For the past 15 years, my colleagues and I have been working with shippers throughout North America to help them save money on freight transportation. In 2018, this cost has hit the radar screens of CEOs, as the tightness in freight capacity has placed upward pressure on freight rates. Many shippers have been experiencing rate increases in the high single digits and even double digits. Some CEOs have been highlighting the impact of freight costs during their quarterly investor calls and earnings reports.
A company’s freight costs often represent between two and ten percent of total revenues. For many companies in the manufacturing, distribution and retail sectors, their expenditures on freight have a direct and significant impact on their companies’ bottom lines.
Twelve years ago, I wrote a blog on this topic. In that blog, I identified one of the consistent problems we encounter in working with shippers on a day to day basis, namely a lack of complete and accurate information on their freight transportation activities. Twelve years later, this problem persists, and it is not limited to small companies. In fact, many companies with freight expenditures of five to fifty million dollars or more face the same problem.
“You can’t manage what you cannot measure.” Good quality freight data is an essential starting point in the management of freight transportation.
There are two sets of freight data. Operational data focuses on metrics such as on-time service, shipments per day, and claims ratios. Financial data addresses KPIs such as billing accuracy, cost per pound by mode, cost per shipment, and freight cost as a percent of revenue. In addition to the strong economy and tight capacity, there are several other issues that are having an impact on freight transportation expenditures.
First, there has been a considerable amount of industry rationalization. Here in Canada, large transportation organizations such as TFI and Manitoulin have purchased many carriers of all sizes in the parcel, less than truckload and truckload sectors. Some of these acquisitions have been merged together as numerous brand names and carrier choices have disappeared from the market. America has been going through the same process. Shippers now have fewer options and their negotiating power has been reduced.
Second, freight companies have become a lot smarter. Rather than going for market share, they are looking for profits. They evaluate shippers based on how well their businesses fit within their networks, the location of their vendors and customers, the ease of making pickups and deliveries and the quality of the head haul and back haul freight they have in those corridors. Shippers with the highest operating ratios receive preferred capacity allocations while less “carrier friendly” clients receive lesser or more inconsistent allocations. If shippers have poor practices that hinder the movement of their carriers’ assets, they are paying the price.
Third, carriers have figured out that if they use their scales and dimensioning devices, they can weigh and measure the freight they move more accurately. They are now charging more precisely and aggressively for the true cubic space occupied. As a result, carriers can and are securing revenue that they may have missed in the past.
What is interesting is that some shippers have high quality ERP and accounting systems. However, when they try to extract a year’s worth of freight transportation data, they receive files that are riddled with errors and omissions. What is even more disappointing is that many companies simply don’t know what they spend on freight or don’t seem to care.
Even after the years we have been in the business, and the articles we have written on this topic, we still find companies that have primarily an outbound transportation focus. Inbound freight costs are viewed as “free” since they are embedded in the landed cost of the products they receive from their vendors. This is a glaring omission and a significant lost cost saving opportunity.
Another comment we hear is that the company’s freight bills are audited by a freight audit company or by a knowledgeable resource within the company. If any discrepancies appear, they are addressed by one of these individuals. This is not what we see. A failure to manage a company’s freight spend can result in many missed opportunities to improve the company’s bottom line. Let me explain.
With good quality freight spend data, a shipper can identify:
• Variances to budget by mode or geographic area
• Opportunities to consolidate smaller shipments into larger lower cost shipments
• Carrier selection errors where small parcel shipments are moving with LTL carriers at LTL rates rather than with small parcel carriers at small parcel rates
• Carriers not supplying the levels of equipment that they contracted to provide resulting in the movement of loads by more expensive fleets
• Non-compliance with a company’s routing guide that could be costing the company many thousands of dollars
• Opportunities to take advantage of lead times to use less costly (intermodal) or alternate (standard ground versus expedited) transportation
• Recurring accessorial costs that can be reduced or eliminated through implementation of Best Practices
• Spot rates for recurring freight movements that should be under contract
• Carriers that don’t have the information management tools need to support their business
• Rate changes brought on by a reclassification of a commodity (due to a change in packaging, scaling or other reasons) rather than by a rate increase
• Core carriers that are providing transit times that are inferior to non-core carriers which can be used as leverage in rate negotiations
• Opportunities to quantify the precise financial impacts of changes in shipment measurements, freight rates and accessorial charges.
In other words, during this period of economic strength and tight capacity, many shippers are missing a range of opportunities to reduce their freight transportation expenses. What can a company do to fix this problem? Find out in the next blog.
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