list to the three economic zones. Markets face rail and port infrastructure challenges for both raw materials and finished goods. This is further compounded by continued port congestion on the Gulf Coast.

Given new capacity coming online and organic growth, rail transportation in the Gulf Coast is already predicted to be a major bottleneck. This will get even worse as companies move strategic supplies away from Asia. Railroads and ports simply do not have the capability, infrastructure, or capacity to support the region today and shippers are already feeling the impact.