Strengthening your supply chain one link at a time.
Your network has inbound transportation flows from suppliers to your plant warehouse, or to your single DC or multiple DCs. Transportation costs are outpacing inflation and the issue needs a solution. What do you do? This blog discusses what to do to bring your inbound transportation costs back in alignment. Outbound transportation costs, such as shipments to the customer, will not be the main focus of this discussion. While inbound freight may represent a relatively smaller percentage of the invoice the potential percentage savings may be significant.
Steps for managing inbound transportation costs
Below are some immediate and longer-term steps for managing your high inbound transportation costs. These steps are crucial for getting a handle of what is often an overlooked cost component of a company’s supply chain. Outbound transportation may receive all the attention because this flow deals directly with the customer. But inbound transportation affects your supply chain positively or negatively through inventory levels, production scheduling and supplier relationships.
Freight Bill Audit
Carrier rates are negotiated with the transportation, logistics or purchasing groups. However, after the shipments occur the actual freight bills may be sent to accounting to be paid. The challenge is now whether the negotiated rates are accurate and if there are any accessorial changes or surcharges that have been added. A freight bill audit process simply compares the negotiated carrier rates to the actual freight bills and would capture inconsistencies in rates vs costs. Freight audit third parties can be helpful in this task. But experience has determined that one needs to do homework on the best company to perform a company’s freight audit process. Nonetheless a freight audit process is a fairly quick way to help control inbound transportation savings.
Internal Processes
Inbound transportation can be managed or initiated by different company departments. Procurement might be the initiator as part of an agreement with a supplier. Transportation and logistics may or may not be involved in the supplier negotiations. But inbound transportation can be managed in a way that is more collaborative to help control costs. When the transportation group is involved in the purchasing process with a supplier the company gets an opportunity to have the inbound transportation and associated carriers and forwarders aligned with the outbound transportation of the company. One benefit is the ability to consolidate carriers and 3PLs to gain leverage in carrier rate negotiations. There is also the benefit of optimizing routes and carriers selected for certain lanes. Having cross functional input during supplier negotiations and setup with the transportation group would help reduce inbound transportation costs.
Suppliers and Freight Terms
Inbound transportation begins with the suppliers. Does the supplier pay the freight and manage the transportation? Or does the company receiving the product pay the freight and manage the shipments? Many times, freight terms are not considered in the negotiations and inbound freight is almost an afterthought. If a company is buying on prepaid or delivered terms the suppliers are managing the freight and can potentially profit off of the transportation cost. If these suppliers had the terms changed to having the purchasing company pay the freight the company will gain control of transportation freight costs. Another way of gaining visibility to those suppliers preferring to manage the transportation is to unbundle the transportation costs from the product cost. A collaborative effort and discussions with the suppliers to verify the cost of transportation is in line with market costs for the lanes. By simply knowing the transportation cost a company can look to work on better rates or change the network flow. Having visibility to transportation costs is the first step in managing transportation costs.
Carriers
Once one has the true current cost of freight, origin and destination flows, and flow volumes in weight and pallets, it is time to approach the current carrier for rates comparison. Other carriers may be brought in to determine if rates can be leverage because of the carrier’s volumes and lane density. But by having the data to provide carriers you can negotiate your rates or perform a carrier RFP.
Part of the negotiation with the carriers is the opportunity to discuss assessorial and surcharges. This would include any additional cost to the base rate. Fuel surcharges can be discussed and potentially streamlined so they are consistent across the company.
When discussing costs and lanes with the carrier it would be an excellent time to include outbound transportation along with inbound transportation. This would provide an opportunity to leverage volumes and lanes for the best lane rates.
Network Optimization Study
A very powerful analytical tool for looking at inbound transportation is a network optimization study. Network optimization studies are end to end landed cost analysis with the ability perform targeted “what if” analysis. Landed costs for a network study may include production costs, production input costs, transportation costs, handling costs, and inventory costs. Or the landed cost in a transportation study can be just inbound and outbound transportation.
A network study would consider supplier locations, and supplier production quantities and customer locations, customer demand, shipment size and all transportation costs. All of a company’s locations such as plants and warehouses are included in the study.
One could include the network study with any updated rates received from carriers and thus create scenarios that considers various number and capacity of carriers. The network study could also include new potential DC locations. For example, if you import goods and the DC is inland where drayage cost is high it could be determined what would the potential savings be by moving the DC closer to a port.
A network optimization study will reveal long term options that the company would be confident for preparing for the future transportation needs. Long term studies need to include future growth of the company. Thus, customer demand is adjusted annually over a 3- or 5- or 7-year period. This is an important input because results in the study will truly be forward looking vs current state, and the transportation challenge will be set for future growth and not simply fix the current situation. The power of this study is one can develop a scenario for any necessary “what if” question. And each scenario will have corresponding total transportation costs to compare.
Some of the questions answered in a network optimization study for a complete transportation study include the following.
Conclusion
There are many things that can be done when looking at inbound transportation cost. There are tactical items related to better managing inbound transportation. Then there are more strategic options to include a full transportation network study that would include inbound and outbound transportation in a landed cost study. A network transportation study is an extremely powerful tool. It looks at inbound transportation in relation to all transportation costs and allows “what if” analysis on how to lower the transportation cost impact to a company.
—Tom Schaefges, St. Onge Company
