Over the past week, there has been a barrage of comments posted in one of the Procurement groups in LinkedIn on the topic of why so many of these activities fail.  For those of you interested in this topic, please sign in to the group or read the following blog prepared by Tony Colwell, Executive Interim Manager and Director at Acuity (Consultants) Ltd.   (http://acuityconsultants.com/wp/2012/01/avoiding-the-pitfalls-of-centralised-procurement-18-reasons-why-procurement-cost-saving-initiatives-fail-to-deliver-to-the-bottom-line/). 

In Tony’s blog, he tabulates the results of 311 comments that he received.  For those of you who take the time to read the postings in the LinkedIn group and Tony’s summary, you will see a fair bit of commonality.  For the benefit of the readers of this blog, I will take the ten most frequently mentioned reasons for failure and elaborate on them based on years of experience in dealing with shippers on freight RFP projects.

1. Cost Inaccuracies/True Costs not understood

My company has confronted this problem repeatedly over the past eight years.  In many shipper organizations, the freight transportation data is not clean and well organized.  The data may or may not include fuel surcharges and other surcharges.  In some cases, it is not possible to discern whether the freight costs include or exclude fuel.  A lack of standardization of fuel surcharge formulas may further impede the work of calculating an accurate base cost estimate and detailed lane data.

2. Poor Planning and Leadership/Unclear Objectives

Some people may find it hard to understand how something so apparently straight forward as a freight tender can get so messed up.  Here are a few reasons.  Successfully executing a freight cost savings initiative requires a range of skill sets.  These include Project Management, Time Management, Negotiation Skills, Data Management, Organization Skills, Interpersonal Skills, Communication Skills – to name just a few.  If the bid is poorly constructed, if it contains bogus data, if carriers are given insufficient time to respond and/or if it is unclear how the company wishes to serve certain markets (e.g. mode choices, warehouse options) this can lead to confusing results.

3. Inadequate Stakeholder Engagement

In many companies, the head office team may be tasked with a leadership role in conducting these exercises.  But in a multi-plant environment, the individual factories may have considerable authority and autonomy.  Then there is the issue of inbound freight that is often under the control of Purchasing rather than Transportation or Logistics.  If inbound freight costs are embedded in the landed cost of the goods, these organizational and cost dynamics make it difficult to execute a complete transportation cost savings initiative.

4. Savings redirected or passed to Customers

There are very few businesses like Apple that are able to create and sustain their own products, markets and pricing power for so long.  Most of us work in highly competitive industries.  In a successful procurement exercise, the temptation is always there to “shop back” part of the savings to the customer to try to gain market share.  In the “real world” there are forces at play that can erode procurement savings.

5. The Wrong Numbers are Measured

This can happen in a number of ways.  There are theoretical savings and actual savings.  An estimated savings number can be calculated by taking the best carrier rates and multiplying by the volumes on every lane.  But in the “real world,” some carriers don’t have the capacity to handle all of the volume, they overcommit to get the business, they secure better paying accounts and/or they divert some capacity to other companies.  The contract numbers may be based on achieving certain volume thresholds that are not attainable.  As a result, the expected level of volume discounts is not obtained.

6. Conflicting Metrics and Incentives

Freight costs are often calculated in terms of a rate per mile, a rate per hundredweight or a line haul cost to go from A to B.  However total landed costs may reflect warehousing costs and/or cross-dock costs and other accessorial costs.  Is it more cost effective to ship in LTL quantities direct to customer or is the superior option to ship full loads to a local warehouse and distribute locally?  If the supply chain scenarios are not fully analyzed at the beginning, this can result in conflicting metrics and confusion at the end.

7. Baseline Shifts

In a freight cost initiative, it is commonplace to provide carriers with historical freight data and/or projections of what the next 6 to 12 months will look like.  But the baseline can shift.  A company may decide to move the manufacturing of certain products from one plant to another.  Companies gain and lose customers from year to year that can have a material impact on their businesses.  This makes the exercise of accurately computing the true cost savings more complex.

8. Inadequate Follow Through and Contract Management

This can be partly related to item 3 above and to a host of other reasons.  Over time, good carriers establish strong bonds with their shippers at all levels of the organization.  Whether it is customer entertainment, NBA tickets, the son of the dispatcher playing on the same hockey team as the carrier’s driver, personal relationships can trump the best intentions of management.  Too many companies think that at the end of a procurement event, their work is done.  It isn’t.  A lack of detailed tracking reports and vigilance can let the savings slip “out the back door.”  A whole new set of tasks begin at the end of each procurement project.

9. Inadequate Sponsorship

At any given time, the leadership teams in manufacturing and retail organizations are dealing with an array of challenges.  The leaders in some companies have trouble maintaining their focus on certain projects.  While their intentions are good, after the launch of a major procurement project, they may soon be on to the next big project.  The management team below them can sense that they have taken their “eye off the ball” and they then take their “eye off the ball.”  The expected savings dissipate over time.

10. Off Program Spend/non-Compliance

The so-called “maverick spend” can happen for many reasons.  At the end of a freight procurement project, companies often produce routing guides.  These written or software-based tools capture the rates, volumes and lanes allocated to each carrier.  But to impress a customer, Sales may override the routing guide and send a shipment via expedited transport.  Manufacturing may decide to delay the release of certain products until more economic production runs are established.  Again, Transportation may be tasked with moving the freight via road versus rail or LTL versus truckload, to meet the customers’ expected delivery times.

These are the top ten.  To see the 8 lower ranked causes of unsuccessful procurement cost reduction initiatives, please click on the link above.  In no way should anyone infer that these projects are not worth doing.  As a company that has been involved in multiple, successful freight cost savings projects over the past 8 years, the key point for shippers is to be aware of potential pitfalls and to seek assistance if satisfactory results have not been achieved in the past