Inbound vendor compliance � and the related savings on shipping � has become a hot cost-saving opportunity. If your company receives and pays for products from outside vendors, you can�t afford to overlook this area.
Two to three years ago, companies had little opportunity to control their inbound vendor freight costs. However, with all the changes that have recently occurred in transportation, decision makers need to rethink policies regarding inbound vendor freight. Cost savings have caused many purchasing departments to switch from �FOB Origin, freight prepaid� and �FOB Destination, freight collect� to �FOB, third party.�
Smart companies realize that most small parcel carriers have made huge technological changes to their shipping systems. The advances in the carriers� Web sites along with the development of Internet-driven supply chain portals provide better controls and procedures that now allow your same outbound discounts to be driven into your vendor inbound programs.
To this day, vendors commonly charge customers not only for products they purchased, but also for shipping and handling. While not all vendors have carrier discounts, many do. And they often bill the freight charges at full carrier rate or, at best, rates that reflect only a portion of the real discounts. This creates a significant profit center for the vendor, and in some cases, these profits can be considerably more than product profits.
Complicating the situation, a few years back, UPS, FedEx, RPS and Airborne Express offered millions of computerized shipping systems � Maxiship, Powership, Multiship and Libra, respectively � that were designed for outbound shipments only. When you requested that your product or shipments be sent to you and billed to your account number, the options were limited. Carriers did not encourage third-party shipments. Instead, they offered some cumbersome choices. UPS, for instance, offered a �consignee billing� program that had certain volume requirements and was difficult to mandate and implement nationwide and was a pain for the shipper. RPS offered a similar small package ground program that was a little easier to use, but still required vendors to use preprinted labels like the UPS consignee program. For air shipments, FedEx and Airborne Express needed a hardcopy airway bill, which required you to input account information. Most of these alternatives made managing your inbound small parcel freight charges difficult.
Things have changed. Recent system innovations by all carriers have made old inbound policies obsolete. An easy-to-use third-party billing option is now offered by all major carriers and you should update your policies to take advantage of the new, carrier-provided systems.
So, what do you need to do in order to take back control of your inbound freight costs? Institute an inbound freight program� in your company. The following information should help you understand what the small parcel carriers have done with recent technology and what steps you can take to finally allow better control of your inbound freight.
Inbound Freight Program Process
1. Negotiate a contract with your carrier that allows third-party inbound freight shipping discounts. This is especially important with contracts that include UPS or FedEx Ground services. When in negotiation, make sure your contract revenue tiers or bands are given volume credit for your third-party shipments (inbound and otherwise). By doing this, you will assure better discounts on all shipments, regardless of direction or billing method.
2. Develop an employee memo that will describe the process, reasons and benefits of a successful inbound vendor program. Send this memo from a person with clout to make such a policy stick.
3. Obtain a vendor list from your A/P department. Make sure it�s valid and up to date. Cull out duplicates and vendors who would not be shipping product to you (i.e., service providers).
4. Design and publish a Vendor Routing. Guide and compliance letter to inform vendors of how you wish your goods to be shipped and billed. These need to be service specific and, if necessary, distance and weight specific as well. This is the way you tell vendors how you want purchases sent to you. If freight is charged, you should get the benefit of your negotiated rates, not the vendor. (See Figure 1). In addition to the routing instructions, this guide should also outline the markings and order information (if any) you want included on the shipping labels and in the reference fields given to the carriers. Getting the proper information into the right fields will make bill payment and assigning of costs easier.
5. Send out the letter and routing guide to all appropriate vendors and key employees. Make sure purchasing personnel at your company understand the policies and what you are trying to accomplish. Give them the facts to make this policy stick with their suppliers.
6. Follow up with key vendors. Use the 80/20 rule to make sure that most of your shipments are sent correctly by calling and verifying the routing instructions with the vendors that make up most of your volumes.
7. Monitor for compliance. Have the purchasing department (or traffic) monitor for compliance.
8. Give a warning by phone on the first incorrectly routed piece. Send instructions and a letter of warning as well. Then we suggest billing back freight costs on additional mistakes. It may seem harsh, but it is a very effective way to get compliance quickly. Usually just one chargeback corrects the problem.
9. Keep records on compliance. Show weekly, then monthly graphs on percentage and average freight costs. These will be handy measures to show the corporation the value of the program and why it was worth the effort.
The process is not easy, but it is worth it. Company after company has used it to get the most elusive costs � inbound transportation � under control. In doing so, the savings go directly to the bottom line and increases the profits and health of your company.
Michael Erickson is president/CEO of Air Freight Management Services, Inc (AFMS). He founded AFMS, Inc. in 1991 after spending many years with Airborne Express as a district managers. For more information, please visit www.afms.com.
