Managing Transportation Through Proper Purchasing Procedures
Norman J. Stringfield
Norman J. Stringfield, President, Jax Trans Services, Inc., Jacksonville, FL 32216, (904) 725-5600, JAXTRANS@AOL.COM
84th Annual International Conference Proceedings - 1999
Abstract. In every purchasing transaction, except for service contracts, there is always a second purchase of transportation. Often ignored in the past, transportation was merely an uncontrollable "cost of goods sold". Today, using sound business management techniques, effective transportation programs can be set up reducing your company's cost. This presentation will examine methods of establishing contracts, implementing transportation purchasing procedures and monitoring vendor compliance with your transportation solutions.
Why Contracts? Prior to the Surface Transportation Act, creating the Surface Transportation Board in 1995, all motor and rail carriers were required to file tariffs with the Interstate Commerce Commission. Changes could not be made without adequate notification to all parties involved. Most carriers belonged to the same rate bureaus and deviations in rates were small. Now, however, carriers "publish" their own rate programs, which vary widely, and can do so without regard to notification requirements. Furthermore, the carrier's only responsibility is to have a copy of the charges available at its offices, unless it has been specifically requested to forward copies of changes to your company. Even if the carrier fails to provide notification for any reason these charges will continue to have application.
Carriers are not currently increasing linehaul rates without some notification to its customers. However, the same cannot be said for increases in or additions to assessorial charges. Linehaul rates are those rates specifically for the movement of the freight from point A to point B only. It includes the pick up and delivery, with the shipper loading and the consignee unloading. Assessorial charges are those fees assessed for services other than linehaul movements. These may include but are not limited to: Inside Delivery; Single Shipment, Notification Prior to Delivery; and Redelivery and Storage.
The carriers are becoming quite creative in their assessment of new assessorial charges. New charges seen in the last few months include: Reweigh and Inspection Charge, applicable if a reweigh or inspection of your shipment results in an increase in weight or a commodity description change; Non Commercial Delivery Charges, applicable on any delivery to a facility without a standard dock; and Over Length Fees, applicable on any shipment that is greater than a certain length, currently 20 feet. Another charge we find especially creative is the Will Call Charge. This is a charge levied if you come to the carrier's dock and pick up your shipment rather than have it delivered to your facility!
In addition, many carriers are publishing provisions designed to limit their liability in case of lose or damage. For example, a carrier may state in its tariff that any shipment tendered to it will automatically have a released value of 25 cents per pound, unless the shipper specifically states otherwise. It may then also state its FAK (Freight All Kinds) ratings will only apply when the shipment is released to a specific value. All of these changes can be done without the shipping public's knowledge until invoices arrive or a loss or damage claim is filed.
A contract, if properly constructed, can eliminate hidden or volatile cost. Contracts can lock in pricing and services and create order and stability in an otherwise chaotic arena. We fail to understand a company that would not purchase paper clips without a contract giving millions of dollars to a freight company without that same protection.
Establishing Contract Parameters. In order to properly establish contracts several factors must be known. First and foremost is what do you hope to accomplish in establishing a contract. Obviously, we all want to move our freight at the lowest possible cost. Perhaps not so obvious is that cheapest price does not always equal lowest cost. It is important to clearly define the goals your company may have in developing contracts. These goals may include: Lower freight cost, Consistent pricing, and Specific levels of service.
Secondly, it is important to know your current cost and what steps you can take to lower this cost. To this end a benchmark must be established for your current circumstances. This bench marking should establish the following:
- Number of carriers used.
- What discounts and rate reductions are you now allowed? Does that vary by location?
- Number of shipments in each weight break category: How many shipments are between 1 and 499 pounds, between 500 and 999 pounds, etc.
- Traffic lane analysis: Where are the average shipments moving from and to? Are most of the shipments inbound, outbound or interbranch transfers?
- How much of your freight cost is linehaul based compared to assessorial related
Finally, with which carriers do you want to establish contracts and why? In some instances lowest price is the absolute defining factor. In others, price must be tempered with service. To assist you in determining your carrier base it helps to establish a survey of each carrier and how well it meets the criteria you may require. This criteria should include: Area of coverage, current rate/discount structure, adherence to service standards, problem resolution, claim experience, condition of equipment/overall financial stability, overall consistency and/or dependability. If you are shipping from or receiving at multiple locations it is always in your interest to include input from those in the field who are actually utilizing various carriers.
With these questions answered it is now time to implement proper contracts and other purchasing procedures.
Contract Negotiations. Once all of the provisions you want to include in the contracts are established the next step is to convince the carriers they will want to give you most of these provisions. To this end some of the information acquired through bench marking can be utilized. Carriers can make use of knowing the number of shipments in each weight category, the information acquired through the traffic lane analysis, and the breakdown of your revenue between linehaul and non-linehaul related charges. With this information, if the carrier elects to utilize it, they can determine just how valuable a customer you will be to them.
Along with this information you should forward copies of the contract you wish signed. Remember, the carrier will rarely offer you more than you had hoped to receive. Therefore it is in your best interest to ask for everything (within reason) you may possibly want from the carrier. You should control what rate tables will be used, what assessorial charges will be acceptable and what the credit terms will be, at a minimum. The Southern Motor Carrier's Rate Conference "CZAR Lite" rating system would be a good choice for establishing rates and rate levels for the following reasons.
