Consort Utilizing Consolidation To Lower Transport Costs

CSCMP ACADEMIC CASE STUDY SERIES

Case studies can supplement a course and be used to teach application of supply chain
management concepts to real-‐world situations. Others can use the case studies to learn
about supply chain challenges and to analyze the situation to develop solutions.

ConSort, Inc.:
Utilizing Consolidation to Lower
Transportation Costs
An Academic Learning Case Study written for the
Council of Supply Chain Management Professionals
Prepared by:
Dr. Ted Farris, University of North Texas
Ted.Farris@unt.edu, (940) 565-‐4368

Council of Supply Chain Management Professionals

333 East Butterfield Road, Suite 140
Lombard, Illinois 60148 USA
+1 630.574.0985 | education@cscmp.org | cscmp.org

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 and the resources to
look at that ‘if I had time’ wish list and test drive a potential future employee—and the experience
can be rewarding for the intern as well, since it gives him real world experience and increases his
market value 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.”
As Jason walked through the door Ferguson began, “Jason, this is your boss, Peter
Patrachalski. Say, you took a transportation course last semester with Professor Bess—tell me
what you know about transportation consolidation.”
PART I: SHIP-‐DIRECT vs. VEHICULAR 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 made up of 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.
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Strategically, you consolidate your freight into larger quantities so you can get the lower TL rate.
There are two main types of consolidation: vehicle consolidation and temporal consolidation.
Vehicle 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 vehicle consolidation where the four manufacturers ship LTL to our distribution
center at our expense and we combine these items into consolidated TL shipments to our
customer. Not only would we be able to reduce dock congestion for our customer but we may
also be able to reduce transportation costs.”
“As long as we can efficiently run our distribution center,” cautioned Ferguson, “our
distribution center costs run $3.60 per 1,000 pounds handled.”

“Jason, I want you to take a look at our data (Figure 1) and complete an analysis comparing
the ship direct model and vehicle consolidation over 52 weeks of shipping,” stated Patrachalski
looking at Ferguson who was nodding his approval. “Quantify a recommendation about the lowest
cost strategy. And don’t forget to include our distribution center costs!”


Shipping LTL Rate LTL Rate
Weight Manufacturer Manufacturer TL Rate DC
(lbs) each to Customer to DC to Customer
Manufacturer week (per CWT) (per CWT) (per CWT)
A 10,000 $2.00 $0.75 $1.00
B 8,000 $1.80 $0.60 $1.00
C 15,000 $3.40 $1.20 $1.00
D 7,000 $1.60 $0.50 $1.00
Figure 1: ConSort Manufacturer Rates and Weights
PART II: SHIP-‐DIRECT vs. TEMPORAL CONSOLIDATION
“So Jason,” Ferguson continued, “What about the other type of consolidation, the
temporal one. What is that?”
“Well,” Jason hesitated, “basically temporal is a fancy word for time. With temporal
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 possibility 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 16,000
Kansas City 7,000 12,000 21,000
Wichita 32,000 38,000 31,000
Figure 2: Historic ConSort Shipments to Kansas Operations
“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 three-‐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,” 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 $2.40
10,000 – 19,999.9 lbs. $2.12 $1.98 $2.16
20,000 – 29,999.9 lbs. $1.80 $1.68 $1.84
30,000 lbs. and over $1.44 $1.35 $1.47
All rate information is based on cost per hundredweight or 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.
Figure 3: Current Transportation Rates
PART III: FORMING A NEGOTIATION STRATEGY
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 $6,704,325
last year shipping freight. I want to consider using a freight forwarder for our operations so
ConSort can lower our transportation costs. Peter checked under NAICS 4885 in Hoovers Online1
and found there are 31,249 freight forwarding companies in their database that are US-‐based. Of
those, 19,900 have revenues below $1 million annually but these are too small. We feel we would
not have leverage with the big guys so we would like to use one of the 121 mid-‐size ($50 million -‐
$500 million) firms. We have selected MT Freight Forwarding and they have agreed to use the
same surface carriers that we presently use so our customers will not notice anything different.
Now we need to negotiate rates with MT Freight Forwarding.”
Patrachalski chimed in, “as a middleman, MT Freight Forwarding is able to consolidate
ConSort freight along with freight from a number of other customers so they can qualify for a lower
transportation rate. We realize that MT Freight Forwarding will have many customers but we want
to pay only our fair share. Our goal is to negotiate rates with MT Freight Forwarding so they earn
their average profit margin or EBITDA and keep their shareholders happy. What we do not want to

