How to manage your freight costs
Optimize your program and gain a competitive edge
Although repetition can be monotonous and boring, in operations repetition may be an indication of a highly efficient and profitable business model. However those of us in operations know things are rarely static and complacency can itself lead to loss of both profitability and one’s competitive advantage.
Transportation is definitely one dynamic area of an operation. The transportation marketplace is constantly changing; anyone who believes otherwise should not be responsible for maintaining an optimized transportation program.
How do we procure our raw materials from our suppliers, move them around our facilities as we convert them into value-added finished products, and then deliver to our customers in as efficient and low cost a manner as possible?
Most logistics managers have 50 different hats to wear on a daily basis and hardly a free second to listen to the 50+ different carriers, brokers, & 3PLs knocking on their doors, calling on the phone, leaving voicemails, sending emails as they compete for attention on a never-ending, daily basis. Most transportation contracts and carrier agreements are good for at least a 12-month period, so the typical M.O. is to re-evaluate our transportation programs and consider what non-incumbents may have to offer, on an annual basis. I know many companies only re-evaluate their transportation programs as seldom as every two or even three-plus years, believing if their contracts haven’t changed, then why bother?
If it isn’t broke, then why fix it, right?
Are you still getting value?
Well, for starters, let’s take a closer look at those contracts. Is the contract based on a specific tariff or is the contract based on the carrier’s current rates at time of shipment?
Perhaps you are utilizing a broker or 3PL and there is no contract in place at all but rather trust and blind-faith that the discount is being passed along, and the actual carriers dispatched to perform the service deliver a better value than pursuing a carrier-direct solution.
None of these examples guarantees that an optimized solution is in place. I have analyzed many third-party solutions where the delivered value was indeed exceptional; however I have found an equal number of situations where the value had completely eroded if it was ever there at all.
If you have a carrier pricing agreement based on rates current at time of shipment, then have you evaluated your carriers’ general rate increases (GRIs), the impact they have on your transportation costs, and what you have done to offset them. Base rates aren’t the only thing affected by GRIs; their impact on the assessorial side of the equation may be of even greater concern for your organization.
Even if you have negotiated tariff-specific rates with your carriers in order to protect yourself from GRIs, have you considered how the ever-evolving NMFCs (National Motor Freight Classifications) may be impacting your transportation costs?
Additionally, although your tariff-specific pricing may be insulating you from another round of GRIs, do you have to accept a decrease in your discount? And more importantly, how does all of this compare to a competitive discount off current rates?
Something else not to overlook is that many carriers offer NFGs (No-Fee Guarantees) to their shippers operating on a carrier’s current rates. This means even standard service shipments may be entitled to a refund if there is a qualifying service failure. Of course, not all NFGs are created equal; this applies to both the world of LTL as well as parcel. Although your carrier contracts or your relationships with your third parties may be static over a 12+ month period, I can guarantee that the actual transportation costs are not.
Dig into the data
Now let’s dig a little deeper into NMFCs and the actual classification of your products. The lower the freight class, the lower the rate; the lower the rate, the lower your cost. During the past six years, more and more classifications have been determined by density. Your NMFC# may not have changed, but that two-digit suffix on the end most certainly has. That two-digit suffix is often determined by density, pounds per cubic foot, and that two-digit suffix will also determine the freight class of your commodities.
Generally speaking, the higher the density the lower the class. In the safety industry, it is essential to consider the packaging: Can the products be nested? What is the perfect case to minimize empty space both inside as well as outside the case when considering how many items to pack per case and how many cases may be properly stacked on a standard pallet?
More than likely, no matter how well you address this issue, you will still have a range of resulting classes with which to contend. A good way to get some control over this situation is by negotiating an FAK (Freight All Kinds) into your carrier contracts. An FAK will result in a single class being applied to a range of classes. For instance an FAK 70: Classes 60 – 92.5 means that all classes within the specified range (60 – 92.5) will be rated at a Class 70 by the carrier.
Be careful, only a thorough analysis and understanding of your actual classes over a very large sample of shipments will allow you to determine what a properly constructed FAK may be for your organization. I have seen many FAKs that may result in some semblance of cost control, however when compared to actual class and negotiated discounts and rates, have actually resulted in an overall increase in net cost to the shipper.
Another concern with FAKs is that they may greatly reduce the amount of built-in carrier liability. Some FAKs may reduce a carrier’s liability from $20.00/lb to as little as $1.00/lb or even less! Understanding NMFCs, FAKs, density, and liability and how they apply to your commodities is essential to reducing and controlling your costs of transportation.
Gaining the edge
If only optimizing transportation in the safety industry was as simple as striving for the lowest possible net cost. Of course when a customer’s business may come to a screeching halt if certain safety products aren’t on-hand when needed, net cost is only one piece of maintaining an optimized transportation program. As your sales department will confirm, providing exceptional service in the safety industry is critical to maintaining a competitive edge. The delivered cost of your products doesn’t mean much to a customer if they fail an inspection because your shipment is missing in action, delayed, or delivered damaged beyond recognition.
Knowing and utilizing the top performing carriers within each lane ensures the fastest time in transit and on-time, damage-free deliveries. Low-cost shipping with one to even two business days faster time in transit may very well allow your company to competitively service a much larger geographic area.
Still, bring too many service providers into the mix and suddenly you have split the pie into too many pieces, resulting in transportation pricing that is no longer competitive, and a routing guide with more overhead than it is worth. A truly optimized transportation program is always a compromise that delivers the best of all worlds.
Just as you are always striving to improve your business, so are the asset-based carriers that handle your shipments. In addition to the general rate increases, mergers and acquisitions, reduction or expansion of terminals and service areas, proper maintenance of equipment, ever-changing human resources, the transportation marketplace is hardly static and ever-evolving.
Looking for ways to improve your transportation program from time to time is simply not enough; the difference between a better transportation program versus a truly optimized transportation program in the safety industry may be what determines your company’s ultimate success.
Transportation optimization is an ongoing process, so hopefully you can find the time and resources to regularly analyze your current and future transportation needs and goals, conduct targeted RFQs, evaluate the results, and implement any necessary improvements without feeling like you are about to rip your hair out. Don’t. Simply remember to wash, rinse, repeat.