Shipper Options in dealing with Inbound Freight Programs

Over the past few years, inbound freight management has taken hold like a new weight loss diet, particularly among Canada’s leading retailers. As I visit our clients on an ongoing basis, this subject is one of the hottest topics of discussion. Many of Canada’s leading retailers including Shoppers Drug Mart, Home Depot, Loblaw Companies and Wal-Mart, have all picked up the baton and have been running with it with varying degrees of success. Inbound freight programs are also being implemented in other industry verticals including fast food (e.g. Tim Horton).

The attraction to these big players is easy to understand. The large freight volumes these companies control provide them with leverage in carrier negotiations. They also create opportunities to reduce costs through more effective loading and transportation processes (e.g. delivering full truckloads of LTL freight versus multiple deliveries of LTL freight, providing backhaul for a private fleet). Through aggressive and effective management, large retailers can achieve significant reductions in freight costs.

For vendors to these large retailers, these initiatives create challenges and opportunities. They permit or push shippers with limited expertise in managing freight transportation, and modest volumes, to step aside and allow their more experienced and powerful clients to take control of their inbound freight. Vendor acceptance removes the responsibility for late deliveries and customer fines.

Of course, this all comes at a price. Inbound freight management is a profit centre for these retailers. The differential between the carrier freight allowances paid to shippers and the cost of the transportation paid out to the retailers’ designated carriers flows right to the retailers’ bottom line.

The range of acceptable vendor responses to these programs varies from one company to another. There are some major implications in giving up control of outbound volumes to large customers. First, the shipper may face higher freight costs and lower margins on this block of business. Second the shipper is faced with retaining control over a reduced volume of freight. Less leverage can mean higher freight costs on the remaining volume. Third, it may become costly to maintain a viable transportation department when their task is to manage a much depleted volume of freight.

This leaves vendors that have the option to participate or not with some key decisions.

1. To Retain or Give Up Control of Outbound Freight

The starting point for shippers faced with this option is to have a strong handle on their freight and supply chain costs. Shippers that don’t have accurate and detailed cost breakdowns for transportation, freight handling and warehousing will be hard pressed to perform a quality cost comparison. They will be challenged to develop an accurate business case to compare the options of compliance versus retaining control.

Before doing the costing analysis, each shipper needs to look at structuring a series of viable supply chain scenarios. A Toronto-based shipper has the option of transporting all goods from a central location across Canada or shipping to warehousing facilities close to the customer’s DC’s (e.g. Montreal, Calgary) and delivering locally. In the case of the latter scenario, the shipper needs to calculate the cost of public warehousing and assess their ability to consolidate and transport loads to DC’s in a timely manner versus maintaining ongoing deliveries of LTL freight. In other words, there is a need to construct a variety of scenarios under which to maintain the status quo, adjust their supply chain to more cost effectively comply with the customer’s requirements while maintaining control of long haul movements or simply turn over control (of the status quo) to their customers.

As mentioned above, relinquishing control can have significant financial consequences. Therefore, some shippers are actively evaluating strategies to make it more difficult for the retailer to take control. One of our clients labels this his “poison pill” strate

    2.   Create a Stronger Leveraging Strategy

Shippers are realizing that if they give up control of their outbound freight to certain large customers, they must make their remaining freight more attractive so they can prevent their freight costs from escalating. This can involve rethinking their carrier sourcing strategy. Many shippers have historically taken a regional allocation strategy in awarding their freight. For their Canadian freight, they would select a primary and backup carrier for Atlantic Canada, Quebec, Ontario – GTA, Ontario – non-GTA and Western Canada. For each region there may be LTL and truckload carriers selected. In the case of Western Canada, an intermodal and over the road carrier might be chosen. Carriers specializing in each of these segments would be awarded business.

Shippers are now revisiting this approach and taking a more consolidated or core carrier approach. To create greater leverage, suppliers are now looking at carriers that provide multiple modes of service (e.g. expedited, regular over the road and intermodal, LTL and truckload) and serve multiple regions. This allows them to create larger bid awards, thereby keeping costs down.

    3.   Create your own Inbound Freight Program

Another way to create additional leverage is for shippers to take control of their own inbound freight. Rather than taking a silo approach with inbound freight (included in the landed cost of inbound freight) controlled by the Purchasing Group, there is value in adopting a more holistic view of transportation. Taking control of inbound freight allows for the creation of round trips and adds more volume to freight RFP’s.

    4.    Ship Collect

For smaller shippers with no expertise in freight management, one option is to shut down the Transportation department and ship everything collect. Another option is outsource the management of the total supply chain to a logistics service provider.

In the consumer products area, inbound freight programs are gaining widespread adoption. Shippers seeking to maintain their bottom lines need to assemble quality data and assess their options in a very methodical and thoughtful manner.