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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.

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A couple of weeks ago, I wrote a blog about the new pricing processes that LTL (and small parcel) carriers are employing to improve the profitability of their operations. I noted that freight carriers are emulating some of the activities that have been undertaken by the airlines such as dynamic pricing (i.e. adjusting rates based on time of day and day of the week) to increase yields on their freight activities.

Similar to the airlines, in recent years, LTL carriers have become more focused and aggressive in seeking payment for additional services (that have distinctive cost elements) that have been offered at no charge or at less than full cost recovery in the past. Many carriers have been focusing on inefficient shipper practices or administratively costly tasks that drive up their costs. They have been turning to their customers to compensate them.

In this blog, I will provide a set of questions that shippers should ask themselves and their customers to understand the current shipping processes that are precipitating accessorial charges and the costs that are being incurred. In the next blog, I will provide some general practices that shippers can employ to mitigate these costs.

Why do Accessorial Charges Exist?

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Motor carrier agreements or contracts are documents signed between shippers and carriers that set out the parameters and processes under which two or more companies work together to provide freight transportation services. These documents, often prepared by lawyers (with input from freight management professionals), set out a range of service expectations and freight rates that define the relationship between the parties. While freight agreements have come into widespread use, the question is if and when these documents are necessary?

One could argue that if two or more parties are operating in good faith, do they need a legal document to circumscribe the nature of their relationship? If shippers and carriers are supposed to work together as partners in an open and trusting manner, does a formal, written agreement get in the way of a business partnership arrangement? Does it inhibit open and honest communication?

Do motor carrier agreements create a rigid framework that reduces flexibility? Are they detrimental to the sometime unpredictable and fluid nature of freight transportation? Does a formal agreement make it more difficult for a shipper to obtain additional equipment or after hour’s service? Do they place carriers with a limited set of equipment into a straight-jacket? Does the fear of punishment or service failure force a carrier to provide equipment and service to one client (that has a contract) at the expense of another client (that doesn’t have one)?

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b2ap3_thumbnail_dreamstime_l_20588089.jpgIn the last blog, I highlighted some of the opportunities that shippers miss out on to save money on freight when they don’t manage their freight spend data effectively. What steps can a shipper take to correct this situation? Here is a partial list.

• Utilize a Transportation Management (TMS) System. TMS systems have changed significantly over the past ten years. Shippers can now buy or lease a TMS system at a reasonable rate. For companies that don’t wish to make this investment, they can reap many of the benefits without making a capital investment by working with a logistics service provider that has a leading edge system.

• Make sure the company’s or LSP’s TMS system is capturing the key data elements on a daily basis that are needed to monitor freight expenditures. This includes complete and accurate commodity descriptions, actual weights and billed weights, capturing the various cost elements of their shipments individually such as the freight rate, fuel surcharge, currency exchange, accessorial charges, carrier name, origin and destination cities, state/province and postal codes/zip codes, ship date and arrival date.

• Sort the data in the following ways to help identify opportunities for improvement:

             By carrier – to reduce the company’s dependency and vulnerability in case of a strike or business failure and to leverage shipping volumes

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Throughout this series of blogs, the focus has been on how Best in Class shippers ensure their freight is delivered at the right place, at the right time and intact. The beauty of freight management is that so much about transportation is measurable. Over the years we have observed how Best in Class shippers pull away from mediocre performers and industry laggards in the area of measuring performance. They tend to have better data and more robust and relevant tools and reports. These are some of the Key Performance Indicators (KPIs) and Reports that they utilize.

Macro Financial Indicators

The first set of financial ratios helps identify trends in supply chain costs and their impact on the business over time. Key ratios include:

Supply chain costs as a % of Revenue

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Success in business comes from crafting and executing effective business strategies. The attainment of strong financial performance comes from integrating and aligning the various strategies of the business into a cohesive force. A company’s supply chain strategy, of which transportation strategy is a key component, is often a critical piece of the company’s business strategy. We often observe that the freight strategies of our clients are not well aligned with their business strategies. In fact, they often inhibit these companies from achieving the bottom line results that they are so desperately seeking. Here are some of the things that we commonly observe.

A Failure to Recruit and Train Top Quality Talent

As noted in an earlier blog (http://www.dantranscon.com/index.php/blog/entry/becoming-a-best-in-class-shipper-3-organization), it takes leadership and management skill to be an effective supply chain executive. By not hiring and training top quality management talent to this position, the company receives mediocre leadership and weak performance.

Some companies don’t fully appreciate the scope of knowledge (http://www.dantranscon.com/index.php/blog/entry/becoming-a-best-in-class-shipper-2-knowledge) that is needed to be a Best in Class Transportation operation. While companies will go out and hire top notch sales and engineering professionals, they will “force fit” unqualified individuals into the role of Transportation Manager. Without the knowledge, skills and resources, the company gets what it deserves - - poor performance.

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In many firms, freight costs can be in the millions or tens of millions of dollars. This large expense can represent a significant percent of a company’s revenue. As a large expense item, it needs to be managed very skillfully.

