- Cost & risk reduction by adjusting the pricing model
- Elimination of non-value-added substructures
- Introduction of a new credit memorandum process and efficient invoice review process to ensure performance-based, accurate billing
Founder & Partner
M.+49 160 93882573
Reducing transport costs through transport tendering for last mile delivery
A leading pharmaceutical wholesaler had set the long-term strategic goal of gaining market share in a highly competitive market through cost leadership. The most competitive procurement conditions were to be used as a unique proposition over competitors to increase sales without reducing service and quality. To achieve this goal, a savings program was initiated with a focus on the largest category in terms of indirect spend: transportation, in particular transport costs arising from last mile delivery.
Our client operated a distribution network with more than 1,000 delivery vans in order to supply its customers, the pharmacies, quickly and reliably several times a day. The network was serviced externally via 150 small and medium sized van transport companies. These transport partners mostly had an average of 5 to 10 vehicles in operation and were in a long standing relationship to our client.
In this article we describe how we achieved successful cost optimisation by means of a transport tender for the last mile delivery.
Goal and challenge: cost optimisation without loss of quality
Our client clearly defined the project objectives: Identify the greatest possible cost saving opportunities for the distribution network and implement them through a transport tender for last mile delivery.
As expected with transport procurement, the practical challenges were manifold. On one hand, previous transport tenders have neglected the suppliers' cost drivers. The current pricing model did not optimally reflect these cost drivers, leaving the transport service providers no choice but to price risk into their offer and thus increase the overall transport costs for our client. On the other hand, the transport subcontractors were, and still are, a resource in high demand and short supply, also due to the ever-rising tide of parcel delivery. This caused price increases and a loss of quality across the entire transport industry – either high prices had to be paid for average quality, or lower prices for poor quality.
Further challenges lay in the accounting. Every month, each of the 150 transport service providers had to submit an invoice for the services provided. The manual effort of checking invoices and, also, the lack of traceability of performance data called the process into question.
Finally, one can always be sure of the introduction of new regulations for transport in the healthcare sector. The associated cost increases usually need to be absorbed.
In order to achieve maximum savings while maintaining the same quality, we supported our client with a transport tender over 3 phases:
- Opportunity Assessment (3 weeks)
- Project realisation (5 months)
- Sustainability (ongoing)
Procuring transport services not only involves the tendering process and the negotiation of the best possible conditions. It also involves the analysis of the cost drivers and price models of the transport service providers, as well as the definition of the optimal supplier structure. Furthermore, one of the central tasks of transport procurement is the identification and selection of appropriate suppliers for participation. The use of efficient transport service providers with a competitive price level is one of the major success factors of a functioning supply chain.
The greatest challenges of the three-week Opportunity Assessment were to identify reliable optimisation and savings opportunities, to set up the appropriate measures that would help realise these opportunities, and ultimately to develop a strategy for the transport tender.
In order to determine the opportunities, transparent spend data had to be compiled and a spend profile (cost baseline) had to be established and validated. Through comprehensive benchmark analysis, transport cost savings in the range of 3-6 million euros (8 to 12%) were identified and set as a binding project goal.
We worked with our client over a period of 5 months to achieve the identified and agreed objectives, using the OCM transport tender process.
The main challenge of the implementation phase was to identify high performing transport suppliers at a competitive price level. The high savings targets were realised by applying the following 5 optimisation levers:
- Adjustment of the pricing model and introduction of a standardised diesel floater.
- Elimination of non-value-adding substructures
- Creation of competition through qualification and inclusion of new contractors in the bidding process
- Identification and elimination of priced-in risk elements in price and contract conditions of transport subcontractors
- Introduction of credit memorandum procedures and an invoice verification process for transparent verification of invoiced performance data
„Transport tender as a vehicle to challenge existing supplier substructures“
Following an invitation to tender and intensive negotiations, the renegotiated conditions could be applied to existing suppliers at short notice. Therefore, a large portion of the targeted savings in transport costs could be implemented during the project. Successful introduction of new contractors required a detailed implementation plan and thorough preparation.
Following the successful implementation of the results, organisational structures, processes, and control mechanisms were established to enable accurate monitoring, accounting, and management of the carriers. This was done by introducing a rolling training program for the carriers and drivers, as well as regular auditing and assessment of the contractors' liquidity and quality.
Through successful implementation of the tender outcomes and application of the other savings levers as mentioned above, annual savings of EUR 4.8 million were achieved. Thus, the project targets - reducing transport costs through transport tenders for last mile delivery – were achieved.
OCM offers comprehensive support in designing your customised transport tender as well as its implementation via our comprehensive product offering Supply Chain & Logistics.
We combine our proven approach of strategic category procurement with logistics expertise to achieve optimal results.
We would be happy to present our approach and modules to you and discuss concrete solutions based on your challenges.
Founder & Partner
M.+49 160 93882573
Logistics optimisation & Supply Chain Consulting modules
Logistics & SCM Opportunity Assessment
- Benchmarking & maturity testing
- Identification of opportunities & action plan
Transport Partner Management
- Transport partner strategy & professionalisation
- Securing resources and resource training design
- Competition, effective transport tendering, fact-based negotiation
- Transport cost reduction
Freight & Logistics Tender
- Competitive pricing, quality, and performance assurance
- Individual weight-distance matrix
- Efficient warehouse logistics & layout
- Optimised processes & working capital
- Optimising logistics through synergies
- Finding a fair and stable collaboration model
- Distance and route reduction
- Reduce resource & logistics costs
Supply Chain Network Optimisation
- Optimise delivery times, service levels, & processes
- Reduce working capital
Inventory & Order Management
- Optimal order quantity & stock on hand
- Optimise working capital
- Fleet concept tailored to requirements
- Cost optimisation
Supply Chain & Logistics Strategy
- Sustainable maximum value contribution of the supply chain
- Clear objectives, concrete measures
Digital Logistics Management & Reporting
- Information advantages in speed, scope, & significance
- Efficiency through automation, data integration & process simplification
Interim Supply Chain & Logistics Manager
- Rapid response: candidates within 48h
- Matching of requirements and assessment of suitability using logistics experts
- From dispatcher to logistics manager
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