Strategic Transportation Sourcing

In general, strategic (transportation) sourcing provides the main guidelines, processes and policies for operative sourcing (transportation purchasing). But what exactly is strategic about sourcing?

In order to find that out, it is important to take a closer look at the concept of strategic (transportation) sourcing. According to the dictionary, Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company. The purchasing or operative side of sourcing is often considered as one of the many parts of supply chain management.

Strategic Transportation Sourcing in today’s Supply Chain

In today’s transportation climate, transportation sourcing is not just about the price anymore. This complicates the freight sourcing game significantly because how do shipping companies create a strategic supplier sourcing strategy that earns them the capacity against a reasonable price that both parties can live with?

Many industry analysts and transportation leaders have been dealing with this and shared numerous of hints, tips and useful insights regarding strategic transportation sourcing. In this post, we share a selection of these insights.

Jurgen Anke, a research analyst based in Dresden, Germany with expertise in IoT

“According to (internet of things), logistics managers must first have a strategic goal. This means aiming to reduce overall spending, reduce dependency on suppliers with high bargaining power, and to improve security of supply with their transportation partners.To get a handle on this, you look at your suppliers, the goods and transportation services you buy, as well as the purchasing organization and its controlling factors.”

According to the German analyst, three tools are required for logistics professionals:

  1. A spending analysis tool (who has spend what amount on money on what?)
  2. A Supplier (relation) management tool
  3. Contract framework management tool

“It is important to find the right mix of price, security and dependency related to the importance and spending of a certain good or transportation service,” says Anke. “Finding the right suppliers can then be supported with approaches like reverse auctioning.”

The entrance of reverse auction tools has not been without controversy, however. This is because, for some, its process is contradictory to the long-term benefits associated with collaborative/cooperative buyer-supplier alliances. Robert A. Rudzki a former Fortune 500 Senior Vice President & Chief Procurement Officer, believes that reverse auction tools in most situations can not cover the full spectrum of strategic transportation sourcing.

Robert A. Rudzki a former Fortune 500 Senior Vice President & Chief Procurement Officer, believes that reverse auction tools in most situations can not cover the full spectrum of strategic transportation sourcing.

“While reverse auctions might be a useful tool for the strategic sourcing process in some situations, it’s too often used in lieu of negotiations management techniques.”

He adds that strategic sourcing can impact the 4 drivers of Return on Invested Capital, or ROIC, and Cash Flow and that transportation procurement should participate in multiple area’s, including revenue activities that can enhance a supply chain’s responsiveness to customers, especially in transportation.

“Those drivers are revenue, cost, working capital, and capital expenditures. When we work on all four of those things simultaneously, we can have a huge impact on the ROIC of the company. The problem is that most procurement departments are responsible for a relatively small slice of the pie.”

Strategic Transportation Sourcing Tools

State of the Art solutions for sourcing all modes of transportation are according to many analysts in the supply chain industry a rather difficult proposition. Transportation sourcing, including carrier contract negotiations, is a large-scale and complicated function, often not well supported by a Transportation Management System (TMS) or ERP suite.

Logistics procurement strategies also vary by transportation mode, whether truckload sourcing, LTL sourcing, ocean sourcing, air freight sourcing, or multi-modal transportation procurement. Logistics buyers should be focused on price and non-price freight bid information from carriers (logistics service providers) to make sure they will end up with the best possible and lowest risk decision.