The purpose of this article is to present some management practices and decisions that have been adopted by large industrial companies and retailers in road freight transport. The material will be divided into two parts:
In this 1st part, the importance of cargo transport management in the current situation will be highlighted. Then, some policies adopted in the management of third parties will be exposed and how these policies can have an impact on the performance of activities and on the prices charged.
In the 2nd part (which will be released in another edition), some practices adopted by large companies in Brazil to obtain a competitive advantage will be presented, such as collaborative strategies, logistics network planning and adoption of information technology.
Most of the information presented throughout the text comes from the survey “Road Cargo Transport Management in Companies – Practices and Trends – 2007”1, carried out by CEL/Coppead. This survey was conducted with 111 shipping companies, belonging to the largest group in Brazil. Organizations from different sectors of the economy participated in the research: agro-industrial; food and drinks; automotive; retail business; clothing, textiles and footwear; electronics and computing; pharmaceutical; hygiene, cleaning and cosmetics; construction material; Paper And Cellulose; automotive parts; chemical and petrochemical; steel and metallurgy and telecommunications.
Some of the main conclusions obtained in the research will be presented below.
Importance of transport management
- Transport as a strategic variable for companies
Transport decisions have an effective participation in the organization's strategy. Indications of the relevance of activities related to transport can be observed in the organizational charts of large Brazilian companies: the main executives responsible for this area are, in 74% of cases, senior managers or directors.
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| Figure 1 - Hierarchical level of the main executive responsible for the transport area |
- High degree of dependence on road transport
Cargo transport in Brazil is typically road. On average, the large companies interviewed by CEL/Copeead transport 88,3% of their cargo by road. Of the total number of participating companies, one-third reported using only the road modal to move their cargo, and only 6% of the interviewees indicated that they used predominantly other modes.
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| Figure 2 – Participation of road transport in companies |
However, shipping companies intend to greatly increase the share of rail and water transport in their headquarters in the coming years. According to the opinion of these companies, if the alternative means to highways have the capacity to support the high increase in cargo movement, the representativeness of the road modal should fall until 2009. However, it is noted that, even with a strong tendency to increase the use of multimodality, road transport will still be predominant and responsible for a significant portion of cargo transported in the country.
As much as Brazilian freight rates are low, the excessive use of highways entails high transport costs, since road transport is the most expensive, after air transport. The country's logistical costs could be much lower if there was a greater balance in the use of modes.
Lack of investment in infrastructure, an obstacle to the restructuring of the transport matrix and the development of the country
Low investments in rail and waterway systems have been hampering productivity in cargo handling in the country and making it difficult to restructure the Brazilian transport matrix. Currently, the extension of the Brazilian railway network is small and part of the existing lines are in poor traffic conditions. The railway network is far from composing an efficient and integrated system. In ports, resource and management problems compromise the speed of loading and unloading, causing long waits for ships to berth, congestion, long lines of vehicles and huge financial losses.
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| Table 1 - Situation of the road transport system in Brazil |
In this context, infrastructure projects, such as paving and recovery of the road network, expansion and restructuring of railway lines and modernization, access and dredging in ports, must be included in the list of priority investments to enable the country's economic growth. Generating conditions for the development of multimodality is essential to stimulate economic development in Brazil.
Alternatives for improving efficiency in road transport
If, on the one hand, the high costs and the various structural problems, associated with political and social issues, define a scenario of great difficulties, on the other hand, the need to stand out in the market and the simultaneous pressures for cost reduction and improvement of quality are leading shipping companies to seek alternatives to make transport more efficient.
CEL identified, based on research with large shipping companies, specific initiatives to improve efficiency in road transport. Among the different fronts of action adopted by the companies, the following stand out:
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Relationship with third parties: The survey carried out by CEL/Coppead found that industrial companies and retailers have given high importance to relationship management with their transport service providers: 61% of the evaluated shippers consider third party management to be one of the priority activities in the area carriage. On the other hand, 19% did not consider it an important activity, which demonstrates a lack of maturity for establishing partnerships or low opportunities for gains with the improvement of transport.
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| Figure 3 - Carrier management priority level |
Relationship management with carriers has a decisive impact on the quality of services offered and on the prices charged. There are countless decisions related to the management of third parties that influence these parameters, as will be described in Table 2.
