Coping with the Crunch: How Innovation Helps the Johnson & Johnson Sales and Logistics Company, LLC Optimize Transportation Capacity
Written By: Bill McBeath
Published On: February 23 2006
Stories of innovation and success in dealing with the global transportation capacity crunch are rare. So when Kristyn Harkins—team leader for Sourcing and Supplier Performance within the Global Transportation Organization (GTO), a division of the Johnson & Johnson Sales & Logistics Company, LLC—presented its story at ChainLink's annual conference recently, we were all ears.
Kristyn talked about the macroeconomic factors that have created this crunch, the GTO's approach to relationships with the carriers, its push for innovation in dealing with the issues, and its use of technology. This article combines some of ChainLink's own research with the story of the GTO.
We've all heard the perfect storm analogy in transportation—long-term economic forces, political factors, and physical constraints converging to create the current crunch. Examples of these forces include:
- Phenomenal growth in China
- Skyrocketing fuel prices
- Aging truck driver demographics
- Growth in the construction sector (stealing potential drivers)
- Hours of service regulations
- Port strikes
- Hurricane Katrina
- Post 9-11 security regulations
- Rail congestion
- Shortages in ocean containers
- New engine requirements
- Chronic port capacity shortages
Johnson & Johnson is a broadly based health care manufacturer in consumer, pharmaceutical, and medical devices and diagnostics. They have a decentralized structure, with over 200 operating companies. Johnson & Johnson has been growing for 73 years in a row and is now a $47 billion (USD) company that strives to be number 1 or 2 in all markets they participate in.
The infrastructure in the US just isn't keeping up with the volumes of traffic.
Carriers Are in the Driver's Seat
Many feel that these factors have led to a shift in the balance of power between carriers and shippers. No longer can shippers expect to continuously drive down rates through auctions or generic bid processes. The new environment requires relationships of partnerships rather than adversaries. In addition, creative transportation solutions are needed to reduce costs without fully depending on lowering rates. The GTO has had some success in achieving these goals
The GTO: An Internal Third Party Logistics Provider
In 2000, a consolidated transportation department was formed to facilitate best practice application, centralize core activities, and to leverage and optimize the combined transportation spend of the firm. The GTO in many ways acts essentially as an internal third party logistics (3PL) provider, and it must earn the business of the internal operating companies.
The GTO manages over $200 million (USD) in spending across all modes, domestic and international (import and export). It strives to be the provider of choice by creating value, leveraging spend, delivering innovative transportation projects and technology, and managing carriers for better performance and service. The goal of the GTO is to continuously provide value to the organization as related to cost and service.
The GTO uses education and communication throughout the company as an important tool to ensure that all business partners are aware of the industry forces that are present in transportation.
The GTO's strategy for dealing with ongoing transportation capacity challenges involves improved carrier relationships, as well as innovation in practices and technology.
Becoming the Shipper of Choice
Aware of the new realities, the GTO has turned the tables by asking, "Why should transportation suppliers choose to do business with us?" It strives to make it a partnership relationship. It incorporates carriers' feedback into process improvements within the GTO, at distribution centers, customer locations, and manufacturing sites. It considers the carriers to be its "eyes and ears". This approach has enabled carriers to be very honest about where they see opportunities for improvement. One such area is freight payment, where the GTO worked very closely with its freight payment company to reduce the cycle time, and improve the accuracy, which has had a huge positive impact on its carrier supply bases.
The GTO invests in transportation innovation, constantly researching new and better policies, processes and technologies. Some examples include:
- Collaborative transportation management to forecast containers and truckloads
- Maxi-cube dedicated routes
- Temperature-controlled protective blankets, where possible, instead of more costly refrigerated trailers (reefers)
- Dedicated fleets to control costs and guarantee service
- Cross-shipper dedicated loops (see explanation below)
- Truckload request for proposal (RFP) technology with combinatorial optimization
Cross-shipper Dedicated Loops
The GTO is currently working with two other large shippers, who are not direct competitors, comparing their networks to find connecting points in both networks and to create continuous moves on a weekly basis. There was no real technology used to do this—just a great deal of diligence to compare major shipping and receiving locations, volumes, and areas of unmet need. Working with other shippers was aimed both at guaranteeing service levels and reducing cost. The GTO found it's given them guaranteed capacity on lanes where it was difficult in the past.
The Search for the Right Truckload RFP Technology
In 2005, the GTO conducted an RFP for its domestic truckload business. The GTO required a platform that would enable total value creation through improved cost and service levels. Other goals for the RFP event included adding carrier capacity in constrained markets and expanding reefer capacity for temperature controlled products.
The GTO was very cognizant of the need for balancing carriers into and out of these markets where capacity was constrained. In addition, the GTO has diversity spend goals, and it wanted to increase diversity spend through the RFP event. Its technology requirements included:
- Power. A tool that could handle complexity—more than 1,000 lanes for 12 operating companies in all 3 sectors of business, with very different requirements, such as temperature control, mode balance, and diversity goals, as well as individual customer requirements
- Usability. Ease of use, not only internally, but for carriers. The ability to easily create and execute analysis scenarios themselves
- Speed. Real time on-line views, and rapid execution of complex scenarios
- Flexibility. Able to handle diverse requirements
The GTO selected a combinatorial optimization RFP tool with expressive bidding capabilities that allowed carriers to create as many combinations of lots or packages of lanes as they wanted. This lets carriers play to their own strengths. When looking at the GTO's entire network, carriers could create miniature dedicated fleets, dedicated loops, and dedicated moves throughout the network. Through its combinatorial optimization (ability to analyze millions of different combinations of bids), the tool allowed the GTO to optimize many different parameters.
Ease of Use and Power
The tool allowed the GTO to create its own business rules and scenarios. It could run complex scenarios in less than five minutes. The GTO's carriers and internal customers said the tool was user-friendly and provided access to the data that was needed. It had detailed parameters available for analysis, and total network visibility, in a decentralized environment. Having visibility into the total network is a big plus.
Allowing Carriers to Offer Creative Solutions
This approach leveraged the creativity and knowledge of the carrier supply base. Carriers did much of the work of finding the optimal solution and proposing packages, from which dedicated moves could be created. This gave the GTO a better understanding of its carrier's strengths and potential areas for growth. Its intermodal providers utilized the RFP event to make the GTO aware of numerous mode-conversion opportunities that existed within its network.
Customized Service for Key Customers
Price is obviously important, but having a price on paper that can't be executed means nothing. The GTO used the tool to create a realistic, best case scenario to deliver the service expectations that its customers needed. The GTO was able to customize decisions made throughout the RFP event to make sure that it was servicing all customers appropriately.
The Bottom Line
The GTO was able to maintain a price inflation rate well below the national average and current benchmarks. More critically, these rates were executable and realistic. It increased capacity through new carriers and development of dedicated scenarios, and its buyer-supplier relationships were strengthened throughout this event.
The current environment is challenging. The balance of power has shifted. The GTO network is large and complex, with complex business requirements. A carrier for its pharmaceutical business has different requirements than a consumer truckload carrier. That needs to be taken into account when looking across its whole network. The enabling technology it chose helped to optimize its network based on these important criteria.
The GTO has said that it's pleased with the results. It has seen value creation, and was able to introduce innovation. This combination of investing in the supplier relationship and innovation looks like a winner.
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