Controlling Inbound Transportation: Unlocking Savings

Many companies have continued to stretch, mold and modify their supply chains in an effort to save money. Most have focused their efforts on Outbound Transportation by squeezing rates and pushing the carriers for more and more efficiencies that can translate into savings. But for many, the largest savings opportunity is still overlooked - Inbound Transportation - an opportunity that can produce savings equal to one percent (1%) of the total purchased price of goods.

This article discusses the following topics to consider when Controlling Inbound Transportation:

1. What is Meant by Controlling Inbound Transportation?
2. Why Do This?
3. Why Isn't This Done More Often?
4. How Do You Do This?
5. Can a TMS or 3PL Help?
6. Are You Ready

What Is Meant By Controlling Inbound Transportation?

The focus of transportation operations within most organizations is to provide for the efficient delivery of goods at, or near, the lowest cost to the organization. This is done by focusing on shipments destined to the clients. Purchasing, as we all know, buys the goods and materials that are used to make your specific product. When Purchasing enters into these agreements, they are essentially making decisions about transportation that are approximately equal to the total outbound transportation budget annually. Some estimates say that at least 40% of your total transportation expense is determined by Purchasing.

The concept of controlling inbound transportation is not new, but has only recently started to gain significant attention. By controlling this freight, you are placing the freight expense, carrier selection, routing, optimization, execution and payment under control of your Transportation function, and not allowing your vendors to make these critical - and potentially costly - decisions. Also, prior to taking control of the freight activity from the vendor, negotiations with the suppliers have unbundled invoice costs and identified what the suppliers are "charging" for freight. What has been found is that since Purchasing has focused on per item costs of goods, the vendors have buried additional margin in freight and other areas of the invoice. These costs, once identified, negotiated, and controlled flow directly to the bottom line.

Why Do This?

For many companies, the freight allocation that vendors apply to the purchased goods is approximately 4-7% of the invoice value. The savings that can be negotiated from the vendor when assuming control of inbound transportation is expected to range from 15 - 25% of this amount. That translates to one percent (1%) of the total purchased price of goods. In addition, there are a number of other areas that provide additional benefit to the organization, including:

Benefits of Controlling Inbound Transportation -

High Level Benefits	Tactical Benefits
Compressed Cycle Times Decreased Inventory Levels Improved Supplier and Logistics Performance Improved Visibility Reduced Logistics Costs	Better Inventory Control Better Scheduling Reliability Fewer Expedited Needs Greater Shipment Consolidations Greater Understanding and Performance Metrics Improved On-time Delivery Improved Labor Allocations Increased Contract Compliance	Increased Core Carrier Compliance Larger Shipment Size (weight, cube) LTL -> FTL mode shifts Opportunities for Continuous Moves, Backhauls Reduced Damage Volume Aggregation for Greater Sourcing Savings

Why Isn't This Done More Often?

There are several reasons why more companies haven't taken control of their inbound freight. These include:

1. Lack of Awareness - Most procurement professionals don't have a deep understanding of transportation operations and how their purchasing decisions could affect (positive or negative) their logistics network. They are pushing to lower costs, while ensuring sufficient inventory to satisfy their needs. As discounts, trade offsets, etc. get more complicated, many typically look for all-inclusive costing from their suppliers as this is easier. However, at a minimum, it is desired to get component pricing with transportation allowances broken out. (eg: Prepaid and Add)
2. Outbound Transportation Inefficiencies - Many companies still have work to do to optimize their outbound transportation operations and don't focus on inbound while there is still opportunity in traditional transportation management.
3. Political Boundaries - In many companies, Purchasing and Transportation exist within separate leadership structures - only the more agile, aggressive company has aligned these two organizations under a single reporting structure. With Purchasing and Transportation having separate reporting structures, their goals may compromise each others respective mandates for lowered overall costs and increased efficiencies.
4. Lack of Technology - Until recently, inbound transportation has been handled as a separate "activity" for Transportation Management System ("TMS") providers and was a separate module that companies needed to purchase. This has changed and TMS providers are now bundling this
5. Zero-sum Game - One company's inbound transportation is outbound transportation for their suppliers. Not everyone can control all transportation activities of an organization as this is just not feasible.