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Selection of carriers: a careful, defined and structured process is a valuable resource for choosing carriers compatible with the company's processes and culture, providing greater consistency in the evolution of service performance in the medium and long term.
For the selection process to have satisfactory results, some steps must be very well planned and defined:
- Proper planning of all stages of the process must be carried out;
- Identified potential carriers to be invited to participate in the process;
- Requested information necessary for a consistent technical evaluation of the candidate company to be carried out;
- Defined the appropriate tools and methodologies for the quotation process. For example, documents sent for quotation (RFQ), electronic auction, non-electronic auction and internet portal can be used.
- Determined the outsourcing policies to be adopted and strategies for allocating routes to carriers.
Carrier requirements: The demands made on carriers also affect the quality of the service and have a decisive impact on the freight rates charged.
Carriers can be evaluated and selected according to several aspects, which may be related, for example, to:
- Financial stability of the company;
• available infrastructure;
• Own equipment and aggregates and technologies used;
• Previous experiences in similar activities;
• Geographic regions of operation;
• History of accidents and thefts;
• Licenses, certifications or awards that the company has or is in the process of obtaining;
• Procedures adopted in risk management and emergency response;
• Personnel qualification and continuous improvement programs.
Some of these aspects may have mandatory requirements, others may not.
Requirements vary greatly depending on the sector and type of product transported. Some segments, mainly those that carry low value-added cargo, such as clothing, textiles and construction material, prioritize the low prices charged by carriers. These companies typically work directly with self-employed carriers in their operations.
Other sectors, however, prioritize safety and quality of service, attributing high importance to the condition of the vehicles used and accident control. This is the case, for example, of chemical and petrochemical companies, which handle hazardous cargo and are subject to stricter environmental regulations. Typically, these companies require certifications and compliance with environmental and safety standards from their transporters.
Formalization of the agreement: many of the contracting companies are seeking to regulate their relationship with transport service providers. In 2002, only 54% of companies had some type of contract with their carriers (Coppead, 2002). In 2006, the CEL/Coppead survey showed that this percentage is 73%. Some of the requirements mentioned above are formalized in the contract, as well as the establishment of schedules and volumes to be met, the determination of the fleet dedicated to the operation, among other items. However, despite the increase in the number of shippers using contracts, there is still a relatively high percentage of companies without written agreements with their transport partners.
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| Figure 4 – Percentage of shippers that sign a formal contract with their carriers |
Carrier performance assessment: measuring the performance of service providers is an essential procedure for controlling and improving the services provided by them. The verification of the results through indicators is fundamental for the critical analysis of the services in relation to the established goals, allowing a management based on concrete data and serving as a subsidy for decision-making and for the re-planning of activities.
In this sense, it was found that 95% of the large shippers register and monitor performance indicators, evidencing a concern with the quality of the services offered.
The importance attributed to each indicator varies according to the analyzed sector. For example, in terms of breakdowns, the sector that most systematically monitors the evolution of this indicator is telecommunications, which usually transport fragile products. This segment is also very concerned about theft and loss, as it handles targeted cargo that is easy to resell.
Compensation Models: one of the great challenges for professionals in the transport area is to structure an adequate model of compensation for their third parties. The model should encourage efficiency, without making management bureaucratic or deviating from the principles of cooperation and credibility between the parties. The criteria for remuneration of carriers and for readjustments of practiced rates must be established in order to meet the needs of contractors and contractors.
The adoption of a trigger, for example, aims at automatically transferring the increase in costs that make up transport tariffs to the companies contracting the service. In general, it is used to guarantee the profit margin of transporters. As this procedure reduces the risk of the companies that carry out the transport, the freight rates tend to be initially lower, but with the possibility of constant readjustments. The vast majority of triggers are linked to the increase in the price of diesel, the item with the greatest impact on transport costs. The percentage of contractors who adopt this tool for freight adjustments is relatively low, only 18% of respondents.
Another important aspect in negotiating with carriers concerns how to readjust the prices paid to them. Adjustments can be based on three criteria, described below:
• Readjustments based on changes in cost items: 50% of companies have their freight rates readjusted based on the increase in the prices of items that make up transport costs, such as fuel, wages and charges, tires and retreads, among others. In this case, estimates are made of the impact of the increase of each item in the tariff charged. In this form of readjustment, the profit margins of the carriers are not known by the contracting companies. The advantage of this method is the meticulous adjustment of prices and the disadvantage is the need for systematic monitoring of price increases for cost items.