The first blog in this series (http://www.dantranscon.com/index.php/blog/entry/becoming-a-best-in-class-shipper-1-freight-data-management) looked at the need for detailed, accurate, freight spend data. One of the benefits of having this type of quality data is that it allows the transportation leaders of an organization to create a quality freight budget. The budget should be tied directly to the company’s business plan and supply chain strategy. Every manufacturer or distributor must make certain assumptions about how it plans to transport its inbound raw materials and deliver its finished goods. These assumptions outline the modes and expected costs.

The budget should detail on at least a monthly basis, the projected revenues and freight costs. Since many companies utilize multiple modes (e.g. small parcel, LTL , intermodal, etc.) and multiple service options (e.g. next day by 9:00 AM, regular ground, air freight etc.), it is important to capture this type of granular data since the costs will vary based on the mode and service chosen. Similarly, projections should be made concerning fuel surcharges and any other extra cost that can be a significant component of the freight budget.

The company should also produce a monthly transportation expense variance report. The report should be granular and provide variances on expenses by mode and cost item. It should highlight percentage changes in modal utilization and carrier collaboration.

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 Best in Class shippers possess an understanding of the following subjects.

 Modal options and trade-offs (e.g. Air, Road, Rail, Marine)

 Carrier selection and management in each mode of transport

 Routing guide preparation and compliance tracking

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We live in an era of impersonal communication. E mails, text messages, tweets and GoToMeetings have replaced face to face communication in many instances.

The decision to award millions or tens of millions of dollars in freight transportation to a set of carriers is a very important one. You don’t want to entrust your company’s business and reputation to poor service providers that say they will meet your needs and don’t deliver. You don’t want to commit your business to carriers that offer low pricing to secure the contract and then come back a few weeks later with a rate increase, claiming they misunderstood the bid. These situations happen all too often and they can be very disruptive and financially punitive to shippers.

It is our view that the bid evaluation and award process cannot be done effectively through automated computer programs. There is a requirement to meet “eyeball to eyeball” with companies that may be your future business partners. These meetings should have a formal agenda. In addition to pricing issues, there is value in reviewing the carriers’ operations in detail. This includes:

a) fleet size and age

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If your trucking company hasn’t been purchased or doesn’t get purchased by TransForce, will it be in business in five years?  That is the question that came up in a recent discussion with a long time industry colleague.  The response I received was that he didn’t think his company would survive.  I was a bit surprised by the response and asked him for an explanation.  This led to an interesting discussion on what it is going to take to make it in the trucking industry in 2014 and beyond.

We both agreed that while the trucking industry has changed in some ways over the past decade (e.g. more use of technology, better cost controls after the Great Recession, LNG vehicles, greater use of 3PLs as customers), the industry is not that much different from ten years ago.  The slow economic turnaround since 2008 has created a challenging environment and there is little reason to expect a major improvement in the short term.  Rate increases are hard to come by, even with a tight driver situation.  Even more of a concern is the lack of innovation in the industry and the threat that such changes could wreak on so many complacent companies.

The warning signs are there.  As a Canadian, you don’t have to look much further than Nortel and Blackberry to see what can happen to industry leaders that were not able to keep up with changing consumer needs and quality competitors.  At the same time, one can observe what companies such as Amazon and Apple have been able to do to change the paradigm of some long established industries. 

Some of the large trucking industry players are making investments in technology and people.  They are integrating back offices and focusing on achieving economies of scale.  They are thoughtfully expanding their service portfolios and geographic footprints. 

Some of the small players are offering solutions that are very tailored to certain industry verticals and geographic areas.  Companies that are focused on same day delivery, refrigerated intermodal service, pooled LTL service, energy distribution and other emerging capabilities are creating a space for themselves in the industry.

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A picture is worth a thousand words.  This certainly applies to LTL freight.  Shippers can be penalized financially if their LTL freight is priced incorrectly using the wrong class or density.  LTL carrier margins suffer when their trailers contain freight that has been priced incorrectly due to inaccurate dimensions and weight.  A new start-up venture has entered the LTL space to address this specific issue.

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FreightSnap (www.freightsnap.com) launched its business in January of 2013.  This technology-based business uses digital images to capture cubic dimensions, cubic pounds per foot, the anticipated freight class and the bumping weight.  These images are stored in a cloud database for easy access and enterprise reporting. The user can take either one or two digital images of the same piece of freight.  The key is to make sure to have something in the image to scale to ensure the readings are accurate.

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The user inputs the weight of the shipment and then uses the screen controls to indicate the end points of the freight.

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Companies typically call us in when they are having a problem and they are not able to solve it themselves.  For shippers, the problem is usually that they are spending too much money on freight and are seeking solutions to bring these costs under control.  For carriers, the problem is that they are not achieving a satisfactory profit.

In our work we have observed a number of variables that play a key role in determining whether the problem or problems get solved or not.  Here is what we have learned.

It takes a multi-disciplinary effort to solve these problems

While one might think that freight transportation is a small element of a company’s operation (and often less that 5% of its costs), it tends to intersect with Sales, Production, Customer Service, Finance and other business functions.  The same can be said for improving the profitability of a trucking company.  Profit improvement comes from a team approach to solving the problem.  Improving one area of the company while leaving the others untouched will usually have a minimal impact on a company’s bottom line.

It starts at the top

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