The Basics
Freight Transportation is typically the single largest cost component of Supply Chain Management. Data from Logistics Management’s Annual Study of Logistics and Transportation Trends highlights that an average transportation spend is in the range of 10 to 11 percent of revenue for companies with less than $250 million in Sales and it is in the range of 2 to 3 percent for companies with revenues in excess of $9 billion. As a result, my colleagues and I are often amazed that freight expenses are undermanaged in so many companies.
Freight Expenses are Controllable, Manageable and Negotiable Costs
Regardless of mode, freight costs are typically comprised of three elements
– Line haul costs
– Fuel costs
– Accessorial costs
The actual freight cost includes components for pick-up, cross-docking (if small parcel or LTL freight), linehaul (point to point) transportation and delivery to the customer and is the largest component of shipping costs. Embedded in this expense are all the costs associated with administration (i.e. data entry, PODs, billing etc.). For small parcel and less than truckload shipments, the freight cost is directly related to the space occupied on the linehaul unit and the weight of the shipment.
Fuel cost, which is usually the second largest component, may appear as a surcharge on the carrier invoice or it may be directly embedded in the line hail rate. The surcharge formulas and discounts vary from carrier to carrier and are typically tied to the cost of diesel fuel.
“Energy is among the biggest cost areas for companies – along with people, product costs, facilities, and equipment – but it’s the only one that is not monitored and managed carefully. Indeed, it’s often the largest inadequately monitored part of a company’s cost structure.” (Harvard Business Review, January-February 2017 Energy Strategy For The C-Suite By Andrew Winston, George Favaloro and Tim Healy). Shippers must be vigilant to ensure they are paying surcharges that are in line with their volume of freight.
Accessorial charges may be applied for any service that is not included in the line haul rate or fuel surcharge. This can include deliveries to job sites or apartment buildings, redelivery to a different location, driver waiting time, trailer detention and a host of others. Over the past few years, carriers have become more focused and aggressive in capturing revenue for these services.
Many of these charges can be related directly to poor practices by shippers. This can range from not providing appointment times for carriers to not effectively managing carrier assets. These services cost the carriers money and they frequently change for this work. All of these elements of freight transportation need to be managed, controlled and negotiated on an ongoing basis.
Telltale Signs of Overspending
Here is a partial list of items that we find in our work that signal that a shipper is spending more on freight than they should.
– No granular freight transportation budget
– High claims expenses and/or high cubing charges that may reflect poor packaging or loading processes
– A knowledgeable person is not managing freight transportation expenses
– Shipper does not know the density of its freight
– Company has no method of managing fuel surcharges
– No RFP conducted in the last 3 years
– Too many carriers being used which results in poor leveraging and high costs
– Freight management is fragmented and managed by each individual branch without strong head office oversight and control
– Poor modal management (i.e. truck used when rail service would be more cost effective)
– Extensive use of expedited freight carriers (signaling poor production processes)
– Overflow or late shipments are given to an incorrect mode or carrier service provider (i.e. small parcel shipments given to LTL carriers)
– No shipment consolidation (i.e. multiple individual shipments going from the same origin to the same destination on the same or consecutive days)
– No transportation management (TMS) software to manage the business
– No ongoing compliance tracking
– No scorecard or KPIs to measure actuals against standards or objectives
– No granular shipment activity data base (Unfortunately, the data remains in files as paper invoices that are not entered into a data base so they can be scrutinized and actively managed.) It is important to remember that many companies have shipping data; the problem is the data is not of good quality, is not in standardized formats, and does not have all the necessary elements.
Poor Management of a Large Hidden Expense – Inbound Freight Transportation
Inbound freight costs are often embedded in the landed costs of goods. In other words, these costs may have no visibility since a different department often manages them; there is more focus is on outbound versus inbound freight management. The procurement specialist may be reluctant to request this information from the vendor. In some cases, the shipper is not able to pass these expenses on to their customers and therefore treats them as “free freight.”
Payment of Carrier Invoices
The payment of freight invoices is another area that must be scrutinized on an ongoing basis. Freight carriers make intentional and unintentional errors in the preparation of their invoices. This can lead to overpayment of freight costs which typically average in the range one to two percent or more. Freight bills must be audited by a TMS system or by a skilled person who understands the types of products being shipped, the density of the products, the carriers approved to handle the company’s freight and the rates being charged. If no such expertise exists in-house, this work may have to be outsourced to a professional freight audit service provider.
Cash Flow
Like other elements of freight expenses, payment terms are negotiable. Some carriers will offer incentives for prompt payment. Each shipper must make an assessment as to whether the financial benefits of prompt payment offset the impact on their cash flows. Some carriers will accept longer term (i.e. 30, 45 or even 60 days) payment intervals.
Summary
Freight expenses represent a significant component of supply chain costs for many manufacturers, distributors, and retailers. Companies that are successful in this area focus on these key elements.
• They have the appropriate Organization Structure staffed with knowledgeable resources.
• They have SOPs and solid Processes in place to manage this important activity.
• They employ the necessary Technology and Systems (i.e. TMS, dock scheduling, shipment routing etc.) to manage their freight.
• They possess good quality Data which is the underpinning to the successful financial management of freight transportation.
If you would like an independent evaluation of how your freight transportation operations are being managed, and a roadmap to reducing costs, please contact me at dan@dantranscon.com. To stay up to date on Best Practices in Freight Management, follow me on Twitter @DanGoodwill, join the Freight Management Best Practices group on LinkedIn and subscribe to Dan’s Transportation Newspaper (http://paper.li/DanGoodwill/1342211466).