- Readjustments based on economic indices: 30% of contracting companies have their freight adjusted based on economic indices, such as the IGPM (General Market Price Index) – FGV, the INCTL (National Index of the Cost of Cargo Transport) – FIPE and the INPC (National Consumer Price Index) – IBGE. The use of these indices to readjust tariffs can facilitate the process, avoiding wear and tear in negotiations. Its disadvantage is that many of the indices adopted are not directly related to the specificities of the transport operation and, therefore, may not reflect the price changes that actually occurred in the services.
- Readjustments with an open cost spreadsheet: 27% of shipping companies know the cost spreadsheets of partner carriers. In this case, the information is treated openly and the variations in the freight price take these values into account. In this open spreadsheet method, the advantages and disadvantages are very similar to those of the adjustment based on cost items. However, this form can lead to greater wear and tear in negotiations and in defining the carrier's margin.
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| Figure 5 - Criteria adopted for readjusting road transport tariffs |
Carrier remuneration models can also consider aspects related to the level of service, penalizing or benefiting companies that meet or fail to meet established targets.
As a way of improving the quality of services provided, most contractors (45%) apply penalties to service providers for non-compliance with established performance parameters. On the other hand, there are few awards and profit-sharing initiatives between transporters and shippers. Only 12% award carriers when they reach targets and 6% perform profit sharing.
Thus, it is concluded that the policies adopted by shipping companies to guarantee the quality of service of their carriers are based on sanctions, with very little benefit for carriers that obtain good performances. This lack of incentives can be an inhibiting factor in the development of solutions to improve processes and systems.
It is important to emphasize that logistical partnerships mean the establishment of collaborative actions. Thus, companies that wish to maintain long-lasting and productive relationships must adopt remuneration models that guarantee the fulfillment of expectations and the stability of the relationship for both parties involved.
CONCLUSION
- The importance of transport management is evidenced when looking at aspects related to the level of decisions taken, the organizational structure of the transport area, the services offered to customers and the costs involved;
- Currently, Brazil is a country extremely dependent on road transport. Even with the tendency to increase the participation of other modes, the road will still be predominant;
- The lack of investments in infrastructure in the country is an obstacle to restructuring the matrix and economic development;
- In order for companies to be able to sustain themselves in the market, reduce their costs and improve the services offered, it is necessary to take several initiatives to increase the efficiency of road transport, such as, for example, better management of third parties, adoption of collaborative practices in the transport, network planning and IT investments;
- There are several processes related to the management of third parties that affect the performance of services and costs, among them: selection of carriers, requirements imposed on service providers, formalization of the agreement, performance evaluation and forms of remuneration;
- A well-structured and careful selection process facilitates the choice of carriers compatible with the company's procedures and objectives, avoiding wear and tear and contributing to the good performance of the services offered;
- The percentage of companies using contracts to formalize their relationship with carriers is increasing (from 54% in 2002 to 74% in 2006);
- There are few profit-sharing initiatives between carriers and shippers. Only 6% of companies maintain this practice.
BIBLIOGRAPHY
CENTER FOR STUDIES IN LOGISTICS –CEL/COPPEAD. Logistics Overview – Management of Road Cargo Transport in Companies – Practices and Trends, 2007.
CENTER FOR LOGISTICS STUDIES – CEL/COPPEAD. Research Accidents in Road Cargo Transport in Brazil, 2006.
COMPSUR/ NTC&LOGÍSTICA – PERMANENT SAFETY COMMISSION. Risk management. National Association of Cargo Transport & Logistics, 2005. Available atwww.ntcelogistica.org.br/gris/canal_gris.asp, March, 2007.
CNT – NATIONAL TRANSPORT CONFEDERATION. Highway Survey 2006. Available at www.cnt.org.br, March, 2007.
PAULO CÉSAR PEREIRA JUNIOR. Outsourcing practices of transport services in Brazil, Coppead, 2002.
1 The complete report of the Cargo Road Transport Management Survey in Companies is part of the Panorama Logístico CEL/Coppead collection. The report is available for sale. Interested parties should contact ILOS – Institute of Logistics and Supply Chain: www.ilos.com.br
