How to Bring Freight Costs Under Control

Much of the work we do at Dan Goodwill & Associates starts with a phone call or e-mail from a President, CFO or Vice President of Logistics or Transportation. One of the first questions that we are asked is can your firm help us reduce our freight costs.

The answer is usually yes. Unfortunately, we are not able to wave a magic wand. Effective freight cost management comes from taking some concrete steps. Here they are.

Centralized Command and Control

Many of our clients have grown through acquisition and/or organically. They have manufacturing and distribution facilities in multiple locations. These sites are often managed individually by local logistics managers who each use a set of preferred carriers. By not consolidating shipments, by moving LTL freight daily and by using a variety of carriers, they sub-optimize on freight cost management.

Companies that wish to manage their freight transportation must have a central command centre. In conjunction with the individual plants, they need someone or a team to select carriers on behalf of the total organization and they need the authority to make sure that there is compliance throughout the organization.

Good Technology and Quality Data

It is amazing how many companies, even large size businesses, have such poor quality shipping data. Shipping weights are entered incorrectly. There is no distinction between actual weight and billed weight. Fuel charges and linehaul rates are combined.

In addition to poor data, there are still so many companies that have not invested in a Transportation Management System (TMS). After all the years that TMS systems have been on the market and with pay as you go pricing (SAAS), about 33 percent of companies that move freight have TMS systems. Poor data coupled with poor management tools equal freight cost over expenditures. It is as simple as that. Yes, TMS systems cost money but they also produce significant savings if they are effectively utilized.

Visibility

Whether a company has good data or not, the data must be studied and managed. With a lack of visibility comes the use of carriers not in the company’s routing guide and maverick spend (i.e. using an expedited freight service when a regular standard ground service would suffice). You can’t manage what you can’t measure.

Good TMS systems produce quality tracking and carrier performance reports. These visibility tools allow the management team to spot service failures and non-compliance and take appropriate action as required. They allow companies to build consolidated loads on designated shipping days to reduce freight costs. The visibility tools allow for the creation of a set of Key Performance Indicators (KPIs) that can highlight deviations from established norms.

Leverage Inbound and Outbound Transportation

This is a problem in many organizations. Inbound transportation falls under Purchasing or Procurement. Inbound freight costs are embedded in the landed cost of the goods. Outbound freight transportation is management by Logistics or Transportation. Opportunities for synergies (i.e. leveraging total spend with the company’s carrier base, creating round trip movements) are lost.

Leadership

Freight Transportation is a unique expertise. The executive in charge must have the skill sets and knowledge to lead a team of professionals and deliver results. If freight transportation is placed in Finance or another department, and managed separately from Supply Chain Management, this may likely result in many of the above problems.

Freight Transportation is of Strategic Importance to the Organization

In a recent study conducted by Descartes Systems, in conjunction with DC Velocity, it was determined that there is a direct correlation between the strategic importance of freight transportation and the financial performance of the company. They also identified that companies that place a greater importance on freight transportation tend to grow faster than companies that give it a lesser priority.

To sum up, there is no quick fix for a poorly managed Freight Transportation department. Saving money on freight costs takes leadership, discipline, hard work and follow through. The leadership team needs to view freight transportation as a competitive weapon and constantly monitor results to drive performance. Even after some improvements are made and the reports are being produced, the leadership team must continually scrutinize the data to keep costs under control.

To stay up to date on Best Practices in Freight Management, follow me on Twitter @DanGoodwill, join the Freight Management Best Practices group on LinkedIn and subscribe to Dan’s Transportation Newspaper (http://paper.li/DanGoodwill/1342211466).