Wednesday, September 2, 2009

When it comes to parcel mode optimization, AP reporter gets it "kind of" right...

When The Associated Press reporter Samantha Bomkamp released her piece As consumers slow down, FedEx and UPS adapt (AP News, September 1, 2009), she got it kind of right. After all, sending paper overnight through the guaranteed services FedEx and UPS provide might be considered a luxury for businesses that have the alternative to use USPS or the "deferred" services that FedEx and UPS provide [see inset frame below for full article].

Bomkamp's contention is that consumers and small businesses that have relied on the overnight services (FedEx Priority Overnight and UPS Next Day -- both services offer next morning delivery of documents and packages by 10:30 am) have re-evaluated their spendthrift ways of days gone by when times were good and revenues plentiful. For those that still require the enhanced offerings for delivery -- including tracking, delivery signatures and guaranteed services -- the solution has been to opt for the carriers' less-expensive modes of delivery, such as two-day and three-day delivery services. And while there is no doubt that these deferred services are priced lower than the overnight services, the knee-jerk reaction to cost-reduction misses the mark as a cost-reduction strategy for those who need overnight delivery as a competitive advantage.

A trusted connection of mine who was formerly employed by one of the top-three global commercial real estate firms forwarded me an internal e-mail communication from the company's CEO that urged all employees to cease the use of overnight delivery services in favor of the slower, less expensive carrier offerings. Think about that for a minute. These are some of the most successful and driven real estate professionals in the world being asked to relinquish a competitive advantage of timely delivery of urgent and important real estate documents (offers, contracts, plans, payments, etc.). Competitors that get offers in ahead of others stand to gain an advantage.

It would seem that a better option would be to reduce the cost of the service that is required. In the example above, our organization attempted to position our logistics spend management service offerings in front of the corporate office to do just that. Bomkamp's article below discusses a small media relations firm in VA who's CFO was trying to strike a balance between reducing headcount and reducing indirect spend. He was able to make a mode optimization, like that referenced above, which saved the organization $14,000 annually. The firm reported that they employed a staff of 13. Not a bad savings, but not the optimum approach. I would doubt that his $14,000 in savings accounted for any of the thirteen's annual salary.

That said, we have been hearing this message for the last 24 months; its reduce expenses or reduce headcount. When the full costs of hiring (and re-hiring) are evaluated, reducing headcount is a backwards approach to cost-cutting. Granted the balance sheet effects are immediate and the modeling compelling, but the approach is short-sided. Services like PA & Associates' make more sense to explore prior to the last-ditch measure of cutting headcount. Ask CFOs if they have taken cost-cutting measures during the last year and they will report they wrung the general ledger dry of all expenses. However, when we dig down into many of the indirect spend categories we find that best practice procurement, strategic sourcing and true spend management techniques have not been employed. Its a mentality of, "we flip the light switch on in the morning and turn it off at night; we're going to get an electricity bill and there's nothing you can do about it". That's just not the case.

The economic downturn has produced two sets of cost-cutters; those who have made the easy and obvious cuts to survive and those who have fully changed their mindset on what it means to run lean. Our clients comprise the latter group and have employed our methodologies as best practice spend management techniques in multiple areas of their operations for real and lasting cost reduction and continuous improvement (spend management). Many are saying that we'll never be the same when things completely recover. I differ with them in that human nature is to resist change and opt for the path of least resistance. We will see some that will make lasting change and it will become their new culture. We will, however, see a large number of those that will go back to their old, wasteful ways when revenues return. How easily we forget.

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