Freight costs are the single largest logistics cost component in a supply chain, and controlling them should be a strategic priority for every company involved in a dynamic transportation network.
Transportation conditions, especially in the U.S. ground transportation segment, are expected to become increasingly more challenging over the next decade. As an aging driver workforce nears retirement and millennials find themselves drawn to more glamorous professions driver shortages will worsen, fuel costs will swing with unpredictability, analytics and technology will change the way we manage our day-to-day, and an uncertain domestic and world economic landscape will influence our strategic decision making process. Not to mention the political ramifications of more stringent government regulation. And these are just a few of the issues facing our industry. A September 2015 report on the Shippers Condition Index (SCI) from freight transportation forecasters FTR noted:
Other research shows that demand for transportation is outpacing available capacity. And, forecasts indicate that the imbalance will only increase as the driver shortage worsens. Logistics Management magazine reported that the findings of its 24th Annual Study of Logistics and Transportation Trends indicate:
In January 2015, the major parcel carriers implemented dimensional (DIM) weight pricing on ground packages smaller than three cubic feet. The greater of the package’s actual weight or dimensional weight is used as the billable weight. Previously, the rate for ground parcels under three cubic feet was based on actual weight, while those over three cubic feet were subject to DIM weight. This change significantly affected shipping costs in 2015 and beyond, since it is estimated that up to 75 percent of the most widely used box sizes are less than three cubic feet.
As packaging designs improve and density increases, design can be used to avoid the additional cost associated with DIM pricing. The increased shipment density may create further savings on LTL shipments, if the product qualifies for a lower freight classification. Also, properly engineered packaging designs will help reduce cargo damage claims.
Packaging design and size should be reviewed on a regular basis, especially when there are changes in product types and profiles. Packaging should be engineered to properly fit the contents and eliminate wasted space. It must also minimize the amount of materials required; yet still provide adequate protection to the contents.
Good packaging should be as simple as possible, and support the desired product protection as inexpensively as possible.
The material closest to the product should have the most protective ply, and the thinnest material possible should be used for each ply. Find the lightest weight material to do the job.
Incoming packaging materials and the outgoing finished package should be standardized when possible. This becomes even more crucial when multiple shipping locations are involved. If an exemption from the standards is needed, it should be authorized by a central manager who has an eye on all packaging operations.
Swapping out cheap materials that weaken the packaging protection are not saving you money, if you have to turn around and make good on products damaged during shipment. Be sure to think about how the package will perform from fulfillment to delivery, and then on to reuse/recycle/refill.
With research and planning, you can both shrink the cubic volume of shipments and also support sustainability efforts by reducing the amount of packaging materials and choosing the right type of material.
Truckload and container load shipments generally have a fixed linehaul rate based upon full utilization of the piece of equipment going from Point A to Point B. Shippers should take full advantage of this by maximizing either the volume of product fit onto the trailer/container, or maximizing the allowable weight of product loaded onto the trailer/container. Even when building multi-stop truckloads, shippers should always strive to fill the cubic capacity or weight capacity of the equipment.
The LTL sector’s standard freight classification system is under scrutiny, as carriers evaluate shipment density and the impact to their cost structure and yield. Some LTL carriers have invested in “dimensioner” technology that allows them to quickly and accurately measure a shipment’s cubic volume and weight. As carriers work to develop better pricing models that are more reflective of costs, the density or the pounds per cubic foot that a shipment occupies on a trailer will be the key component in determining the cost of a shipment.
You can take advantage of the economies of LTL by adopting an optimization approach which considers such things as consolidation / deconsolidation, zone skipping, mode shifting, lane shifting as well as other programs that will focus your volume shipments in the most cost-effective mode. Zone skipping is one such practice where you bypass the parcel carrier’s traditional “zones.” This is accomplished by utilizing LTL and TL carriers to transport parcels to the parcel carrier’s hub in that destination state or region which significantly reduces the overall cost associated with parcel zone rating. The parcel carrier then unpacks the load and delivers the individual parcels to their final destination.
Companies can more effectively gain control, visibility, and leverage of a transportation network and spend by centralizing transportation procurement functions. While decentralized and fragmented procurement teams typically deliver positive results at the site, region, or business unit level, their effectiveness is limited when it comes to an enterprise-wide approach to the network and overall cost.
To effectively optimize a network requires the necessary personnel, technology and expertise to access appropriate shipment data to analyze the overall transportation network. The centralized procurement team should evaluate, qualify, and select service providers that deliver the best overall value in terms of business requirements, service and price. A centralized procurement team is more likely to build, maintain, and manage their carrier relationships at a more senior level. Through these relationships, collaboration is fostered resulting in mutually beneficial business opportunities, continuous improvement, and cost savings initiatives.
