How Cummins Power Generation Used Lean Six Sigma to Achieve Significant Transportation Savings

Now more than ever, companies – regardless of industry – are looking for ways to improve customer service while also cutting costs and growing the top line. This often requires a major shift in thinking – from the top down – and for many, implementing a formal process improvement methodology such as Lean Six Sigma (LSS).

While companies implement improvement programs for a variety of reasons, at the core of their decision is the desire to utilize a proven strategy and set of tools to effectively change how they operate and further promote process excellence. For those that turn to LSS, the goal is to challenge current way of working in order to make more data-driven decisions and to identify and eliminate waste. Lean Six Sigma is about not simply accepting the old way of doing things, but asking “Why do I do that?” or “Is there a better way?”

Initiating change in any organization can seem like a daunting task, but if done properly, can produce substantial and lasting results – both internally and for your customers.

A Real World Example – Cummins Power Generation

A worldwide provider of electrical power generation systems, Cummins Power Generation (Cummins) uses Six Sigma (6S) as its primary continuous improvement methodology. Being part of a large corporation with complementary businesses, there was often minimal visibility across business units, which Cummins identified as creating waste within the supply chain. Cummins recognized the need for a methodology that would allow them to identify improvement opportunities, make necessary improvements, and control processes. With 6S, Cummins wanted a cultural shift in how they made decisions and managed projects.

By implementing 6S, Cummins had the goal to provide “real value” to the business; promote data-based decision making; create a common language across the organization; provide a better customer experience and level of satisfaction, and ultimately grow profits faster than its revenues were growing. Although applied throughout the organization, Cummins identified the elimination of transportation waste as an area that would have a significant impact. Subsequently, LSS projects were developed to address waste in several key areas: contract carrier freight rationalization, ship day alignment, Asia-to-US / Asia-to-Europe container optimization, CNG truck costs and impact.

While all have added value, let’s take a closer look at contract carrier freight rationalization.

Contract Carrier Freight Rationalization
A market survey by Transplace indicated that significant opportunity existed to reduce Cummins’ effective rate per laden mile. In partnership with Transplace, Cummins embarked on a LLS project with the objective to reduce the effective rate per mile paid for contract carrier by at least 5% without compromising on service quality and its supplier-partner relationship with carrier.

It was important to bring all parties to the table, so after establishing a project team that included members from Transplace and the carrier, they examined the key X variables:

• Carrier Lane Assignments – round trip vs one way
• Mode Selection – vans vs flatbed
• Contracted Freight Rates
• Customer Base – vis-à-vis state

After gathering and comparing data from multiple sources – something they couldn’t do before due to previously inefficient processes – they uncovered potential issues with their freight audit system due to deadhead miles. By measuring the variability of the process and their impact on the effective rate, Cummins was able to determine how to address each X variable in order to reduce transportation costs.

• Carrier Lane Assignments – One-way rates should be used when possible
• Mode Selection – Flatbeds and Van Trailers should have individual contract and lane rates
• Contracted Freight Rates – Negotiate to reduce rates or source major lanes to external carriers
• Customer Base – Rates should address individual demand profile of destination states

Having identified that all-in, round trip miles was wasting money due to empty miles, Cummins needed to work with their carrier to find the best way to utilize truck capacity. As a result, Cummins made several changes:

Flatbed:
– Larger national fleet scaled down to smaller regional fleet
– One-way rates established by individual destination (state)
– Rates were benchmarked against market rates
– Effective rates established for dedicated fleet to capture true cost of midwest shipments and avoid audit errors

Vans:
– All van outbound shipments will be handled on a strictly one-way basis
– All inbound shipments will be charged at a single, fixed rate

Contract established for three years with a minimal increase compared to the national average of 3 cents per mile

LSS is about continuous improvement, so sustaining the improved processes was vital. In order to ensure the sustained improvement, Cummins changed on-going processes, such as how invoices were audited by Freight Pay Systems, establishing semi-annual reviews with carrier and Transplace to adjust effective rates for the flatbed regional fleet, and savings are tracked monthly against forecast and incorporated in its AOP.

By making data-driven decisions and being transparent with its carrier partner, Cummins was able to establish its command and credibility throughout the negotiation process. In addition, the carrier proved that they truly value our partnership, and remained willing partners throughout the project. As a result, Cummins was able to reduce significantly the effective rate per mile and exceed the 5% target.

For Cummins, 6S has provided the foundation for continuous improvement and process excellence throughout the organization, particularly in the area of contract carrier freight rationalization. Success was achieved due to the commitment from all parties involved in finding a mutually agreeable solution and utilizing data analysis to guide all decision making and to understand where each party could compromise.

Jason DeBus is Director of Global Logistics at Cummins Power Generation.

Barry Gasaway is Vice President, Lean Six Sigma at Transplace. He has over twenty-five years of success and experience at Transplace. His accomplishments include directing the initial rollout of the Lean Six Sigma program within the company, as well as directing and managing the retooling of the Customer On-Boarding process. He is currently responsible for managing the Lean Six Sigma department with a focus on identifying continuous improvement opportunities and delivering results, overseeing internal Lean Six Sigma training, and positively influencing the company culture through the Lean Six Sigma methodology.