By Harold B. Friedman
No matter what industry you’re in, you know that cost pressures are never far behind. Your customers demand faster deliveries at lower prices, carriers raise their rates every year and the price of oil remains volatile.
Indeed, shippers from around the world report total logistics expenditures as a percentage of sales revenues have increased to 11 percent in 2017, up from 10 percent the previous year. And this trend looks set to continue in 2018 and beyond.
If you’re to prevent further impact on your profitability, then you’ll need to act now.
Notably, leading shippers are already looking beyond freight audit and payment (FA&P) for opportunities. They’re digging deep into their data warehouses, applying state-of-the-art analytical tactics and tapping freight shipping experts to unearth valuable business insights.
Here’s how:
Use advanced dashboards. Having critical data at your fingertips can let you spot opportunities and problems early. For example, if you’ve just negotiated a new contract with lower rates but see that your costs are going up, you could drill down and uncover the cause. A dashboard could also help track usage trends to ensure carrier compliance and keep spending and accessorial costs in check.
Apply advanced analytics. Using an analytics tool or a professional analytics provider can help uncover opportunities to reduce costs and improve efficiency from your freight payment data. These include optimizing modes and services, answering “what if” questions, enforcing carrier compliance, and identifying consolidation opportunities.
Run market assessments. Market assessments let you benchmark your carrier contract rates and accessorial rates against the industry standard and your competitors. For example, you might find that general rate increases are eating your margins and that short payment terms are hurting your cash flow. This would then guide you towards your next step, whether it’s a carrier renegotiation or a request for proposal (RFP).
Establish RFP management. An RFP can be a highly time-consuming and complex process with significant consequences. For example, too many organizations run a single-round RFP, selecting the lowest bid with acceptable service levels. But this often results in a lot of money left on the table and unfavorable contract terms. This is why we use a rigorous, six-step RFP process that covers everything from impact modeling to carrier nomination to contract development.
By applying those four tactics to boost visibility, assess operations and create better contracts, you too can realize significant savings and benefits beyond what’s possible with FA&P.
Are you leaving money on the table?
Best-in-class shippers have the right systems and processes to monitor and optimize their logistics operations. Try the following questions to see how you measure up:
1. Do you have easy access to your payment and shipping data? It’s more than just about paying your carrier on time. The more data you have, the easier it will be to spot trends, stem waste and negotiate lower rates.
2. Do you have a process for negotiating with carriers? Simply picking the lowest bid after the first round of responses won’t save you much. Also, without a contract, you can’t count on the low rates you were promised.
3. Have you or a third party ever performed a benchmark analysis? Not securing a cap on a general rate in increase and more favorable payment terms (e.g., 90 days vs. 15 days) could hurt you — a lot. That’s on top of paying an above-market rate for transport.
4. Do you perform regular analyses to determine if optimal modes, carriers and service levels are used? Even the best rates won’t matter much if you’re not measuring compliance and making sure you’re not wasting money shipping by air when an LTL carrier would do.
5. Do you analyze your freight payment data to look for potential consolidation opportunities? If you’re not on the lookout for opportunities to improve utilization, you can bet your competitors are.
If you answered “no” to any of the above questions, you might be leaving money on the table.
Case Study No. 1: Financial services provider saves 33 percent with smart RFP management.
The client ended up saving $2 million annually while a good business relationship remained intact.
An RFP can be an intimidating step to take for clients who have a long-standing partnership with their incumbent carrier. However, it can also be an illuminating one. Bringing other carriers into a bidding war can expose competitive freight rates you didn’t even know were possible.
A client had been dealing with their incumbent parcel carrier for years, but their requirements were changing. They were producing a much lower freight volume than they did when they first signed with the carrier, and their contract was due to expire. They were afraid of losing the good rates and the partnership they’d enjoyed with the carrier for so long.
After a market assessment, it became clear that the client would benefit from bringing another carrier in by conducting an RFP. Out of courtesy, they brought their incumbent in for a meeting to alert them of this decision. As expected, the carrier insisted that they wouldn’t get better rates anywhere on the market and that they were risking their relationship with an RFP. Though shaken by the incumbent’s reaction, the company decided to proceed with the RFP anyway.
During the first round of bidding, the incumbent held fast to its existing rates while the competitor severely underbid. However, the incumbent didn’t just have to contend with one competitor. The client had offices in Texas and California, so it also had to vie with regional carriers from those states. As negotiations proceeded to the third round, the incumbent was ready to do anything to retain its client. The client ended up saving 33 percent ($2 million annually) while a good business relationship remained intact.
Case Study No. 2: Avanced analytics saves manufacturer 63 percent annually.
It’s a clear demonstration that collecting sophisticated shipping intel will achieve nothing if businesses don’t know what to do with it.
It’s not enough to have access to all data. Not performing regular analytics on your data could result in significant, unneeded strain on your budget. It’s crucial to continuously examine your shipment-level data (modes, carriers, service levels) to fine-tune cost optimization.
Management was placing pressure on a global manufacturing firm to identify saving opportunities. They sought outside assistance for advanced analytics and discovered that they were spending vastly more than they needed to on the wrong transportation mode. For deliveries made for less than 600 miles, they were using air freight, a costly mode of transport. They could have shipped with LTL, which would have gotten their shipment there on the same day for 63 percent less — nearly $1 million annually.
This outcome was made possible by the client’s investment in a full-time resource to identify savings opportunities. Once a month, this analyst receives freight payment data from the client to analyze. He then uses his findings to advise the client weekly on opportunities to optimize transportation cost.
Case Study No. 3: Market assessment spotlights overspending, saves electronics retailer $8 million.
While the RFP was what won them a better contract, it was the market assessment that alerted the client that they were paying far above their means.
A market assessment is the first integral step in an RFP process. It’s a look at carrier freight and accessorial rates to compare how they match up to those of companies with like volumes.
In this case, the client’s volume had gone up. Due to these changes in volume, they wanted to determine if they could get their incumbent carrier to lower market rates. After an assessment, they found that they were spending well above their means and above market rate. However, the incumbent proved to be extremely uncooperative about renegotiating the contract. So, it soon became apparent that an RFP was in order.
During the RFP, the incumbent lowered their rates but it was not as competitive as the other large national parcel carrier. After three rounds of negotiation, the client ended up switching to another carrier and saving 10 percent ($8 million) annually.
While the RFP was what won them a better contract, it was the market assessment that alerted the client that they were paying far above their means.
Summary
In today’s fast-changing, competitive business landscape, you need to continuously fine-tune your expenses or lose the competitive advantage you worked so hard to build. The good news is that there are now tactics at your disposal to arrest rising costs.
FA&P can only do so much to reduce costs. To achieve higher savings, improve efficiency and increase profitability, you must do more than just FA&P to mitigate rising expenses and falling revenues.
Harold B. Friedman is senior vice president for global corporate development at Data2Logistics, a global authority on supply chain logistics, cost management and shipping bill process and payment.