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This is the most expensive and least understood of all the vendor-supplied
services. For some, it represents an opportunity to generate
income. For everyone, a look at freight costs should result in
a reduction of expenses. Many managers have strong memories
of buying, and attempting to deal with, a regulated industry.
In the old days, before Congress passed the 1980 Motor Carrier
Act, this industry was difficult to understand and more
difficult to communicate with. While this topic is most
beneficial for firms who have a shipping department, there are
bits and pieces in this segment for almost everyone. With
the advent of deregulation, smart freight carriers have become
innovative and responsive. This can equal faster delivery to
either you or your customer, at an equal or lower rate than
you are paying now. It can also result in improved,
information services. During a freight study for an
employer, I recently evaluated twelve truck companies and
United Parcel Service. The firm's outbound freight expense was
approximately $130,000 per year. The average freight cost per
dollar of sales was 8%. This figure did not include our own
delivery vehicles, which had an equal expense ratio to sales.
Our outbound freight volume had been divided between six
carriers. Assuming all carriers are giving us the same
discount, service, etc., our one-door, receiving/shipping
department is easily congested when more than two trucks
and/or trailers are present. My goal was to reduce the number
of carriers serving us. The reasons for this desired outcome
are that (i) the transaction cost of Accounts Payable,
Customer Service and Traffic Coordinator is substantially
reduced (soft dollars), (ii) we would obtain a greater
discount, in exchange for offering greater volume and
efficiency to the carrier (greater load per pick-up), and we
would obtain the use of a vendor-supplied, management
information link-up (E.D.I.). To make an informed decision,
you need to know something about why you are using a service.
In supplying information to the vendors, as a means of
determining how much of the aforementioned value my firm could
obtain, I was able to tell them only that:
1. My dollar volume was distributed between northern
California, Oregon and Washington.
2. 55% of my outbound freight weighs more than 160 pounds.
3. Some shipments were trailer load, most were LTL (less than
trailer load).
4. All UPS shipments were going in individual 20 pound, 14 x
12 x 12 boxes (health & beauty aid product is sent in
"fragile" packaging).
INBOUND FREIGHT
During the negotiation process, the picture improved a lot. I
learned that my inbound freight, which is almost exclusively
shipped prepaid by the supplier, could evolve into a profit
center. As my inbound freight is approximately the cost of
outbound, it did not take a rocket scientist to determine that
any percentage of our annual $250,000 freight expense is a
good piece of change. The way to slice the inbound pie is to
negotiate with your suppliers to give you a freight allowance
equal to their cost of freight to you. You are NOT asking for
them to incur a greater expense, just to pass along their
identical cost to you in the form of an allowance.
With your
freight company, in the course of negotiations, you obtain a
commitment for an "unloading allowance." This allowance is
available, but not volunteered, because their drivers do not
unload the truck, you do. Many will give you a 2% to 7%
unloading allowance, for each order you send them. This
allowance is earned if the freight is paid for by the
supplier, AND if you designate the carrier as your carrier of
choice. By giving the carrier the business, they will give you
cash value. Once you have determined your cost of freight,
following an extensive freight rating evaluation (as
illustrated below), you next step is to determine if your
volume discount will result in a lesser freight cost than the
discount given off the invoice. When your supplier pays the
freight expense, you will usually receive an invoice that
indicates the cost of shipping that particular order. You need
merely to balance your negotiated rate with that of the
invoice. Adding the income generated from the off-loading
allowance, to the variance of your "freight terms from
pre-paid to collect" equation, you then make a case-by-case
decision as to the method your freight is delivered. Either
way, you must still insist upon your company designating a
carrier, as income and control are gained. RESULT: This
distribution firm gained $10,000 per year by understanding and
changing the terms of freight. It also reduced the time spent
by employees to trace orders, as they had computer access to
the freight carrier's mainframe which gave them current data
as to PRO number, where the freight was (within eight hours),
and monthly reports. The reports will be used to give
potential suppliers a clearer picture of the business, which
will result in either greater savings or a lesser increase the
next time you go out to bid. As I mentioned earlier, what
gets measured gets done. To determine if any savings or
profits can be realized on your shipping costs, or if service
can be improved, you must perform two vital tasks. Yes, you
could do exactly as I did, or you could obtain the maximum
benefit from the business you give a carrier. If you have the
staff to perform a file search and data accumulation, I
recommend you complete step one before proceeding to the
second step.
