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ConSort Inc.
Page 1
ConSort, Inc.
Utilizing Consolidation to Lower Transportation Costs
ConSort Inc, is a mid-sized distributor based in the southeastern United States.
The ability to distribute their products in a cost efficient manner is imperative to
remaining competitive in their niche.
Transportation manager Peter Patrachalski stopped by the office of Fred Ferguson,
ConSort’s VP of Supply Chain. “What’s new, boss?” asked Patrachalski.
“We have a student intern named Jason starting today from Possum State
University,” replied Ferguson. “I’m going to assign him to you.”
“Excellent!” exclaimed Patrachalski. “This gives me an opportunity to have the
resources to look at those things on the ‘if I had time’ wish list and test drive a
potential future employee. And the experience is rewarding for the intern as well
since it gives him real world experience and increases his market value when he
looks for his first career position. It also comes with an obligation to shape and help
him learn how to apply his classroom learning. If we do it right it can be a very
symbiotic gain-gain relationship. When can I meet him?”
“You actually walked right past him outside my office.” Grinning, Ferguson looked
at his open door and bellowed, “Jason, come into my office. You need to meet your
boss and we need to discuss our transportation strategies.”
ConSort Inc.
Page 2
As Jason walked through the door Ferguson began, “Jason, this is your boss, Peter
Patrachalski. Say, you took Professor Bess for a transportation course last
semester; tell me what you know about transportation consolidation.”
“Professor Bess taught us that truckload (TL) rates per pound are lower than less-
than-truckload (LTL) rates per pound.” Jason replied. “With LTL you are handling
many smaller shipments for different customers. Truckload shipments are often just
a few shippers so you get kinda’ an
‘economies of scale’ thing -- fewer delivery
points, less handling, more profit for the
carrier. Transportation rates reflect this and
that is why TL rates are lower per pound.
Strategically, you consolidate your freight into
larger quantities so you can get the lower TL
rate. There are two primary types of consolidation; vehicle consolidation and
temporal consolidation. Vehicular consolidation combines LTL shipments from
various sources together into TL quantities so you can qualify for the lower TL
rates.”
“Correct,” agreed Patrachalski. “ConSort can either use a ship direct model where
our four manufacturers ship LTL directly to our customer and we pay the higher LTL
freight charges or we could switch to vehicular consolidation where the four
manufacturers ship LTL to our distribution center at our expense and we combine
ConSort Inc.
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consolidation ConSort would combine LTL shipments over time going to a single
location into TL quantities to benefit from the lower TL rates per pound.”
“Perhaps we should use temporal consolidation to consolidate these shipments into
larger, lower cost shipments rather than making a number of higher cost, small
shipments,” stated Patrachalski; “OK, Jason, I also want you to take a look at the
possibilities of using temporal consolidation from the ConSort Oklahoma City
distribution center to each of our operations in
Kansas. Use the history of average past orders
to three Kansas cities over consecutive three
day periods (Figure 2) and assume this is
representative of demand every three days
throughout the year (e.g. Day 4 shipments will
be identical to those on Day 1). Complete an
analysis using our current rates (Figure 3)
comparing no consolidation (e.g. daily
shipments) versus temporal consolidation of three days of shipments over a 30 day
period. Quantify and make a recommendation based on the lowest total cost.”
Day 1 Day 2 Day 3 Topeka 5,000 23 ,000 16 , Kansas City 7,000 12,000 21, Wichita 3 2,000 38,000 3 1,
Historic ConSort Shipments to Kansas Operations
Figure 2
ConSort Inc.
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“But Peter, if we delay shipments our customer service levels will drop. That has to
cost us something,” cautioned Ferguson.
“True,” responded Patrachalski, “so Jason, in your analysis assume the cost of the
delayed shipments to the customer will result in a loss of $2,000 (cost of poor
service) for each 3 day period.”
“This all sounds complicated,” pointed out Jason, “Why don’t we use a freight
broker or a freight forwarder to handle ConSort freight?”
“Well, Jason,” replied Patrachalski chortled, “I guess the answer to your question is,
um, another question. What IS the difference between freight broker and a freight
forwarder? Why don’t you compare and contrast the similarities and differences for
me to consider.”
Topeka Kansas City Wichita 0 – 9,999.9 lbs. $2.35 $2.20 $2. 10,000 – 19,999.9 lbs. $2.12 $1.98 $2. 20,000 – 29,999.9 lbs. $1.80 $1.68 $1. 30,000 lbs. and over $1.44 $1.35 $1. All rate information is based on cost per CWT. Assume that once you reach the 30,000 pound rate the carrier may use multiple trucks if needed but will still charge you the 30,000 pound rate.
Current Transportation Rates
Figure 3
Two weeks later Fred called Jason to his office. Peter was sitting in a chair when he
arrived. “Jason, after you completed your analysis of consolidation and completed
the comparison of a freight broker and a freight forwarder, Mr. Patrachalski and I
got to talking. We spent $13,601.554 last year shipping freight. I want to
ConSort Inc.
