C. F. Lynch & Associates

Old Concept, New Justification

By Clifford F. Lynch

DC Velocity, August 2008

With prices at the pump rising by the day, distribution professionals are constantly on the lookout for fresh new ways to cut transportation costs. But they might do better to look back to the past.

For 50 years, consumer goods companies (and food producers, in particular) have shaved expenses by consolidating their smaller orders with those of other manufacturers to create one large shipment. Although conditions at the time these programs were introduced were quite different from todayís, this tried-and-true concept could go a long way toward helping our transportation system become more fuel efficient. And thereís nothing magical about consumer goods; it can work for other industries as well.

The first food consolidation program was established by a public warehouse in Huntington, W.Va., a half century ago. At the time, major food manufacturers shipped most of their customer orders by rail, which raised the problem of how to serve smaller accounts that didnít purchase enough to fill a rail car. Utilizing one of the many interesting rail tariff provisions in effect back then, the public warehouse came up with a plan: It would consolidate orders from multiple clients and load the merchandise into a separate rail car bound for each individual destination (up to three), thereby allowing its clients to ship goods at carload rates (plus stop-off charges) rather than at significantly higher less-than-truckload (LTL) rates.

Not surprisingly, the concept caught on with shippers. And though consumer goods shipments gradually shifted from rail to truck, shippers continued to use consolidation programs in order to get truckload (rather than LTL) rates. Participation in consolidation programs has waxed and waned over the years, but the technique has remained a basic tactic in the distribution of consumer goods.

These days, consolidation programs are typically administered by logistics service providers (LSPs), which market their programs as "shared services," a more sophisticated term for the time-tested technique. With their large client bases and sophisticated systems, LSPs are able to combine what would otherwise be LTL shipments into truckloads, reducing freight and handling costs. The leading LSPs boast systems that combine orders into truck or container loads by customer and requested arrival date, route the shipments, and electronically tender them to the appropriate carriers. As testament to their capabilities, one food manufacturer eliminated its network of privately owned and operated DCs several years ago and outsourced the entire system to firms with sophisticated consolidation programs.

For those companies that might benefit from such a program but havenít yet given it much thought, now might be the time. The traditional objection has been the additional storage and handling costs incurred through outsourcing, but these are beginning to pale in comparison with rising trucking costs.

You donít have to be a small shipper to find value through collaboration. The Jacobson Companies recently announced the opening of a 424,000-square-foot distribution center for two big food companies.

Nor do you have to spend months locating the "right" companies to combine shipments with. Your partners need not be companies similar to your own or even companies that store their products in the same facility you use. In the 1980s, Trammell Crow Distribution Corp. operated a very successful program that combined shipments of compatible products originating in the same industrial park and delivering them in truckload quantities to LTL carrier terminals. It worked then and can work now, with even more dramatic savings.

There are several ways this cat can be skinned, and new thinking about old ideas can often be very productive. If we cannot reduce fuel costs, we can at least strive for maximum fuel efficiency.



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