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Hidden savings OEMs can add to their cost savings through a better understanding of the logistics business</b>
Supply chain and logistics executives are under intense pressure to keep domestic transportation costs down in the face of rate increases and fuel surcharges, while keeping customer service levels up in the face of capacity constraints. Proactive transportation leaders are looking for ways to minimize their costs and resources while maximizing the efficiency of inbound freight. Taking control of inbound transportation can positively affect the bottom line, provide critical visibility into inventory and reduce lead times while ultimately affecting customer service. Digging for hidden savings within inbound shipments can reveal some undiscovered treasures. It can be easy to overlook the rising cost of inbound shipments, since units other than transportation management--primarily the procurement group and vendors--often affect or even make those decisions. As a result, unnecessary hidden costs can creep into inbound shipments. For example: • 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. Within these situations lie opportunities for uncovering hidden savings. Revealing the opportunities may take time, but it can yield substantial financial savings and lead to shorter delivery times. Electronics manufacturers are gaining more-efficient logistics options by working with their transportation providers and leveraging their full portfolio of services. Here are some important factors to consider when analyzing 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. Significant efficiencies can be achieved for any size of electronics manufacturer. A typical, primarily domestic company spends at least 3 percent to 4 percent of sales on transportation. For a global company, this percentage is generally much higher. A one-percentage-point decrease in transportation costs as a percentage of revenue can translate into savings of half a million dollars for a $500 mil- lion company. A second benefit is shortened lead times for the inbound components needed for production. By controlling the carrier and mode for inbound shipments, transit time can be reduced. For example, transit times for freight can vary as much as two or three days, depending on the carrier and its reliability. Most production plans don't allow for that kind of variability, however, even though building products to schedule is vital in meeting customer delivery demands. A high level of certainty with short transit of inbound shipments is critical to manufacturers that keep minimal inventories on hand or that provide build-to-order products. An extra day in transit can result in missing the outbound shipment of the order. Controlling inbound shipments supports the ability to quickly make received products into outbound orders. With inbound visibility of shipments, the dock can know when an inbound shipment tagged for an immediate outgoing order is scheduled to arrive and can bypass its delivery to the warehouse, relabeling it for a customer order and shipping it out again the same day. As market pressures escalate, driving companies to produce more with less, finding ways to optimize efficiency and cost is critical. Taking control of inbound transportation can optimize your overall transportation efficiency and spending. Leveraging the abilities of your transportation provider to benefit your business can streamline inbound shipments and add reliability into your supply chain and manufacturing operations. During the next discussion with your transportation provider, consider adding the topic of inbound freight to your agenda, and start exploring the opportunities for uncovering your treasure chest of hidden savings. Linda M. Taylor is with the industry marketing team at FedEx Services. She can be reached at linda.taylor2@fedex.com. Find more on FedEx services at www.electronics.fedex.com.
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