Logistics professionals are under constant pressure to reduce logistics expenditures especially in the face of rising transport and fuel costs. Linda Taylor of Fedex Services has written an excellent article on some potential areas to find savings in your supply chain as well as areas where additional costs may creep into your operation.

Potential Causes for Additional Costs:

• Vendors may utilize shipping costs as a profit center for their business by charging higher fees than necessary for transportation. These higher costs are passed on to the unsuspecting customer. Without a control process in place, such fees can have a large impact on the transportation costs of inbound freight.

• Procurement managers may give minimal thought to the cost of transportation, since they are focused on getting the right product in the right quantity at the right time. In some cases, they may not be responsible for the transportation costs of their purchases but are held accountable for per-unit costs only. As a result, they may choose an ineffective transportation mode or carrier, leading to unnecessary transportation costs.

• Managers often incorrectly assume that the vendor can get (and will pass on) better transportation pricing, especially when the vendor’s company is larger in size than the manager’s. Such an assumption does not lead to the best transportation decision. Again, the result may be higher costs.

• Sometimes the wrong transportation mode is selected. An inexperienced purchasing professional may use a due date of “ASAP,” which allows the vendor to select the mode and carrier that may best suit its needs but not the customer’s.

Another area I would add would be the incorrect usage of Incoterms or not having an agreed upon Incoterm with your supplier. For instance, your transportation costs could increase if you are importing your product on an FOB port basis out of the Southern China Region and you fail to state that the Incoterm is FOB Yantian Port. Potentially, your supplier could use an alternate port in China which may have a higher cost/rate.

Potential Areas for Cost Savings On Your Inbound Freight:

1. Establish who pays for inbound freight. Some vendors will prefer to include the cost of inbound transportation in their price. Be wary of this practice, since it may require a minimum order size or cause prices to be inflated. Local vendors may have their own delivery truck; often, this is the ideal delivery method.

2. Convert your vendors from prepaid freight to freight collect, which occurs when the purchaser controls the routing and the rates that are charged by the carrier. When the shipper controls rates, it is considered prepaid. Performing due diligence in the comparison of these two factors often results in the identification of cost reductions and improved control. “Free freight,” meanwhile, is a deceptive term because there are always costs associated with delivering a product. Free-freight claims should raise a red flag and precipitate discussion. To convert your vendors, work with your procurement department to outline expectations. Most procurement managers do an exceptional job in reducing the cost of purchased products and extending payment conditions, but greater opportunities exist in savings and efficiencies by also negotiating inbound transportation.

3. Improve the visibility of inbound shipments. One of the key elements in an effective inbound-freight management process is visibility into the supply chain to track and control inventory movements. Many transportation carriers can provide real-time information about shipments in transit. Control your inbound logistics to provide greater visibility to your inbound shipments, allowing for efficient staffing of dock personnel and assuring knowledge of when critical inventory will arrive.

4. Leverage transportation costs. Aggregating inbound, outbound and return shipments can increase your negotiating power in obtaining higher discounts on overall transportation costs. Ensure that your parcel carrier discounts your inbound shipments and includes your inbound revenue for companywide volume incentives. Consider establishing a special inbound collect account to capture vendor shipments in order to maximize your volume discounts.

5. Develop a complete vendor compliance program. The program should define vendor expectations and provide for a method of measuring and reporting on performance against those expectations. This is one of the most effective ways to ensure consistency and reliability in the management of the inbound transportation process. The program should also include routing guides. Items that should be addressed within routing guides include carton markings, packing slips, bill-of-lading instructions, designated carriers and penalties for noncompliance.

6. Develop strong vendor relationships. One of the most overlooked factors in a successful inbound-freight program is the relationship with vendors and carriers. Some companies try to manage relationships through rigid contracts and performance measures. While these are important, having the ability to deal with someone you trust often simplifies the resolution process when issues arise. Many ideas for improving the process come from collaboration rather than the strict enforcement of an agreement.

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