Managing Inbound Transportation
- By Nicholas Isasi
- July 1st, 2015
ILLUSTRATION © SOLEILC
Even as most states have begun to restore some of the cuts they made to higher education funding after the Great Recession hit, public and private institutions alike are examining their budgets more closely than ever to ensure prudent spending. One often-overlooked operating expense continues to cost many institutions tens to hundreds of thousands of dollars more than is necessary each year. That expense is inbound transportation costs.
As much as one-third of a college or university’s total logistics expenses can be tied up in inbound transportation. Unfortunately, dealing with these costs is problematic, as they typically comprise “hidden costs” that are controlled by the vendor. When the vendor arranges and pays for the transportation — called prepaid or “delivered” transportation — the vendor sets the rates, chooses the carriers to be used and assigns the classification codes. When colleges and universities don’t control the delivery timing and transportation charges related to their purchased goods, stock shortages and late deliveries can result. Additionally, the cost for transported goods can be marked up as much as 40 percent when vendors build excess transportation and handling charges into their prices and don’t pass on to the purchaser reduced transportation rates they have negotiated.
How can educational institutions reduce inbound transportation costs and achieve significant operational savings? The following seven steps will help.
1. Audit your inbound transportation process. Review your vendors and where they ship from. Then, determine the lanes (route between the pickup and delivery points), the volume in each lane and, if shipping by truck, the merchandise class being shipped. Discuss the visibility your institution requires regarding shipments and transit times in each lane with your purchasing and receiving departments. You can identify poor carrier service, inefficient routing and inbound shipment rates that are too high by conducting a lane-by-lane benchmark analysis. Determine total annual costs for inbound transportation and calculate it as a percentage of the institution’s gross revenue. If possible, identify accessorial charges such as fuel and additional services like lift gate and inside delivery. With this information, take the following additional steps.
2. Utilize appropriate transportation classifications for the items you ship. Every item that is shipped domestically has a National Motor Freight Classification number that directly correlates to the rate charged. The higher the classification number, the higher the transportation rate — and these rates can vary by hundreds of dollars per shipment. Items shipped internationally have a Harmonized Tariff Code that serves a similar function. By implementing appropriate transportation classifications alone, most schools can realize significant savings.
3. Implement and enforce a vendor routing guide. Routing guides help you control costs and improve receiving efficiency. The guide itself should be simple (it need not be longer than one page), and it should be included with the purchase order as a separate item. It should include proper routing instructions telling your vendors exactly which carriers to use in priority order. Use the guide to enforce vendor compliance. Clearly state the rewards for strict adherence and the consequences, such as chargebacks, when routing instructions aren’t followed.
4. Demand that transportation be clearly identified on each vendor’s invoice. Don’t accept pre-pay and added or “free” transportation. Transportation is often buried in the price you pay. This is called free freight. (Breaking out transportation costs from the cost of goods isn’t easy; the process requires frank conversations with suppliers.)
5. Create visibility. In-transit transportation tracking reduces the time buyers spend confirming shipments with vendors. It also helps to monitor individual carrier performance. Look for carriers that can supply such tracking methods. Also, utilize these reports to file for service failures with carriers that do not perform up to their guaranteed services.
6. Adopt a core carrier program that identifies strong carriers in your critical lanes. Having several carriers backing up to your receiving dock can create continual confusion and become overwhelming to manage. A core carrier program helps you identify carriers’ pick-up coverage, transit times, service facility locations, systems and technology prowess as well as their financial stability.
7. Negotiate lower transportation rates. Leverage your volume to receive better transportation discounts. In most cases, the fewer providers you utilize the more leverage you have. Negotiate with your carriers to eliminate or modify accessorial charges identified during your audit (see number 1 above).
COMBINE YOUR BUYING POWER
One way to leverage your transportation volume is to combine the buying power of several institutions. Single-industry-specific consortia — whether the industry is higher education, retailing, pharmaceuticals or furniture manufacturing — can be more effective than other multi-institution arrangements because the pricing is geared toward a single industry’s commodities (see number 2 above); routing guides are easier to enforce because more institutions are shipping from common vendors (number 3); and core carriers are more productive and competitively priced when more freight pickups occur at common vendors (number 6). Additionally, carriers’ pricing tends to be more aggressive when bidding for multiple accounts — not just a single one.
One way to engage in consortium rates is through an independent third party that can gather the data, negotiate pricing with a limited number of carriers and supply the software to manage those shipments. A third-party alliance can increase your buying power without the need to share information with other institutions.
Proactively managing your inbound transportation can help you reduce costs and improve your supply chain. The keys are to take control of carrier selection and classification decisions, track all inbound transportation dollars spent, and reduce the number of delivering carriers. Following the seven steps outlined in this article will take some effort. But with potential savings of tens to hundreds of thousands of dollars on the line, it is time and effort well spent.
This article originally appeared in the July 2015 issue of College Planning & Management.
Nicholas Isasi is executive vice president for DM Transportation, based in Boyertown, PA (www.dmtrans.com). The company provides vendor inbound, drop shipment and supply-chain management services to educational institutions and corporations in a number of industries. Isasi has more than 20 years' experience in carrier negotiations, supply chain management and corporate-level logistics planning.