1
http://libproxy.library.unt.edu:2308/H/industry360/financials.html?industryId=1605


do is to subsidize the other customers of MT Freight Forwarding. We need you to conduct an
analysis for us to use in our negotiations which determines what these rates ‘should be.’
Ferguson interposed, “Tell him about the Accenture report.”
“Oh yes,” Patrachalski continued, “I found an Accenture report2 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.”
Over $5M -‐ Under
Size by Revenue All $50M $50M $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%
Figure 4: Hoover’s Online Summary of the Freight Forwarder Industry3

2
http://www.accenture.com/us-‐en/outlook/Pages/outlook-‐online-‐2013-‐freight-‐forwarding-‐and-‐logistics-‐what-‐high-‐performers-‐know.aspx
3
http://libproxy.library.unt.edu:2308/H/industry360/financials.html?industryId=1605


“Use these rates to develop a negotiation strategy 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
56,250 100,850 57,800 42,200 28,100
(000s lbs):

0 to 499.9 $ 2.40 $ 2.15 $ 2.35 $ 2.50 $ 2.75
500 to 999.9 $ 2.36 $ 2.10 $ 2.30 $ 2.46 $ 2.70
1,000 to 1,999.9 $ 2.32 $ 2.05 $ 2.25 $ 2.41 $ 2.65
Weight 2,000 to 4,999.9 $ 2.27 $ 2.00 $ 2.21 $ 2.37 $ 2.60
(lbs) 5,000 to 9,999.9 $ 2.23 $ 1.97 $ 2.17 $ 2.33 $ 2.55
10,000 to 19,999.9 $ 2.20 $ 1.95 $ 2.10 $ 2.30 $ 2.45
20,000 to 29,999.9 $ 1.85 $ 1.65 $ 1.80 $ 1.95 $ 2.10
30,000 + $ 1.48 $ 1.30 $ 1.45 $ 1.55 $ 1.70
All rate information is based on cost per CWT.
Figure 5: ConSort Carrier Rates
“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 the risks associated
with this strategy? And, what would be the additional ‘cost’ to us of using a better performing
freight forwarder with an EBITDA of 7.5%?”
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?

$
Q#3: Do you recommend using the ship direct OR the vehicle 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?

$
Q#6: Do you recommend using the ship direct model OR the three-‐day temporal
consolidation model? Explain why.



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.


$ $ $ $ $



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”


$ $ $ $ $

Q#10: What are the risks associated with the strategy of using a mid-‐sized freight forwarder
with a 6.3% EBITDA? Should we use a “Better Performer” instead?

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CSCMP ACADEMIC CASE STUDY SERIES

Council of Supply Chain Management Professionals

PART I: SHIP-‐DIRECT vs. VEHICULAR CONSOLIDATION

Figure 1: ConSort Manufacturer Rates and Weights

PART II: SHIP-‐DIRECT vs. TEMPORAL CONSOLIDATION

Day 1 Day 2 Day 3

Figure 2: Historic ConSort Shipments to Kansas Operations

Figure 3: Current Transportation Rates

PART III: FORMING A NEGOTIATION STRATEGY

Ferguson interposed, “Tell him about the Accenture report.”

Zone A Zone B Zone C Zone D Zone E

Figure 5: ConSort Carrier Rates

Freight Broker Freight Forwarder

Zone A Zone B Zone C Zone D Zone E

“Should Be” rates using “Better Performer”

You might also like

Consort Utilizing Consolidation To Lower Transport Costs

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CSCMP ACADEMIC CASE STUDY SERIES

Council of Supply Chain Management Professionals

PART I: SHIP-­‐DIRECT vs. VEHICULAR CONSOLIDATION

Figure 1: ConSort Manufacturer Rates and Weights

PART II: SHIP-­‐DIRECT vs. TEMPORAL CONSOLIDATION

Day 1 Day 2 Day 3

Figure 2: Historic ConSort Shipments to Kansas Operations

Figure 3: Current Transportation Rates

PART III: FORMING A NEGOTIATION STRATEGY

Ferguson interposed, “Tell him about the Accenture report.”

Zone A Zone B Zone C Zone D Zone E

Figure 5: ConSort Carrier Rates

Freight Broker Freight Forwarder

Zone A Zone B Zone C Zone D Zone E

“Should Be” rates using “Better Performer”

You might also like

PART I: SHIP-‐DIRECT vs. VEHICULAR CONSOLIDATION

PART II: SHIP-‐DIRECT vs. TEMPORAL CONSOLIDATION