Reduce Total Purchased Cost by 5% Through Inbound Freight Management
Dr. M. Theodore Farris II
Dr. M. Theodore Farris II, Professor, University of North Texas, Denton, TX 76205, (940) 565-3120, firstname.lastname@example.org ; www.unt.edu/logistics.
83rd Annual International Conference Proceedings - 1998
Abstract: This paper discusses the strategies and opportunities of reducing total purchase cost by 5% or more through managing inbound freight. A strategic overview of transportation management is used to identify how and why the concept is beneficial to the strategic purchasing activities of the firm. The paper is geared toward understanding key concepts and pinpointing specific opportunities to effectively procure inbound transportation services. Identifies informational needs and potential pitfalls to avoid when you determine if managing inbound freight is right for you.
Regulatory reform brought opportunities for inbound freight savings, but an integrated effort between the purchasing and transportation functions is essential to exploit the full benefits of a new transportation environment.(1) Using a simulation model analyzing inbound freight, Bagchi and Davis(2) argue that direct shipments from vendors are almost always more expensive and result in longer delivery times.
Key Transportation Concepts: Procuring transportation services follow many of the key principles found in procurement practices of production and service items.
- Weight Makes for a Better Rate. As a general rule, the greater the volume purchased, the lower the cost per unit. The same holds true in the purchase of transportation services. The practice of seeking higher volume is fundamental to receiving a better rate and can be enhanced by bridging together your inbound traffic volumes with your outbound traffic volumes. It is likely the carrier you select will already be handling much of your outbound freight.
- Consolidate Providers. When they review their purchase of transportation services, many companies discover an unusual number of carriers providing services for the firm. Consolidation of the number of carriers into a smaller number typically results in lower rates coupled with better service for both inbound and outbound service. Sun Chemical has reduced its list of preferred carriers by 39%...and the management of inbound freight has cut over 10% off of its annual freight costs.(3) Note: many shippers are sensitive to over-consolidation and tend to avoid single sourcing traffic services (many shippers solely using United Parcel Service discovered the down side this summer).
- Increased Information = Reduced Cost. More information often translates into a better working relationship with carriers and the ability to identify opportunities which are beneficial to both parties.
Appropriate Business Environments: There are very few situations in which the management of inbound freight is not beneficial. Success stories abound from government and industry settings. Transportation represents from 40% to 60% of a shipper's distribution costs. "Too many people focus on the outbound side because they know how much they spend on it. People don't realize how much cost is buried into the inbound side at the supplier.(4)" A KPMG Peat Marwick study(5) determined retailers could save up to 2% of the cost of goods sold (COGS) per supplier per year by altering their inbound transportation agreements to handle shipping expenses themselves. Merisel Inc, seller of computer hardware, software, and networking products expects to reduce its inbound costs by 20%.(6) Readers Digest is utilizing a third party provider, Menlo Logistics, to handle their inbound freight. Menlo has achieved its commitment of 5% to 10% net savings above its management fee.(7) Walter, Allen, and Rouviere completed a study of the State of Kansas where the state reduced total purchase cost by 5%.(8)
Benefits and Disadvantages: The buyer enjoys a major advantage to buying goods FOB Origin in order to determine which carriers haul the goods as well as when the carrier will make the pick-up and delivery.(9) In addition, the buyer can have greater responsibility to properly classify the freight. Louis Buratti states "Mis-classified freight is the cause of more than 50% of all claims filed by freight bill auditing companies, and the majority of those mistakes are on inbound freight."(10) Key advantages of inbound freight management include:
- Ability to schedule inbound shipments through a single (or few) LTL carriers
- Reduces inbound congestion at the docks
- Lower receiving costs through the use of fewer carriers
- Better ability to monitor inbound freight costs and classifications
- Lower transportation costs through consolidation of shipments
- Increased attention by carriers to you as a larger customer in terms of handling problems and maintaining data records
The disadvantages of managing inbound freight tend to be more operational and short term problems which can be fixed as the inbound freight management program matures:
- Suppliers utilizing wrong carriers
- Shipping from a location different than the one found on the freight bill
- Supplier ships collect but bills the customer for freight
When NOT To Manage Inbound Freight: Many of the situations when inbound freight management is not actively pursued is a result of organization structure or corporate culture.(11) Strategically, when faced with a situation where you as the customer are smaller than your supplier, it makes more sense to allow the supplier to manage his outbound. Issues arise when supplier and customer both compete for traffic volumes. Remember, your inbound freight is your supplier's outbound freight.
Conclusion: With the support of both the purchasing and transportation functions, transportation purchases can result in significant savings. The purchasing function can help by:
- Reviewing the existing situation
- Making an evaluation of the scope of cost impact
- Listing the methods available to minimize freight
- Evaluating repetitive deliveries for potential savings, and
- Reviewing the total handling of significant commodities to explore possible packaging modifications or additions.(12)
- Gentry, Julie J. and Farris, Martin T., "The increasing Importance of Purchasing in Transportation Decision making." Transportation Journal, Fall 1992, 61-71.
- Bagchi, Prabir K, and Davis, Frank W. Jr. "Some Insights into Inbound Freight Consolidation." International Journal of Physical Distribution & Materials Management. 18(6) 1988, 27-33.
- "Small Departments Big Results." Distribution, September 1992, 40-45.
- Andel, Tom, "Carrier Selection Tools: Open a Window to Service." Transportation & Distribution, July 1996, 27-32.
- Ross, Julie Ritzer, "Transportation Model finds savings from shift to retailer-paid shipping." Stores, June 1997, 72-73.
- Bowman, Robert J., "Family Values." Distribution, February 1997, 54-56.
- "Gainsharing--right from the start." Transportation & Distribution (Supply Chain Services Directory Supplement) January 1997, 4.
- Walter, Clyde Kenneth, Allen, Benjamin J. and Al Rouviere. "Inbound Freight Transportation Management by State Governments: Extent and Experience." Journal of Business Logistics, Volume 12, Number 2, 1991. 95-113.
- Cooke, James Aaron, "Should you control your inbound?" Traffic Management, February 1996, 30-33.
- Buratti, Louis G. Jr. "Beware of the silent culprit." Distribution, January 1995, 64.
- Gordon, Jay. "Inbound Buying Habits Die Hard." Distribution, March 1991, 38-42. This article also cites a study conducted by the Center for Advanced Purchasing Studies in 1991 involving inbound freight management.
- Todd, Arthur W. "Buying Inbound Transportation: Part I" Purchasing World, September 1986, 54-58. See also "Buying Inbound Transportation: Part II." Purchasing World, October 1986, 60-64.