[5] Mistakes that Cripple Profitability and How to Correct Them

[5] Mistakes that Cripple Profitability and How to Correct Them

The driver shortage, while currently masked in terms of capacity, has driven up the cost of shipping and will continue to do so in the foreseeable future. O&G companies looking to drive down operating costs will have to find ways to manage transportation efficiently and cost-effectively. Tight capacity and rising costs completely changes the way a company must manage transportation. Service levels, productivity and operating costs are all on the line when moving freight, and O&G companies must learn to make an investment in transportation to keep business profitable.

[ MISTAKE #1 ] Limited Use of Transportation Management Software
Properly using a transportation management system (TMS) in today’s complicated logistics
environment is not optional. A TMS can be used for more than just booking loads; it provides
historical and real-time data for visibility into the supply chain, which is necessary before any
profitable changes can be made.
When inbound and outbound shipments are not managed using a centralized TMS, aggregate
data on costs, performance, safety and other critical issues do not exist. Local data may exist on
someone’s hard drive, within a file folder, or worse, in someone’s head, but it is not available to the
entire organization for analysis and decision support.
A TMS generates standard and custom reports that help identify key business challenges.
Through analysis of the data created by the software, you can figure out future capacity
requirements, historical and projected freight costs, and whether or not your carriers comply
with DOT safety regulations.
Whether it’s a steel pipe traveling on a flatbed or a hotshot delivery to a rig, a central TMS tracks
freight moves, which is crucial for freight optimization. Not all businesses can afford implementing
a TMS, let alone learning and operating the system, so outsourcing this function makes sense. After
enlisting the help of a 3PL and automating manual processes, companies see reduced overhead and
administrative costs due to personnel elimination or reassignment. Partnering with a 3PL gives you
access to all the benefits of a TMS without the capital outlay and hassle.

EXAMPLE : A large pipe distributor felt it was spending too much on transportation but didn’t know
how to reduce costs because it had no visibility into freight processes. The distributor recruited the help
of a 3PL with a powerful TMS system. The 3PL implemented and centralized the TMS system, and was
able to implement changes based on the data collected. A year later, the distributor saw a 20% reduction
in freight costs and benefited from a fuel surcharge 40% lower than the market average.

BENEFITS OF A TRANSPORTATION MANAGEMENT SYSTEM:
• Optimized freight moves
• Automatic recommendations on freight consolidation, continuous moves
and cost-saving opportunities
• Visibility into shipment status and overall logistics processes
• Reduced freight risk and improved safety during transport

[ MISTAKE #2 ] Decentralized Transportation Management
Decentralized transportation management means that there is no central system used to manage
freight. In O&G projects, buying freight services is typically left to non-logistics employees who
don’t have the time or expertise to arrange the best solution. For example, often times the person in
charge of arranging transportation at a drill site is a rig supervisor, who is only focused on keeping a
drilling site fully operational.
Making decentralized decisions in the field leads to overspending. Non-logistics employees aren’t
able to spend the time looking for a good rate, and typically just want the items to arrive as fast
as possible. Unnecessary expedited shipments can be a major factor in transportation spend.
The biggest enemy of any drilling project is downtime, so little thought is ever given to the cost of
sourcing replacement parts.
Overspending is not the only disadvantage to decentralized transportation management. Without a
central system, there is a lack of visibility and control. When freight is managed job-by-job or moveby-
move, executives are powerless in establishing freight management policies. Also, there’s no
accumulated intelligence to aid in future transportation decisions.
One simple remedy is to partner with a non-asset based 3PL for some or all of your shipments. The
right partner gives you access to industrial freight expertise, capacity, technology and can manage
and optimize freight moves while you focus on core business competencies. When a 3PL helps
centralize your transportation management, you gain the ability to leverage all freight spend for
rate negotiations, as opposed to buying transportation separately at each location; this will lead to
reduced contract rates and better service.
EXAMPLE: An on-site engineer at a drilling company used local search to source a carrier for a
hotshot move from West Virginia to central Pennsylvania. The PA-based carrier charged $1,300 – a
$100/hour rate – for a round-trip to West Virginia and back. A similar delivery was arranged two weeks
later by a freight broker, who contacted a driver already in West Virginia with another load and arranged
to have him bring the needed load to Pennsylvania for only $350.
BENEFITS OF CENTRALIZED FREIGHT PURCHASING DECISIONS:
• Instant visibility to shipment status and real-time notifications
• Strategic and enforced freight policy
• Reduction in freight costs

 