Step #1. Utilizing a database program, compile the following
results:
Destination Report
Reporting Period: 02/01/03 to 09/01/03
Shipped To (there is also a Point of Origin Report)
Number Invoice Date Date
State City Carrier Weight of Boxes Amount Class % Disc Shipped Received
CA Alhambra Federal Express 120.00 6 $95.90 0.00 08/01/03 08/15/03
Long Beach Yellow Freight 250.00 1 $300.00 55 35.00 07/15/03 07/23/03
San Diego Consolidated 951.00 40 $850.21 57 55.00 06/29/03 07/01/03
S T A T E T O T A L S 1321.00 47 $1,246.11
Carrier Evaluation Report
Reporting Period: 02/01/03 to 09/01/03
Invoice Weight Number Average % of PPD % of Collect
Carrier Totals Totals of Boxes % Disc Invoices Invoices
Federal Express $2,546.01 3,200 94 00.00% 100.00% 00.00%
Yellow Freight $3,100.00 4,000 99 40.00% 90.00% 10.00%
R E P O R T T O T A L S : $5,646.01 7,200 193
Step #2. Complete a Freight Vendor Analysis, utilizing the
following Carrier Rating System, asking for complete
disclosure, with service and discounts based upon the volume
and destination information shown within step #1.
CARRIER RATING SYSTEM
The carrier rating is based upon a total scale that has a
maximum point value of one, and is made up of five major
segments.
1. Carrier Responsiveness = .15 points maximum
(allow .03 points for each reply)
Does this carrier provide:
Courteous, knowledgeable and professional personnel___
Periodic calls in person or by telephone____
On-time pickups____
Electronic Data Interchange capability____
Service Reports on a regular basis____
2. Financial Condition = .15 points maximum
(Give four points for each profitable year, and three extra
points if all three years were profitable)
Within the last three years, determine, from his financial
statement, whether the carrier has earned a profit from
operations. After all, you don't want to risk losing any goods
in transit, as that act may cost you the firm's profits for
the year. Ask for their operating ratio. It should equal or
exceed 96%.
3. Claims = .20 points maximum
(Subdivided into three areas, give each segment 5 points
maximum and add the last .05 points if exceptional claims
resolution are proven.)
3a. Loss & Damage Claims Ratio and Incidence should be less
than 0.80 percent. To determine the ratio, divide the number
of claims filed by the number of shipments. If the LDC ratio
exceeds 2%, you will be hard pressed to justify further
evaluation of this carrier.
3b. Loss & Damage Claims Services are based on how carriers
react to help resolve claims upon notification. Most carriers
have a standard, and maintain measures of actual performance
against that standard. Example: 90% of all claims will be
resolved in thirty days.
3c. Overcharge claims are based on the ratio of dollar amount
of adjustments to revenue. This area is difficult to obtain
information on from vendors. Insist upon it as it is
available, because they must report such matters on a routine
basis to the Interstate Commerce Commission.
