May 20, 2013 | By Amy Roach Partridge
Managing inbound freight effectively can be challenging, but the obstacles don’t have to deter you from the benefits. Our experts map out detours to help you reach your goal.
All too often, shippers do not make inbound freight a supply chain priority. Managing and controlling inbound effectively is a difficult process, and one that can pit various departments within an organization against each other. In addition, tweaking inbound freight flows can sometimes upset delicate transportation agreements for the shipper, receiver, or both.
But the upside—the opportunity to take costs out of the supply chain, improve predictability and reliability, and boost service and operational excellence—makes pursuing an inbound freight management plan worthwhile. The changes can be as simple as collaborating with suppliers to gain a more accurate picture of inbound freight spend, or as complex as changing freight terms with all trading partners so you pay for—and control—all inbound shipments.
Either way, as transportation continues to be the leading cost element in supply chain management, now is as good a time as any to take another look at inbound freight. Here, five transportation veterans share their insights on the top five roadblocks that prevent companies from effectively managing inbound freight—and how shippers can find a detour to drive transportation management efficiencies.
1. Inbound freight management is not a high priority.
Mike Regan, TranzAct Technologies: In the reality of everyday corporate activity, companies devote resources to issues deemed to be most important, and inbound freight doesn’t crack that list.
Companies often have other, more pressing issues to attend to. They say, “We don’t have problems with inbound shipments getting to us, so why worry about it?”
There is also an ownership issue—many companies believe it is better to allow vendors to be responsible for the freight, regardless of their performance. And, they don’t grasp what is at stake. If companies truly understood the extent to which a seamless, fully effective and functioning inbound transportation system could help their supply chain, they would elevate inbound freight management to a must-address issue.
Rene Yates, Institute for Supply Management: Procurement is busy focusing on driving down costs in the top 80 percent of spend. Typically, inbound logistics is not on the procurement radar, because it doesn’t fall into the 80 percent that is actively managed.
Detour: Because inbound freight is generally a concern that falls to the logistics, transportation, or supply chain departments, those managers must be the ones to drive home to the rest of the organization the importance of more closely examining inbound freight. Getting C-level executives to understand the benefits that can be gained from an inbound freight management plan is key.
“You need to bring internal stakeholders on board, and be able to successfully sell the business plan around controlling inbound freight,” says Dave Castro, Institute for Supply Management.
2. Managing inbound freight is hard work.
Brooks Bentz, Accenture: Though it sounds simple, inbound freight is a complicated issue. Think about how difficult it can be just to gather all the data on inbound freight spend. A large retailer, for instance, could have 5,000 trading partners shipping goods to its facilities.
Determining the financial impact of taking over inbound freight is also challenging. If a company uses a supplier with multiple facilities around the country, it may make sense to control the inbound freight in some areas, but not in others, because the economics are different.
In addition, consider these operational issues if a company decides to pick up goods at a supplier’s facility: What are the hours of operation? How many dock doors are available? Are pickup appointments required? Does the company use a drop trailer program?
You need to make sure your equipment aligns with the supplier’s facility, too. For instance, if you operate a fleet with hydraulic lift gates on the trailers, you have to make sure the pickup point does not have dock locks.
Another consideration with private and dedicated fleets is that they often are picking up at the same locations they deliver to—with pallets, totes, returns, and dunnage—and may not have sufficient capacity on the truck for inbound freight.
It is gritty, hard work to sort through all these factors. Then, once you figure it out, the vendor pool may change. You may use one supplier now, but if the purchasing department gets a better deal from a different vendor, you will have to go through the entire inbound freight analysis again with a new vendor.
Robert E. Murray, REM Associates: Drilling down on all the equipment specifics can be challenging. Say a company wants to take over inbound shipments so it can execute backhauls with its private fleet, but the nature of the product it hauls outbound prevents it from picking up inbound. It could be that the body type of the truck needed for the outbound shipment doesn’t match what is needed for the inbound shipment. Or maybe the vehicle needs to be completely cleaned once a load has been delivered, so the company can’t just turn around and pick up a new shipment from a supplier.
Castro: Organizations often focus on outbound shipments because they are easier to execute. You can consolidate outbound shipments as long as you have demand in similar places. Trying to consolidate inbound shipments requires much more planning.
