The first blog in this series looked at the money saving opportunities for organizations that take control of Inbound Transportation. This blog will outline a series of steps that need to be taken to make this happen.
A Commitment to Act
In the last blog, it was highlighted that some vendors place a mark-up on their outbound freight costs (viz. your company’s inbound freight expenses) and pass it on to their customers. It is important for every company that receives inbound freight to understand the following.
A trucking company adds a mark-up to their costs in order to come up with their freight rates. A freight broker and/or logistics service provider will take the carrier’s rate and add another mark-up. In other words, by the time you receive shipments from your vendors, they may have from two to four mark-ups added to the basic cost.
We can all understand why a shipper will add a mark-up to their production costs to cover overhead and profit. But should you be paying mark-ups that vendors apply to your freight costs?
Some shippers will argue that freight costs can range from 3 to 10% of revenue. Why worry about an additional one or two percent increase in freight costs? If your company isn’t concerned about these costs, then there is no need to read the rest of this blog. If your company is trying to reduce or eliminate these charges, then pushing back on these discretionary freight cost mark-ups is totally in order.
Transparency and Data
The next step is to obtain data on your actual inbound freight costs. This includes two sets of data, the rates charged by the carriers moving your vendor’s goods from origin to your facilities and the mark-ups being applied. In some cases, this may involve securing purchase order data. This historical data needs to be captured in some sort of electronic fashion so you can look at total costs, markups and the markup as a percent of the freight cost, by vendor. Some vendors may be reluctant to share this information.
It will be helpful if you can organize this data so you can sort the spreadsheet by size of vendor, total freight costs and percentage mark-ups. To determine if there are potential savings, there is a requirement to secure rate quotes from your current carrier base and from some additional carriers if your current carriers don’t service any of these lanes. Since the rates you receive will be tied to the potential volumes that the carriers may receive, this data may need to be shared with the carriers in an RFP format.
Once you have inserted the carrier rate quotes into your analysis model, you are then able to identify where there may potential savings. Coming out of this exercise will be a short list of potential cost saving opportunities.
Carrier and Vendor Negotiations
Knowledge is power. The results of this analysis will highlight where you have leverage and where you don’t. There may be lanes where you cannot obtain carrier pricing that is better than what your vendors are paying. Large vendors may be able to negotiate better rates than you can on some blocks of business.
Every company going through this exercise needs to make a determination as to where to focus their efforts. Typically, there will be some high volume vendors where the saving potential is worth pursuing and others that are marginal and where the effort may exceed the reward.
Armed with this data, a manufacturer can then arrange a series of meetings with vendors and carriers. In some cases, there will be a requirement to change the terms of sale (i.e. switch from prepaid to collect). Some vendors may prefer to negotiate the margins rather than lose shipping volumes on certain lanes. In other cases where there are limited vendors for certain commodities, a manufacturer may choose a different strategy (i.e. change their marketing and/or pricing strategies to their customers) to make up the margin erosion.
Implementation
There are several components to a successful implementation. The carriers need to be notified of routing and billing changes and dates need to be established to ensure a smooth transition. The company’s routing guide needs to be updated and loaded into the TMS system. A tracking system needs to be implemented to monitor the cost savings. For companies that receive a high volume of inbound freight, the financial benefits are worth the effort.
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