How Do You Do This?

As always, there is never a single model to follow to achieve your end goals of Controlled Inbound Transportation, but there are a number of common actions and principles that have emerged. These include:

• Establish a common vision and expectations - Do this early, and keep the vision throughout the process, which may be longer than anticipated.
• Set realistic goals - Controlling 100% of your inbound is not realistic, nor does it provide optimal cost benefits. Set a goal that optimizes your procurement and transportation activities.
• Create a well structured analytical model with a mutually acceptable cost allocation method - This needs to be accomplished early in the process and refined as your progress in your objectives. Ideally, this works when drafted by transportation/logistics experts within the company and then refined by other groups.
• Develop a comprehensive communications plan - Create cross functional understanding of your corporate vision and expectations for this activity.
• Create a negotiations training plan - Include specific negotiation training and tools that help purchasing identify, overcome and react to suppliers that may object to the process. Many have deep relations with their supplier partners, and this will challenge these relations.
• Complete an initial pilot program - Compile a short list of select suppliers to get "low hanging fruit", quick wins, and help define process steps and integration points.
• Integrate (and update as needed) your TMS - Analyze the new optimized transportation structure for your newly controlled inbound and outbound network. This may also help to determine which vendors should be used for a pilot program.
• Engage your carrier network - Early in the process, compile lane cost data for high volume, targeted inbound vendors. Use only select, core carriers, who will provide the data without allowing your activities to leak information to your suppliers. As you move forward in negotiations, the carriers contracts require updating, with volume commitments and lane configurations included.
• Establish Review Periods - Vendors networks, as well as your own, will continue to change over time and therefore have variable benefits of controlling the freight. There will be times that vendors change origin points or lanes which will make them less desirable in the network. When this occurs, there should be a process to change back to vendor controlled freight.

Can a TMS or 3PL Help?

Yes - and some will argue that a TMS is required. The efficiency savings that have been discussed (e.g.: continuous moves, load building, etc.) will be optimized through the use of a TMS system. This is not to say that it cannot be done by hand, in fact your early pilots may be routed via a manual basis, but to achieve ongoing savings in a time efficient manner, a TMS is almost mandatory. 3PL's will also assist - and should be working with you on a continuing basis to complete this activity. Especially when you have overseas suppliers, the 3PL's network of foreign affiliates (company owned or agents) will allow you to control foreign inland freight through to delivery at your facilities. This may also include Customs Brokerage activities.

Are you ready?

We have developed a "Stages of Excellence"" summary that we use with clients to assess their readiness to control their inbound network. For Stage 1 and Stage 2 clients, there are likely other transportation activities that will be easier to complete and provide an equivalent amount of benefit. Stage 3 clients are primed to undertake these activities, and Stage 4 clients have been doing this for some time. Assess your organization honestly, to determine your stage.

Freight Payment Stages of Excellence - What Stage is Your Company?

Stage 1 -	Stage 2 -	Stage 3 -	Stage 4 -
0% Inbound Freight Collect 0% Purchased goods invoiced as Prepaid and Add No visibility of inbound freight - shipments "arrive" at destination Transportation and Purchasing not aligned	10% - 15% Inbound Freight Collect Less than 25% Purchased goods invoiced as Prepaid and Add Limited supplier collaboration for inbound shipments (some emails, not integrated into other systems) Transportation group provides data analysis to Purchasing as needed	20% - 35% Inbound Freight Collect 25% - 40% Purchased goods invoiced as Prepaid and Add Has initiated freight conversion activities for select vendors Identified product categories to determine freight costs based on weight, CGS, etc. Transportation aligned with Purchasing	40% (+) Inbound Freight Collect All non Purchased goods invoiced as Prepaid and Add Assigns freight costs based on SKU level data, weight, or CGS Limited supplier collaboration for inbound shipments (some emails, not integrated into other systems) Transportation is vital part of Supply Chain and purchased/total cost methodology

***  CornerStone Select, Inc. specializes in helping clients control costs and optimize their overall transportation and supply chain operations. Our services have helped small, medium and large companies gain a strategic advantage through effective transportation management, reduced transportation procurement costs, outsourcing select operations and applying leading technologies on a regional or global basis.