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“Oh yes,” Patrachalski continued, “I found an Accenture report^2 which considers the
“higher performer” freight forwarders. The high performers have tightly controlled
operating expenses and strong working capital management. Their average return
to shareholders over a five year period is 7.5%. Hoover’s indicates the industry
average EBITDA for all freight forwarders is 6.6% so it appears the higher
performers earn a higher return for their better quality. Happily, the medium-sized
freight forwarders have a lower average EBITDA of 6.3% (Figure 4) so we might be
able to glean even more cost savings.”
“Since we already have rates from our carrier (Figure 5),” Ferguson interjected,
“We can assume the forwarder has the same shipping rates or better.”
(^2) http://www.accenture.com/us-en/outlook/Pages/outlook-online-2013-freight-forwarding-and-logistics-what-high- performers-know.aspx
ConSort Inc.
Page 8 Size by Revenue All Over $50M
$5M -
$50M
Under $5M Cash 12.7% 11.6% 13.4% 13.0% Transportation Purchased 65 .1% 64 .3% 65 .4% 66 .1% Accounts Receivable 37.4% 39.1% 38.4% 35.4% Inventory 0.9% 0.9% 0.8% 0.9% Total Current Assets 58.4% 57.9% 60.1% 57.5% Property, Plant & Equipment 19.6% 17.9% 19.7% 20.9% Other Non-Current Assets 22.0% 24.2% 20.1% 21.6% Total Assets 100.0% 100.0% 100.0% 100.0% Accounts Payable 17.1% 16 .9% 17.6% 16.9% Total Current Liabilities 35.5% 37.8% 35.2% 34.0% Total Long Term Liabilities 21.4% 17.2% 22.2% 24.2% Net Worth 43.1% 45.0% 42.7% 41.9% Total Assets to Sales 42.4% 44.8% 37.9% 44.0% EBITDA to Sales 6.6% 6.9% 6.3% 6.5%
Hoover’s Online Summary of the Freight Forwarder Industry^3
Figure 4
“Use these rates to develop a negotiation strategy for us to use with MT Freight
Forwarding so we can negotiate a flat rate per CWT for each zone for what we
expect to pay.”
Zone A Zone B Zone C Zone D Zone E Total Weight Shipped Last Year (000s lbs): 112,540 201,700 115,620 84,400 56, 0 to 499.9 $ 2.40 $ 2.15 $ 2.35 $ 2.50 $ 2. 500 to 999.9 $ 2.36 $ 2.10 $ 2.30 $ 2.46 $ 2. 1,000 to 1,999.9 $ 2.32 $ 2. 05 $ 2.25 $ 2.41 $ 2. Weight 2,000 to 4,999.9 $ 2.27 $ 2.00 $ 2.21 $ 2.37 $ 2. (lbs) 5,000 to 9,999.9 $ 2.23 $ 1.97 $ 2.17 $ 2.33 $ 2. 10,000 to 19,999.9 $ 2.20 $ 1.95 $ 2.10 $ 2.30 $ 2. 20,000 to 29,999.9 $ 1.85 $ 1.65 $ 1.80 $ 1.95 $ 2. 30,000 + $ 1.48 $ 1.30 $ 1.45 $ 1.55 $ 1.
ConSort Carrier Rates
Figure 5
All rate information is based on cost per CWT.
“Finally,” Ferguson continued, “I am interested in your thoughts about the strategy
of using a mid-sized freight forwarder with a 6.3% EBITDA. What do you think are
(^3) http://libproxy.library.unt.edu:2308/H/industry360/financials.html?industryId=
ConSort Inc.
Page 10 QUESTIONS
Q#1: If we use the ship direct model, using the data from Figure 1, what
are our total costs over a 52 week period?
$
Q#2: If we use the vehicular consolidation model, using the data from
Figure 1, what are our total costs over a 52 week period?
$
ConSort Inc.
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Q#3: Do you recommend using the ship direct OR the vehicular
consolidation model? Explain why.
Q#4: If we use the ship direct model, using the data from Figure 2 and
3, what are our total costs over a 30 day period?
$
Q#5: If we use the three day temporal consolidation model , using the
data from Figure 2 and 3, what are our total costs over a 30 day
period?
$
ConSort Inc.
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Q#7: Compare and contrast the similarities and differences between
freight broker and a freight forwarder. When is it appropriate to
use one but not the other?
Freight Broker Freight Forwarder Definition: Differences:
Similarities:
Best Used:
Q#8: Propose a flat rate for each of the five zones using a cost/CWT.
Zone A Zone B Zone C Zone D Zone E $ $ $ $ $
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Q#9: What would be the additional “cost” to us of using a better
performing freight forwarder with a 7.5% EBITDA?
$
“Should Be” rates using “Better Performer”
Zone A Zone B Zone C Zone D Zone E $ $ $ $ $