- All carriers have access to this system.
- It is relatively easy to use.
- It provides Intrastate as well as Interstate rates (from 1996 on).
If you allow each carrier to use its own rates you cannot easily compare pricing. While arguments have been made that a carrier can publish lower rates on its best lanes and you could take advantage of those lower rates, we have never seen any variances in rate levels on specific lanes for any carrier
The contract should be so written so that it will always take priority over other provisions the carrier may have in effect at the time of the shipment. Remember, a Bill of Lading Contract is exactly that, a contract. Most carrier bills of lading state the shipment is being accepted under the rates and rules published in the carriers tariffs. It is absolutely necessary to include provisions in your contract to counter-act this wording. Outbound shipments can be easily handled by developing your own bills of lading. Inbound shipments are more problematic. Generally speaking, without these provisions, the carrier will not attempt to circumvent your contract, unless it goes bankrupt or you cease doing business with it. Then it can and often does file "balance due" bills to collect the differences in freight charges up to one year after the shipment was generated.
Your contract should list the rules you are willing to accept and the charges applying to those rules. If the carrier applies its rules tariff you have allowed the contract to be potentially changed at any time in the future with no notification to you required. For example, if you simply state "Rules and Regulations shall be those as found in XYZ Express, Inc. Rules Tariff 105 Series" any rule change the carrier places in its tariff becomes part of the contract. A simple method of insuring this does not happen is to provide the rules as effective on a specific date. For example you may state: "For applicable rules and regulations see XYZ Carrier Rules Tariff 105 as effective on July 1, 1998"
In order to be a binding contract each party must offer a benefit to the other. In the case of motor carrier contracts you, the shipper, must offer the carrier a specific amount of freight and penalties that may apply if the terms are not met. This need not be a large amount of freight, three shipments totaling 1000 pounds, for example, would meet the requirements.
Be prepared to have the carrier change your contract proposal. Some carriers will accept almost anything presented to it, others will engage in a total rewrite. Before you sign and accept the carriers version it is absolutely imperative that you compare, line by line, what you mailed the carrier and what you received back. Several carriers will change your contract but will not make notations as to what changes it has requested. The returned contract will look remarkably similar to yours, however sometimes major revisions have been made. Some companies have issued the contract proposal on colored paper. This will serve to make any changes very visible unless the carrier is deliberately attempting to deceive you. Once again, review each carrier's returned contract to insure you can live with the changes, if any.
Monitoring Vendor Compliance. A contract offering very attractive rates and services has no value if it is not used. Ensuring your "approved carrier list" is actually adhered to is important on two levels. First and foremost is the reduction in rates offered. Secondly, if a carrier is not receiving an adequate volume of your business it will not be disposed to renew the contract. You must show you can and will control the shipping of your products.
It is equally important to manage your inbound as well as your outbound freight shipments. The bottom line does not care which direction your freight is flowing. Dollars are dollars and the fewer of them spent the happier everyone in the company is. In order to properly manage your shipping it will be necessary for Purchasing to provide guidance to both your shipping personnel and your vendors in the form of routing guides or similar information. It is also very helpful to develop a reporting system to advise when "misroutes" occur. A misroute is defined as any shipment that did not move via a preferred carrier or did not move by the optimum preferred carrier. Some companies will accept any carrier as long as it is on the preferred carrier list. Others will only accept those at the top of the list for that particular shipment.
When you are the shipper, gaining full utilization of your contracts is relatively easy. Simply work with your shipping personnel to maximize loading only those chosen carriers. Since your company is dedicated to offering the best service at the lowest cost it is reasonable to expect full cooperation from all departments involved. To assist in gaining this cooperation a "misroute report" is a useful tool. This report should advise what shipment was misrouted, what the freight charges were, what the best carrier would have been for future shipments and what their charges would have been. This report need not be punitive, merely informative.
Gaining control of vendor routed freight is slightly more complicated. It takes some finesse to insure compliance without antagonizing anyone. In the final analysis however, it is your freight and you are paying the freight charges. The choice of carriers should be yours. Many companies will advise the vendor what carrier to use at the time of issuing the purchase order. Some companies allow only one choice, others give more latitude in this selection. If the vendor is being used on a continuing basis a general routing guide can be sent with instructions to use for all shipments with freight charges paid by your company, along with a reinforcement of the routing when specific purchase orders are issued.
Once again, when misroutes are noted the vendor should be notified. Some companies will merely forward a report requesting a different routing for future shipments. A more effective approach is to charge the vendor the difference in freight charges due to the misroute. Or, a step further, is to charge the vendor the difference plus a processing charge for identifying the misroute. This can be either a flat fee, say $50.00 per misroute, or a percentage of the freight charges. We believe this approach has more merit since the object of routing shipments is to put as much as possible on your contract carriers for future negotiations.
Conclusions. In today's shipping environment, not establishing contracts has gone the way of steam powered railroads and horse drawn freight wagons. It is not an easy task to negotiate and implement effective contracts. It will take constant vigilance and a good working knowledge of the strengths and weaknesses of your carrier vendors. However, this is nothing the professional purchasing manager can not and should not handle.