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You need to manage your transportation spend to move your company towards greater profitability but what is really involved?
Understanding that Transportation Spend Management involves managing the shipment lifecycle from contract negotiation, to shipping execution, to payment and settlement is a good start. So why has your company always looked at contract management, shipment management and payment management as different functional owners? One common reason is that you have been making your decisions with islands of information, without considering the natural lifecycle of the entire process.
It helps to think of the shipment lifecycle as having three phases: Upstream of the shipment going out you have things like contract management and carrier selection. At the midpoint, you have the execution of the shipment itself. Finally, you have the downstream activities like auditing the freight bill and allocating the costs to the proper chargeable activity.
Managing your carrier contracts is a critical part of reducing transportation spend. Understanding fully those terms and conditions which can create additional charges is key. Carriers are now shifting a larger portion of the cost of shipping to other types of charges besides the negotiated line-haul rates, making it even more difficult to get an accurate view of enterprise transportation costs. These additional expenses are known as accessorial charges, a term that most people find hard to pronounce, and very few know how to manage.
If you go to the dictionary, you find the following definitions:
a. A subordinate or supplementary item; an adjunct.
b. Something nonessential but desirable that contributes to an effect or result
Definition a is true enough: an accessorial charge is definitely supplementary to the charge you agreed on to make the shipment. The problem comes with definition b: it may contribute to the result, but is it desirable? The answer lies in whether you are the one doing the accessing or the one being accessed. Accessorial charges now make up over 11% of the charges made for commercial freight.
Going to a carriers website, the following are a few examples of what is typical:
Detention: $75 per day for a trailer, $90 per hour if it is refrigerated
Loading/unloading: $55 per hour, with a two hour minimum
Sunday pickup/delivery: $100 per hour with a five-hour minimum
Fuel Surcharge: 5% - 16% over base rate
It does not take long for charges of these magnitudes to have a real impact on the amount of money you spend on transportation.
The reason for the increased use of accessorial charges is simple: the concept of line haul rates is easy to understand and you can readily determine what it will cost to use one carrier over another. But, when the carrier can come back to you multiple times for the same shipment with the kinds of charges outlined above, how can you determine who will provide you with the actual lower cost?
More often that not, the decision you make to select one carrier over another will revolve around the transportation or freight aspects of their services and not on the additional charges that are not ordered in the execution phase. If not negotiated in the contract, your carriers will assess these charges at list price. A critical aspect of the successful negotiation of rates and key service level agreements is being knowledgeable about your business and having up to date information about your shipping. If you know that your business model requires pick ups and deliveries on Sunday, build that into the contract, dont let it become the subject of an accessorial charge.
So your contracts are negotiated and finalized. It is important, however, to influence the shipment execution phase of the lifecycle to ensure downstream problems that lead to additional charges are avoided. Remember, we are only talking about those shipments within your control managing the inbound shipping volume is more difficult and will involve both pro-active and re-active controls to ensure enterprise compliance. Best practice in managing shipment execution is to enforce business rules using workflow-based software at the point of execution. Business rules ensure proper documentation is generated, addresses have been verified as valid, appropriate charges are applied for services and service options, approvals have been met, and carrier/service selection are optimized.
Another aspect of managing your carrier partners to reduce assessed charges is through the use of supply chain event management.
When your shipping patterns are complex as in multi-modal or international type shipments, visibility of each event in the process becomes paramount. These types of shipments are especially vulnerable to delays and more often than not visibility is not available from an entire shipment perspective. Viewing the entire lifecycle to fully assess whether shipments are on time and if not who is accountable for the delay is required to determine root cause of issues such as additional charges for containers not fully utilized and drayage carriers waiting for loads. Determining the source of the problem allows you to either address the issue with the carrier or change carriers completely. Usually, bringing these issues to the carriers attention and providing evidence to support your case will result in improved performance. Without adequate information, you will pay the price unless something is done to remedy the situation.
Keeping your contracts in order and building business rules that control shipment execution allows you to be pro-active and follow a best practice approach to transportation spend management. That said you cant control those things that are outside of your sphere of influence namely inbound shipments where you are financially accountable and carrier billing where carriers add additional charges that were not part of the initial order. Downstream payment management captures all aspects of carrier billing, validates the billing against the original contract, allocates the costs to the appropriate GL entry, and completes the exchange of money between customer and carrier.