A Simple Tactic for Controlling Budgeted Freight Expense
by Mike Starling
OK, how many of you out there have gone through the exercise of conducting a mode-based competitive bid in hopes of achieving significant freight expense reduction, implemented the same, and in the end achieved disappointing results? This is particularly important if you are dealing with Inbound. Sound familiar?
Well, if you are lucky enough to be using a Transportation Management system, you probably don’t have this problem. But there is a sizeable shipping population out there that still relies on the “old school” method of using a routing guide to maximize service capability and minimize freight expense.
So, what is the biggest factor that leads to disappointing results in the above situation? It's poor compliance with the routing guide you've provided (and are depending upon for compliance to help you achieve that freight-cost reduction). This is especially true for “inbound collect” vendor shipments for which you are paying the freight — meaning that non-compliance results in unnecessary additional freight expense, hit-and-miss inbound service deliveries, and having to deal with carriers you had no intention of using in lanes reserved for your designated carriers (to fulfill volume requirements related to those great contract rates you negotiated).
So, how do you make this work? Two things are necessary.
1. Strict management enforcement of the routing guide related to those charged with tendering the routings to the carriers in the designated lanes in your routing guide.
2. Cooperation of your vendors in complying with the use of your routing guide carriers when it comes to inbound collect shipments you are paying for.
Number 1 above should be easy enough for any Transportation Manager worth his salt. Number 2 can be trickier, as it involves other departments within your organization (purchasing, sales) and the cooperation of the vendor(s) involved.
Transportation needs to work with Purchasing to get purchase contract freight terms to specify “inbound collect” right up front when they first negotiate a new purchasing contract. Attempting to do this “retroactively” can be difficult, if not impossible, as both Purchasing and the vendor will surely push back for a variety of reasons. Unless you have a clear-cut rate quote in hand that clearly shows “freight savings opportunity” with “inbound collect” and “inbound prepaid” rates side by side, so the numbers clearly demonstrate that changing to “inbound collect” is the obvious alternative, you will lose this battle. The key going forward is to get Purchasing to agree to allow you to get rate quotes for both “prepaid” and “collect” BEFORE the purchasing agreement negotiation is finalized. While this may not result in 100 percent of your inbound being converted to “collect,” it will provide you with a clear-cut path to inbound freight expense reduction that contributes directly to improving operating cash flow. (A very desirable thing, I assure you!)
For those vendors who refuse to comply with your routing guide instructions, your final option is to implement a Compliance Program that has specific charge-back penalties for specific compliance infractions. Money talks, and Vendors squawk. The topic of vendor compliance programs will be addressed in a separate article.
So, if you are a Transportation Manager with limited resources working to achieve significant freight cost savings/reduction as a follow-up to your competitive bid process, and you are relying on compliance with your routing guide to get there, you may want to consider implementing some of the above suggestions to vastly improve your chances of reaching that goal. GO FOR IT!
Articles in This Series
Call Us! 877-674-7495 info@dksco1.com