INBOUND TRANSPORTATION – HIDDEN CASH
by Mike Starling
Inbound Freight Not a High Priority? WHY NOT? Does this sound familiar? “We don’t have problems with inbound freight getting to us, so why worry about it?” Many companies believe it is better to allow the vendor to be responsible for the freight, REGARDLESS of their performance. This raises the question, “What is your vendor delivery criteria, and how do you measure vendor compliance?
What does your vendor inbound delivery bring to you? Good tidings? Or BAD?
Vendor compliance for inbound freight comes in two parts (maybe three if you are tracking inventory at the batch level). The first part is carrier performance. The second is the physical shipment packaging and pallet stack performance. Mess up either of these two and you can quickly add unexpected and unnecessary operating expense, which negatively affects operating cash flow.
In the first case, the added expense will be passed along to you in the form of an “inbound freight expense” line on your vendor “delivered” invoice. Maybe the vendor’s carrier's untimely arrival caused a problem. Maybe they arrived during your peak receiving time for carriers who had scheduled dock appointments, causing carrier delay and detention charges that get passed along to you on the freight line on your invoice? Or maybe it’s the vendor carrier who shows up when you weren’t expecting him in the middle of the afternoon picking shift, and you have to pull warehouse labor already engaged in outbound shipment prep to handle this extra inbound workload?
In the second case, the inbound freight arrives on time, but the physical shipment leaves something to be desired. Let the vendor be cavalier about how they prepare and ship the skid load of product to you, and you wind up eating added warehouse labor expense to correct what the vendor should have done in the first place.
Do you do charge-backs for the extra operating expense incurred as a result of sloppy vendor pallet stack? Mixed SKUs on the pallet that require SKU verification and resort prior to actual receipt confirmation? How about the broken pallet that has to be replaced? Or the over-stacked pallet that requires rework because it won’t fit into your rack? Or the rushed pallet receipt that causes you to miss the hidden damaged product buried in the center of the pallet stack?
I think it was good old Benjamin Franklin who said “Take care of the pennies, and the dollars will take care of themselves.” Maybe it’s time to take another look at inbound transportation as a hidden source of cash that could help improve company operating cash flow? What do you think?
VISIBILITY! Do you know what your inbound freight expense actually is? You’d be surprised how many companies have no idea. Why is that? DUH! Because the price of the freight has been baked into the purchase price of the product. YEP! FREE SHIPPING! Remember, NOTHING is really free when it comes to transportation cost. Someone is paying, and it’s probably you!
If you really want to find some hidden operating cash that will reduce your freight expense, you need to take a peek under the hood on inbound transportation. Let’s take a look at a couple of the reasons companies don’t focus on this area when it comes to seeking out hidden cash.
1. Purchased product freight terms are “delivered.” So vendor controls not only the inbound carrier, but only he knows the true cost of inbound freight expense. What’s missing here? Visibility of actual freight expense incurred.
If this is related to an ongoing vendor scenario, you will need to get the vendor to break out the actual transportation expense as a separate line on the invoice, or provide you with a copy of the actual freight invoice as back up for the product-purchased invoice. Now at least you can tell what you are actually paying, and can calculate freight as a percent of cost-of-goods benchmark against which you can measure savings opportunities.
If this is related to setting up a new vendor, it should be SOP for the buyer to break out the specifics of the inbound transportation freight terms in the purchasing contract. That way, even if Purchasing’s priority is not reducing or minimizing inbound freight expense, at least you have the capability to know what the actual freight expense is if you need to.
2. Freight is such a small percentage of cost of goods sold it isn’t worth worrying about. (Hmmm, even if your inbound freight bill is more than $1,000,000? But you probably don’t know what this number is anyway, do you?)
In this economy it should be a given that companies look everywhere for ways to cut or minimize operating expense. Inbound transportation is no exception. Just because you are purchasing a high value product doesn’t mean that inbound freight expense should be ignored. One key fact that gets ignored in these situations is the impact of inbound freight expense on sales margin. Why? VISIBILITY!
You see, the Buyer gets rewarded on the how/what that is being purchased. The Salesman gets rewarded on the sales margin achieved. They don’t necessarily understand that A has an impact on B. If you take a holistic view of the cash-to-cash cycle, what is the impact on sales margin if you can reduce the cost of goods on your inbound freight? Yep, Visibility is important.
So, again, if you want to find hidden cash to improve operating cash flow, don’t ignore the opportunities that lie with your vendors who currently control your inbound transportation!
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