More often than you would think, companies overlook inbound freight costs. These costs may be either bundled into the unit price or simply listed as a separate charge in the purchase. By unbundling the unit price to determine how much was allocated to freight, you can also validate whether the amount allocated for freight is competitive and reflective of the market.
While the ultimate goal is to unbundle actual inbound freight costs and take control and ownership of the process, this can present multiple challenges. Taking control of inbound freight, is in essence, taking away another’s control of outbound freight and requires working closely and managing change across various departments of both shipper and consignee.
Depending upon the lane, lead times, and the flexibility of your supply chain, mode shifting can be a very effective cost-reduction or cost-avoidance strategy.
The Intermodal Association of North American (IANA) reports approximately 16 million intermodal loadings in 2014, with a steady rate of growth over the past six years. Despite lower fuel costs, shippers continue to receive benefits from intermodal, which can provide much-needed capacity.
Many shippers have reduced cost with intermodal—and added capacity to offset the driver shortage situation. Be aware there could be lead time and cargo damage considerations when shipping by rail.
Cost avoidance can often be accomplished when the urgency of the situation requires some form of expediting. An example would be shipping only the specific product or amount critically needed via air—or other form of expedited transportation—and then completing the remainder of the move by standard over-the-road or ocean service. As an alternative to their standard service, many carriers offer a cost-effective expedited and/or guaranteed service at an upcharge that is still much cheaper than air.
Although technically not mode shifting, some shippers can realize a financial benefit while locking in truck capacity by moving volumes from one-way for-hire services to a dedicated fleet.
If your freight spend is approaching $500,000 per year and you are not using a Transportation Management System (TMS), you may very well be leaving money on the table.
- Turney Thompson, Vice President, Kenco Transportation Management
Reducing freight costs is often the primary objective in transitioning to a TMS, but there are other benefits; such as replacing manual and inefficient processes.
At Kenco, we use the automation of TMS to: accept customer orders; consolidate orders into an optimum shipping plan; check safety and insurance status for each motor carrier; match loads to available carriers; issue invoices; reconcile discrepancies; and provide shipment reports to our customers.
If you’re unsure about implementing a TMS at your company, begin by considering the importance of freight visibility and the current and estimated future scale of business. If volume has grown so much that spreadsheets are no longer a sufficient management tool, it may be time to think about how a TMS can reduce freight costs, increase service levels, and improve overall supply chain positions.
The 24th Annual Study of Logistics and Transportation Trends reports that demand for transportation has exceeded the available capacity in several surface transportation modes.
Given the current driver shortage situation and the projection that it will worsen for the foreseeable future, competition between shippers for a limited pool of drivers will increase. Becoming a shipper of choice can raise your profile with carriers, increase access to available truck capacity, and also have a positive impact on controlling freight costs.
Shippers have traditionally given carriers scorecards, but it has become more common to find carriers now giving shippers scorecards in their efforts to maximize driving time and minimize dock time. Earning the designation as a shipper of choice is becoming a necessity and shippers must change to make themselves as attractive to carriers as possible.
In today’s market, carriers are more closely evaluating whom they choose to do business with, how much capacity to commit and at what price.
Shippers have traditionally given carriers scorecards, but it has become more common to find carriers now giving shippers scorecards in their efforts to maximize driving time and minimize dock time. Earning the designation as a shipper of choice is becoming a necessity and shippers must change to make themselves as attractive to carriers as possible.
The outsourcing of logistics functions to 3PLs—started initially by large multi-national corporations—has gained popularity with small and mid-size companies as value creation is demonstrated. According to Armstrong & Associates, in 2014 the global 3PL market expanded to $750.7 billion, and the U.S. 3PL market grew 7.4 percent to $157.2 billion.
Companies can benefit by using 3PLs in a number of ways. Working with a partner who has deep logistics expertise allows the business to focus on its core competency whether it is manufacturing, retailing, or some other field. Part of the deep expertise that a 3PL offers is a team made up of industry experts that utilize their tools, processes, and intellectual capital to make the client more competitive. To provide the best rates possible, 3PLs leverage their scale and buying power across their entire customer base.
Companies can immediately enjoy the benefits of leading technology solutions from a 3PL without the upfront and on-going costs associated with implementing, maintaining, and updating in-house systems. When common goals are shared and cultures are aligned, it creates an environment where collaboration can flourish, companies become more successful, and savings are delivered.
While the preceding is far from a comprehensive list of solutions that can be implemented to control and reduce freight costs, it does shed light on some key areas that companies should take into consideration.
So ask yourself this question:
This guide includes a checklist for evaluating your potential partners, a KPI scorecard, and contract FAQs
