Inbound freight is typically the last frontier for many companies search for cost savings in their freight spend, as there is an abundance of complexities that are often outside the logistics and supply chain department’s control.
When talking about inbound freight management a term often used is freight term optimization (FTO), which is the process by which shippers strategically establish the most advantageous freight terms, while minimizing the total inbound landed cost. The optimal freight terms are influenced by a shipper’s ability to consolidate orders across days, shipments across vendors and customers, order level service requirements, and the shipper’s ability to plan and execute routing options like multi-stop LTL, static or dynamic pooling, zone skipping, and backhauls.
To correctly manage FTO, one needs to analyze a vendor inbound move or customer inbound move in the context of other relevant typical shipments, not just as stand-alone moves. This is difficult to do without the right tools and actual or achievable benchmark transportation rates.
Many shippers struggle because of the various inbound freight management difficulties, and thus, they pay a hidden freight cost; either by paying too much for goods that could have a lower landed cost if the inbound transportation move were controlled, or by charging too little for product that could be delivered less expensively than if a customer were to pick it up. Frankly, what is often called free freight on the inbound side is often the company’s most expense move.
In addition to cost savings a well laid out inbound freight management program also gives organizations visibility into their inbound product flow, better management of supplier compliance to PO’s and freight routings, improved timeliness of deliveries and service, optimization freight flows for reduced transportation costs, and connections all internal and external stakeholders.
With all the benefits and challenges, the remaining discussion is a quick read on the four-step process utilized by R² Freight & Logistics to help shippers get their arms around their inbound freight challenge and begin to unleash the value.
Step 1: Understand non-controlled costs and manage Them into the future
To support and enable annual FTO analysis, companies must develop good sources of shipment information on loads they do not control (like EDI 856 data on inbound prepaid shipments or DC reports on collect outbound shipments) and develop a good freight term negotiating process that will be utilized going forward.
Transportation management organizations that utilize a web enabled transportation management system can more easily accomplish FTO because they have an application to receive and act on data about prepaid inbound and collect outbound loads. These organizations would make daily tactical use of an optimizer that can be used for FTO analyses but regular, periodic FTO efforts are highly valuable, even for more manual operations.
This process is ever evolving. There is always a need to continue to report, analyze then optimize the decision tree and processes.
Step 2: Analyzing freight costs
Determine the transportation cost of controlling a customer’s or a supplier’s moves. This cost will later drive the negotiation process with suppliers or customers. It is important to understand that the cost of controlling a customer’s or a supplier’s moves is not simply the cost of the moves themselves, but the difference between the total solution cost with and without the customer’s or supplier’s moves. The moves for most suppliers and customers do not affect the overall solution structure, but some do, either by changing pool consolidation or pool distribution economics, altering multi-stop truckload routing opportunities, or eliminating backhaul, continuous move, or triangle route opportunities. And while high volume customers or suppliers, particularly those with geographically concentrated moves, are much more likely to affect the overall solution structure, FTO analysis often uncovers lower volume customers and suppliers whose moves are disproportionately important.
Step 3: Customer or supplier negotiation
Using the transportation cost of controlling a customer’s or supplier’s moves to negotiate prices with them that reflect possible change in control of the moves.
The sales group or the purchasing/ procurement group will typically drive this portion of the FTO effort; however, they almost always need support from transportation professionals to address customer or supplier objections and evaluate customer or supplier pricing offers. It is very common for initial supplier freight allowances to be unrealistically low. It is also very common for customers to expect to receive all the cost reduction benefits in return for continued business rather than any increase in margin.
Organizational incentives often need to be aligned to encourage and reward the sales or purchasing groups to capture these savings. Otherwise, these groups may negotiate away this freight term opportunity at too low a value in return for benefits that are more common in their historic negotiation process, or for a benefit that flows directly to their group/ function. Fortunately, most procurement organizations that are not negotiating based on total landed costs are trying to move that way.
Step 4: Implementation
All the inputs gathered in the study are brought together on a software platform. Key performance indicators are established on the baseline analysis to measure the effectiveness against cost improvement and execution excellence.
Rick LaGore is CEO of R² Freight & Logistics.
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