[ MISTAKE #3 ] Focusing Only on Over-the-Road Carriers
Many O&G companies and suppliers rely exclusively on over-the-road (OTR) trucking companies to
move freight; avoiding rail and barge because they may not understand these more complex, multimodal
moves or they lack established relationships with railroad, barge and trans-load companies.
O&G companies should consider whether shipments need expedited and if speed is a priority. Barge
transport is often overlooked because it is slow, and many businesses don’t have large enough
shipments to fill a barge. But, shipping by barge is an extremely cost-effective transportation
solution.
Using alternative modes or intermodal shipments instead of OTR carriers is a useful strategy for
O&G companies. Although these types of shipments may be complicated, they can help produce
freight savings, and a 3PL is always available to help with the complex shipping processes. With
the help of a 3PL, O&G companies can consolidate barge shipments to save money on freight. Or, a
3PL can do the complicated work of planning a shipment over several different modes to find cost
savings.
EXAMPLE: A mid-sized steel company sent regular shipments of steel pipe via flatbed from Houston,
Texas to Edmonton, Alberta. The company abandoned rail because its carrier and trans-load providers
could not hit promised delivery deadlines. Consequently, the company paid three times per-ton to move
the goods by truck. A 3PL with a strong industrial experience was brought in to shift the freight moves
back to rail. By coordinating the activities of the steel company, carriers and trans-load companies, the
3PL was able to hit promised delivery dates while reducing the customer’s annual cost for this lane by
more than $850,000.
BENEFITS OF USING ALTERNATIVE FREIGHT MODES:
• Potential 20 – 40% reduction in per-ton cost
• A wider array of available capacity
• Flexibility to switch modes based on overall costs

 

[ MISTAKE #4 ] Relying on a Small Carrier Base
O&G companies tend to lean heavily on the same set of core carriers due to long-established
relationships and a foundation of trust. This trust comes from a comfort of working with carriers
that have proven the ability to move freight safely, and with specialized equipment.
Choosing only familiar carriers, and not shopping around for competitive pricing, can quickly drive
up costs. As the industry expands to different geographic regions, the strategy of relying on carrier
relationships might leave you without the capacity you need, forcing you to pay spot market or
expedited rates.
Freight rates for O&G cargo are typically negotiated by sales, purchasing or other non-transportation
staff who may not understand the availability of lanes, modes and other options like using a 3PL or
negotiating fuel surcharges. It is easiest for O&G companies to rely on known carriers since it isn’t
familiar with the transportation industry, but this can lead to rates being overinflated up to 20%.
The simplest solution is to allow a 3PL to negotiate rates for you. Their carrier networks within the
industrial sector allow them to leverage down costs through a competitive bidding process and they
have the expertise to negotiate fuel surcharges lower than the industry average. 3PLs have their own
wide-ranging network of carrier relationships to be added to your own. That way, there is a reliable
source of capacity and the carriers are pre-approved to be safe and efficient.
EXAMPLE: A large pipe distributor used a local Texas-based carrier to move pipe from Texas to
Marcellus Shale rig sites in Ohio, Pennsylvania and West Virginia. Because this carrier could not
arrange backhaul loads to Texas it charged a round-trip rate. After shifting the volume to an industrial
transportation specialist with the lane volume to fill the backhaul, the distributor now pays one-third
less, saving about $300,000 per year to serve rig sites.
BENEFITS OF SHOPPING FREIGHT RATES AND EXPANDING YOUR CARRIER BASE:
• Capacity and specialized equipment when and where you need it
• Better backhaul pricing
• Fast, accurate freight quotes for new business proposals
• Lower operating costs and higher company profit

 

[ MISTAKE #5 ] No Visibility or Control Over Inbound Freight
Transportation accounts for almost 50% of an average company’s logistics costs. O&G companies
can gain more control of these costs when they choose to make inbound freight management a
supply chain priority.
Controlling inbound freight enables a company to track shipment status and create better inventory
management. Typically, inbound shipments are in the vendor’s hands, limiting visibility and control
over costs. Vendors usually hide the cost of transportation in the price of its products and use
freight movement as a source of revenue.
Without control of inbound freight, O&G companies have much less control over their construction
schedule, which hurts operating efficiency and costs. For example, midstream companies often
face unexpected crane and labor costs of up to $6,000/day due to delays in transportation.
Inbound freight for midstream O&G companies is extremely expensive, and vendors make nearly
as much on shipping freight as they do by selling their products. Since midstream companies don’t
understand their actual transportation costs, they do not understand the true cost of building a
plant or compressor station.
Optimization of inbound freight starts with gaining control, however, management of inbound
materials can be a complicated process, as internal operational changes are often required.
Working with a 3PL is the best solution to fix inefficient inbound freight processes. A 3PL will
control inbound freight and vendor relationships and implement tracking and management
software to begin making profitable changes.
EXAMPLE: A large drilling company allowed their vendor to move loads of 80-foot pipes from
Houston, Texas to a site in Arkansas for $4600 per load. They decided to enlist the help of a large
industrial transportation and logistics company. After working with the 3PL, the company was able to
bring these costs down to $3,900 per load, saving $560,000 on one, high-volume project.
BENEFITS OF GAINING CONTROL OVER INBOUND TRANSPORTATION:
• Visibility into inefficiencies and hidden savings
• Reduce vendor markups by 15 – 50%
• Faster, safer cargo movement

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