Also, in some instances, companies don’t have an accurate picture of who is involved in bringing in their inbound freight—they might be working with multiple freight forwarders, customs brokers, and third-party logistics (3PL) providers. Because it is so complicated, companies have a tendency to just look the other way.
Detour: Managing inbound freight is hard work, but it can pay off big time. Attack it by starting with basic analytics to obtain a fact-based understanding of your transportation operations.
“The first step is to identify your vendor base and gain visibility to who is hauling your inbound freight and how much it costs today,” Bentz says. “Ask your vendors to break out freight costs from product costs on their invoices so you can easily determine what you are paying.”
Then you can start to perform the internal analysis necessary to decide if changing freight terms and controlling all—or some—inbound shipments makes sense.
But don’t overlook the details. “Make sure to qualify the scope of the challenge,” Regan explains. “Companies need to address what it takes to satisfactorily implement an inbound transportation management program: Will they be able to set up a Web-based routing guide? How will they put chargebacks into effect? How will they ensure vendor compliance? How should they source their carrier base?
“If the project is too overwhelming, but still makes financial sense, consider outsourcing to a third party that specializes in freight management,” he adds.
3. Businesses lack visibility to inbound freight costs.
Castro: Companies often have no visibility to their inbound freight spend. When creating a purchase order, for example, company requisitioners merely estimate the tax and shipping—say 10 percent of the cost of goods sold—as one line item on the purchase order. To determine what inbound freight actually ends up costing, employees have to go back and review the invoices.
Bentz: The price of inbound freight is often built into the cost of the product being shipped. The shipper pays for it, so the procurement and supply chain managers at the receiving company frequently have no idea what it really costs. In many companies moving high-value product, freight is a small percentage of cost of goods sold, which is a typical objection to managing inbound. Freight may, however, be a significant percentage of the margin, which is a question asked much less frequently.
Murray: Many companies are starting to mandate that the procurement process identify transportation as a key element. They are asking vendors to identify the freight that is required to move product from point of origin to the recipient. Historically, visibility has been limited in this regard.
Regan: Because of this lack of visibility, companies have a hard time quantifying how much they actually spend on inbound transportation.
Take a company that purchases $500 million annually from its supply base. If you ask for its inbound freight spend, managers will likely cite the $2 million that shows up in the general ledger. But do they really think that freight is being delivered for less than half of one percent of their total raw material purchases? That is not logical. The rest of that freight spend is unaccounted for because it is coming in on a delivered cost or pre-paid basis.
Detour: The only way to gain the visibility needed to improve inbound freight management is to make it a requirement of your supply base. “Companies must collaborate with suppliers, and communicate the importance of understanding freight costs,” says Bentz.”Then, task suppliers with breaking out freight costs on every invoice.”
“Also ensure that inbound freight becomes an essential part of the purchasing and negotiation process going forward,” adds Murray.
4. Companies are operating in silos.
Bentz: Often, inbound product is purchased and controlled by the procurement department—not the supply chain department—so inbound freight lacks collaboration.
Inbound can be a politically charged issue internally. The buyers don’t want logistics playing around in their territory. They are focused on getting products to the store shelf on time, and if inbound freight is only a small percentage of the cost, they might think, ‘Don’t tinker with it, you will damage the service by trying to save a nickel here and there.’
The fact is, managing the process intensively improves supply chain performance from both a cost and service standpoint.
Yates: The way procurement professionals operate and are evaluated is not necessarily in line with the goals of transportation and logistics. Procurement professionals are often measured on purchase price variance—the difference between the current price and historical/standard price—so they are focused solely on trying to reduce prices on the items or commodities they are responsible for.
Also, they may be given a cost reduction/containment goal of, say, six percent. Once they reach that goal, they have no incentive to search for further reductions.
So procurement is not at all focused on freight costs. There is often a disconnect when it comes to understanding the overall value proposition of focusing on inbound freight spend.
Regan: If the procurement department and the logistics/transportation group are not in sync, you will not have a good inbound transportation program. Disciplines and methodologies in the transportation and logistics department are needed in the procurement department, and the procurement department is operating in ways that the logistics team needs to address. With a siloed approach, you can easily sub-optimize your inbound program. It should be all for one, and one for all.
