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DG&A's Transportation Consulting Blog

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This is a year that shippers have been dreading. Increased demand, from retailers looking to restock after the holidays and from manufacturers, has made it harder for companies to book transportation, particularly on short notice. Prices have also risen due to bad weather, a new U.S. federal trucking safety rule, truck and driver shortages and diesel prices that are around a three-year high. For shippers that play the spot market, double digit rate increases are becoming the norm.

This was the subject of a feature story in a recent issue of the Wall Street Journal (https://www.wsj.com/articles/rising-freight-costs-are-weighing-on-companies-profits-1517521490 ). A number of U.S. companies told investors that rising shipping costs in recent months have cut into earnings. Many manufacturers and retailers throughout North America spend millions of dollars a year on freight transportation.

Freight costs can represent between 1 and 10 percent of a company’s operating revenue, one of the largest cost items. Unfortunately, they are often treated as just a cost of doing business. From time to time a shipper may try out a new mode of transport, a new carrier or conduct a freight bid. Other than that, freight programs tend to remain fairly static from year to year.

During our years of consulting with shippers all over North America, we have observed a pattern of Best Practices that elevate certain shippers and companies above their peers. Employing these Best Practices allow these companies to reduce freight costs and improve profitability. One of the best ways to find out where a company stands in this area of rising freight rates is to conduct a Transportation Audit.

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Many manufacturers and retailers throughout North America spend millions of dollars a year on freight transportation. Freight costs can represent between 1 and 10 percent of a company’s operating revenue, one of the largest cost items.  They are often treated as a necessary evil. From time to time a shipper may try out a new mode of transport, a new carrier or conduct a freight bid. Other than that, freight programs tend to remain fairly static from year to year.

During our years of consulting with shippers all over North America, we have observed a pattern of Best Practices that elevate certain shippers and companies above their peers. Employing these Best Practices allows these companies to reduce freight costs and improve profitability. One of the best ways to find out where a company stands in the area of Freight Management is to conduct a Transportation Audit. It is our view that shippers with a freight budget in excess of $1 million should periodically conduct an independent audit of their freight programs. Just as businesses audit their accounting practices, looking for opportunities for improvement, Transportation departments should do so as well. You might be amazed at what you find.

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For the past several years, American Shipper, in partnership with the Council of Supply Chain Manage­ment Professionals (CSCMP) and Retail Industry Leaders Association (RILA), has successfully benchmarked more than 250 payers (shippers and 3PLs) on their transportation invoice processing and payment practices and systems. Participants completed a 28-question survey covering all modes of international and domestic freight transportation.  The report focused on transportation spend in three segments—procurement, execution and settlement.  Here are some of the major findings and recommendations.

The 6 Key Invoice Processing Functions

The report looked at the six key functions of invoice processing.  They include Invoice Receipt, Validation, Dispute Resolution, Approval, Payment and Audit.  The study found that about a quarter of the respondents outsourced the receipt and validation functions while over 40 percent use automated tools; the remaining 30 percent of the respondents process their invoices manually.

Two thirds of respondents use manual processes to resolve billing disputes.  Forty-five percent of respondents approve invoices manually while 42 percent approve them electronically.  The remainder are approved through a third party.  In fifty-three percent of the cases, the invoices are paid electronically while about a quarter are paid manually and another quarter are paid through an outsourced provider. 

Forty-five percent of the invoices are audited manually while 29 percent are done electronically and 26 percent are audited through a third party. The majority of shippers automate, or outsource the receipt and validation of invoices while dispute resolution remains highly manual.

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Manufacturers and retailers spend millions of dollars a year on freight transportation.  Freight costs can represent between 1 and 10 percent of a company’s operating expenses.  Many companies treat freight costs as a necessary evil.  Once a year they engage in an annual ritual, the freight bid or RFP.  The current carriers are squeezed in their pricing; sometimes new carriers are brought into the mix if some incumbents haven’t performed.  Shippers walk away thinking they have dome their jobs and optimized the value of their freight costs.  They haven’t.

Every few years, shippers with a freight budget in excess of $1 million should conduct an independent audit of their freight programs.  Just as businesses audit their accounting practices, looking for opportunities for improvement, Transportation departments should do so as well.  You might be amazed with what you find.

There are four key components of well conducted Transportation Audit.

  1. Face to face interviews with the key transportation professionals using a structured interview format
  2. Administration of a written transportation technology and strategy questionnaire
  3. Observation of a company’s shipping operations including the packaging of the freight, dock operations , loading/unloading,
  4. Analysis of a company’s freight data

The following items are assessed in the audit:

  1. Organization of Transportation within business unit – degree of centralization/decentralization
  2. Linkage between inbound and outbound freight
  3. Where transportation fits within the design of the company’s supply chain
  4. Location of plants, DC’s, vendors and customers and how transportation links these components
  5. Freight spend as a % of revenue and trend over time
  6. Utilization/effectiveness of transportation technology
  7. Freight transportation budget versus actuals
  8. Spend management/ Off-plan spend (e.g. use of expedited freight transportation)
  9. Packaging of freight
  10. Loading/unloading of freight – load optimization and load factors
  11. Dock operation
  12. Use and management of private fleet
  13. Mode and carrier selection process/vendor and customer required transit times
  14. Analysis of Routing Guide by mode
  15. Freight spend data analysis by mode
  16. Compliance tracking (e.g. compliance with routing guide)
  17. Freight rate benchmarking – is it done?
  18. Timing/results of most recent freight bids by mode and results achieved
  19. Carrier performance management (e.g. scorecards) – on time service, billing accuracy, claims ratios, customer satisfaction
  20. Freight rate auditing process – pre and post-audit

The results of the audit provide a prioritized list of cost savings opportunities.  They highlight opportunities to strengthen the transportation organization.  The audit also provides a road map for improving processes and customer satisfaction.

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