4. Pricing = .30 points
A maximum of .17 points for actual discount rate; .04 points
for innovative price proposals; and .09 points for pointing
out innovative ways to reduce shipping costs in areas such as
packaging or use of freight auditors. Remember the golden rule - the one with the gold rules. As
long as you have not indicated a preference in carriers or in
terms, you are still in control. The perception by the carrier
of your interest, or lack thereof, can effect your cost. As
long as you have a tight hand on the checkbook, you will rule
the negotiating process. When negotiating price, do not let
the carrier know what discount you are getting now, the
discount you want, or what other bidders are offering. If you
tell him anything about price expectations, you will never
discover what your true market cost is. Lastly, do not barter
back & forth between vendors, as word of that act will get
around, eroding your future negotiating efforts. Beware of choosing perception over performance. Do not let
polished sales talk or slick brochures turn your eyes from the
actual value the carrier will give you. Stick with the results
of this analysis, as it is reasonably unbiased, and allows you
to segregate most freight variables and assign a factor to
each of the five sections. While some managers see only the
price factor, this analysis considers (i) the financial
strength of the shipper (as you do not wish to have your
freight become the property of a creditor), (ii) carrier
responsiveness (service after the contract), (iii) resolution
of claims for loss, damage or overcharges, (iv) speed and
completeness of service, and (v) price. Price is not only what you pay, but what you recover on past
overcharges and what you avoid paying in the future. The
recent rash of bankruptcies have resulted in claims to
shippers from either trustees or creditors of bankrupt, motor
freight (truck) carriers. Your failure to file your earned
discount with the Interstate Commerce Commission (I.C.C.)
could result in your firm being sued, to recover that
discount.
The trustee for bankrupt Overland Express sent a bill to
General Mills in the mid-1990s for over $450,000, claiming the
required Customer Pricing Notification Tariff paperwork for
the I.C.C. was not filed by either Overland Express or General
Mills. This issue is not defendable when there is no proof of
I.C.C. filing, as the United States Supreme Court has found
back-billing to be permissible. Back-billing is defined as the
process of invoicing the difference between the amount
previously invoiced and paid, and the undiscounted amount.
While this act of back-billing appears to be a disavowal of a
contract, the International Brotherhood of Teamsters supports
this process as a means to recover under-funded pensions,
health claims and wages, to former employees. You may all be
shocked and surprised (NOT!) to learn that some unethical
persons are believed to be actually altering the filed tariff
documents.
Therefore, whatever the discount, be certain after you or your
carrier files it with the I.C.C., that you have a copy of this
filing in a safe, next to a certificate of insurance from the
carrier's insurance company. Be certain to stipulate to your
carrier that you will not commence services without a copy of
the filing in your hands.
5. Service = .20 points
(Give a maximum of .10 points, based upon the carrier's
service statistics of their on-time service, .05 points for a
guarantee of on-time pick up or delivery with a performance
penalty clause, and .05 points for both our warehouse
manager's and the carrier's references remarks, regarding the
carrier's ability to (a) handle expedited shipments, (b)
ability to trace shipments, (c) reliability of pickup, (c)
communications with warehouse manager, (d) willingness to help
with problems and, (e) cleanliness of equipment.) As a result of my evaluation of twelve, motor freight
carriers, I found:
a. Discounts from my freight class range from 36% to 55%.
b. Service varied by almost 100% ( L.A. to Oregon and
Washington with one carrier was four days, while most were two
days).
c. Some Electronic Data Interchange resources for shippers
were not user-friendly.
e. Claims resolution ranged from 70% to 95%, within thirty
days.
For my firm, it was important to consolidate vendors to one or
two, obtain vendor supplied information as to freight in
transit to us or to our customer, and to reduce costs while
generating revenue.
RESULT OF MY EVALUATION: Consolidated Freightways earned the
highest points earner overall, while Willig scored highest in
price, claims resolution and service within California.
For small shipments, United Parcel Service has an interesting
program known as HUNDREDWEIGHT SERVICE. Most of you are aware
that UPS will send seventy pounds in a box for as little as
$6.96. With motor freight carriers charging anywhere from $35
to $64 for a 100-pound shipment, thank goodness for UPS.
Keeping that $35 minimum freight cost in mind, go a bit
further into UPS by evaluating their Hundredweight program.