Murray: It is important for transportation and supply chain departments to work collaboratively with buyers to identify transportation as part of product costs so they can determine if they are paying too much for freight, and could cut costs by dealing with it differently. This is starting to happen in some companies, but historically it has not been the case.
Detour: Breaking down silos is an important part of almost all company transformations—and inbound freight management is no exception. This is easier said than done, but promoting a corporate environment where logistics, procurement, finance, sales, and marketing all come together on these issues goes a long way toward bringing about meaningful change. “A coordinated process between the transportation and purchasing functions enables successful inbound freight management,” Murray says.
Starting small is a good move. “Start cross-functional work on inbound freight management with simple things,” suggests Bentz.”If procurement is bringing on a new vendor, for instance, they should include someone from the supply chain/logistics group in the meeting so inbound freight issues and requirements are discussed.” This should be a standard part of the process at all times.
5. Trading partners don’t want you to manage inbound freight.
Murray: Inbound freight is a two-sided coin; your inbound delivery is your trading partner’s outbound shipment. Whether your suppliers operate their own fleet, or use contract carriers to deliver these shipments, they have their own freight experience, and they may not want to give up control.
A shipper might say to the receiver, “If we let you manage this freight, we lose leverage. We have a national contract with Carrier X, and your shipments make up 25 percent of our outbound freight. If you take that away, it limits our ability to negotiate a good price on our remaining 75 percent.”
In these cases, both the receiver and the supplier may believe they have the ability to get the lowest freight costs. It can be an even tougher negotiation if a supplier has a private fleet and backhaul commitments centered around the receiver’s shipments. If the receiving company takes over that freight, it upsets the supplier’s transport flows. It can become a tug of war.
Bentz: Sometimes, it’s as simple as suppliers not wanting to give control of freight to the receiving companies because the suppliers are making money off it.
Regan: Most companies are blissfully unaware of the extent to which their suppliers use freight as a profit-generator. But it comes back to the question of who is paying for the freight. The party paying the freight—the receiving company—should have the opportunity to determine its destiny.
Detour: Collaboration is the name of the game. Unless you are willing and able to take a hard line, and demand control of all inbound freight from vendors, it’s a good idea to simply discuss when and where making changes to inbound shipments makes sense for both partners.
“Come up with a plan that works best for all the trading partners involved,” Murray recommends.
The process is part art and part science. “You might sit down with suppliers and find out that you are using the same carriers,” Bentz notes. “You can decide who should haul the freight based simply on the economics.”
Beyond the Roadblocks
What is the reward for detouring around these five roadblocks and finding a way to improve your inbound freight program? The benefits include significant supply chain cost reductions, improved transportation efficiency, better control over incoming goods, a boost in customer service, reduction in cycle time—and even freedom from legal headaches.
Murray: Cost is what everyone goes after first, and improving inbound freight management yields a significant opportunity to reduce costs. Companies also see service improvement. If a manufacturer or distributor has its own fleet, and can pick up goods instead of waiting for delivery from the supplier, it can often speed transportation operations.
Bentz: Managing inbound freight is not about being the big guy in town and controlling everything. Rather, it is a key driver of improving supply chain performance, and a way to reduce costs. Gaining visibility around inbound freight helps companies understand the available service and cost tradeoffs, which allows them to make more cost-effective decisions. If you can impact your order management process, for example, to get the optimal modal choice—i.e., using ocean instead of air for imports—you can potentially save a lot of money.
Another benefit is matching freight flows collaboratively across your supplier network. It’s good for carriers because they get more loaded miles, and can haul freight in two directions instead of one. It is also better for shippers and receivers because they achieve a more efficient operation, which translates into lower costs and better service. And, by improving overall supply chain performance, companies can avoid having to carry larger amounts of safety stock in distribution centers or on store shelves.
Regan: Another key benefit of effective inbound freight management is better control over the flow of material into your facility. Companies yearn for a Lean operation, and a great Lean program cannot happen without that inbound control.
Managing inbound freight also helps you avoid potential legal battles. When you allow companies to select your inbound carriers, you are saying that you trust that company’s ability to protect your interests. If an accident or a problem occurs, you are often at their mercy. Proactively managing inbound freight frees you of that worry.