With that service, you can ship 200 pounds or more, for as
little as $8.60 per hundred pounds, or $17.60 for that
200-pound order. Your final step in setting a freight policy is to compare the
program of your carrier of choice to that of UPS. Find the
equilibrium point from which it would not matter, from a
dollar and cents perspective, which vendor was chosen. With the big issues out of the way, let's look at a little
one, namely the small shipments you are sending via UPS. As I
discussed earlier, UPS is the businessperson's favorite, small
parcel carrier. They love those seventy pounds or less
packages. As Operations Manager for a firm who distributed
health and beauty supplies, I devised a method of reducing
damaged goods and freight costs. Historically, to minimize
crushed or broken items, it was more economical, from a
freight claims perspective, to limit the packaging to 14 x 12
x 12-inch boxes. A review of the UPS freight bills indicated
that these boxes were consistently 20-pound boxes which cost a
minimum of $3.68 to ship. To reduce freight costs, I had an overpack box made, a box
that would hold three of my 20-pound boxes. This overpack box
cost me 80 cents. However, the UPS minimum rate for 60 pounds
(20 x 3) is $6.73. Anyone could see that $3.68 x 3 = $11.04,
while my total cost of the 60-pound alternative was $6.73 +
.80 = $7.53. By constructing the overpack and changing
shipping policy, I saved over 31%. Of course, for shipments
with only two 20-pound boxes, I merely taped them together,
reducing a ($3.68 x 2) $7.36 cost, to $5.64, for a 23%
savings. Speaking of boxes, it is important to go to the source,
bypassing distributors, brokers and sheet plants. You will
reduce your box cost by as much as 40% when you purchase from
a box corrugator.
Let's not stop now, for I have the key to unlock cash from
your paid invoices. Yes, I'm talking about freight
overcharges. Many managers don't know that the I.C.C. will
allow a shipper to recover overcharges made by the carrier
during the previous thirty-six months. I heartily recommend
that you contact Associated Traffic Services at 858 Oak Park
Road, Suite 103, Covina, California 91724, phone (818)
967-0677, and have them audit your freight bills. They work on
a percentage of found money. If they find an overcharge, they
will make a claim for you; you will receive a check from the
carrier and pay Associated half of that sum upon receipt. It
costs you nothing for the audit, it's found money! Some people will cringe at the idea of giving half of the
money to an auditing firm. My reply is that half of nothing is
still nothing. If you do not send it to them, you will have
nothing. I am not one to plug a firm as I did this one.
However, it is difficult to discover where these audit firms
are and freight companies are not interested in finding a
source from which to reduce their income. This may be a perfect opportunity to clear up the misuse of an
often used term known as "f.o.b.", "free on board." This
phrase originated over a century ago, and meant that you, the
shipper, would be responsible for your cargo until it was
actually loaded upon a ship. It has NOTHING to do with the
cost of freight. It has EVERYTHING to do with legal title. If
you ask for "f.o.b. destination," you are stating, as the
consignee, that the supplier is responsible for insurance,
etc. until the goods are delivered to your receiving facility.
Any claim resulting from theft or damage must be made by the
shipper, who is responsible for the value of the goods. If you ask for "f.o.b. point of origin," you are assuming
legal title of the goods, at the shipper's loading dock, and
are responsible for the value, at the moment the goods are
loaded upon a truck or other conveyance. The purpose of assigning the correct f.o.b. term is to take
control or, inversely, state that the other party has
responsibility for the value of the goods in question. The
responsible party has the right to designate how the goods are
to be delivered. To obtain the maximum value of your inbound
freight, and to consolidate carriers to facilitate an E.D.I.
arrangement, it is in your best interest to ask for F.O.B.
POINT OF ORIGIN, and FREIGHT COLLECT, two separate terms. When
you specify Freight Collect terms, you are stating that you,
the consignee, will be responsible for the actual expense, not
the shipper (supplier). Be certain your allowances from the designated carrier exceed,
or at least meet the allowances earned from the supplier. On
some occasions, the supplier may have a better discount than
you do. In that case, it may cost you more than you earn,
which may be a big negative. A carrier is a vendor who provides the service of carrying
your goods from a point of origin to a specific destination. A
shipper is one who possesses and/or sells goods to another. In instances where you wish to have no liability, merely ask
for F.O.B. DESTINATION. The issues of "freight pre-paid" or
"freight collect" can be discussed, but the party with the
liability has the final say in the matter.
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