You know that you need to manage your transportation spend to move your company towards greater profitability, but what is really involved?
Understanding that the transportation spend management process involves managing the shipment life cycle 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 life cycle of the entire process.
It helps to think of the shipment life cycle as having three phases: upstream, midpoint and downstream.
Upstream: Contract Management
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 zone-based 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 for accessorial charges:
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 originally. The problem comes with definition b: it may contribute to a result, but is it desirable? The answer lies in whether you are the one doing the assessing or the one being assessed. What is desirable for the carrier is probably not so for you.
Accessorial charges now make up over 11% of the charges assessed by carriers. Going to a carrier's Web site, the following are a few examples of what typical charges consist of:
Address correction: $10
Oversize charge: $10
Residential delivery $1.50
Saturday pickup/delivery: $15
It does not take long for charges of these magnitudes to have a real impact on the amount of money you spend on transportation.
Accessorial charges mean that shippers are experiencing a significant variance between the estimated cost and what they are actually spending.
The reason for the increased use of accessorial charges is simple: the concept of zone-based 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?
Don't worry there are ways to manage your transportation spend and get your arms around the entire shipment life cycle, and technology has made it easier to get the information to those who need it most.
More often that not, the decision you make to select one carrier over another will revolve around the transportation aspect of their services and not on the additional charges that are tacked on after the execution phase. If not negotiated in your contract, the 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 pickups and deliveries on Saturday, build that into the contract; don't let it become the subject of an accessorial charge.
Midpoint: Shipment Execution
So, your contracts are negotiated and finalized. It is important, however, to continue to influence the shipment execution phase of the life cycle to ensure downstream problems that lead to additional charges are avoided. This will involve both proactive and reactive controls to ensure enterprise compliance. The 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 and service selections 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 of the entire life cycle to fully assess whether shipments are on time, and if not, who is accountable for the delay, is required to determine root causes of issues, such as additional charges for the business being closed or finding the address to be incomplete. 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 carrier's 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.
Downstream: Payment and Information Management
Keeping your contracts in order and building business rules that control shipment execution allow you to be proactive and follow a best-practice approach to transportation spend management. That said, you can't control those things that are outside of your sphere of influence primarily, inbound shipments where you are financially accountable and carrier billing where carriers add charges that were not part of the initial order. Downstream payment management captures all aspects of carrier billing, validates the invoice as compared to the original contract, allocates the costs to the appropriate general ledger (GL) entry and completes the exchange of money between customer and carrier.
As one can see, accessorial charges mean that shippers are experiencing a significant variance between the estimated cost at the point of shipment execution and what they actually end up spending. Appropriate accruals of this overall transportation spend must consider all aspects of the shipment, including those charges assessed by the carrier. To further complicate the matter, carriers often settle shipment charges over more than one invoice cycle sometimes over as many as three billing cycles. To handle this situation, managers must look across multiple cycles to ensure the overall costs are in agreement with the carrier contract, billing is not duplicated and all costs are allocated appropriately across the entire payment process. Electronic billing and automation of the above processes are required to manage such a daunting task and reduce your expenses.
Your transportation spend cuts across many departments. Collecting all of this activity in an enterprise data warehouse and providing the necessary tools to procurement, transportation, accounting or even C-level executives is a very effective way of bringing collaborative solutions to your organization. Having access to the information to better manage all aspects of the shipment life cycle, better understanding of your carrier performance, effective routing guides and adherence to contracts can be summarized in a robust data warehouse.
However, as with all things in life, nothing is perfect. It is important to remember that this data is coming from a number of different sources and is generally disparate in nature. What one carrier may decide is an extended area charge another may decide is beyond freight charge. It is critical that these codes be normalized into one set of definitions so that like expenses can be matched. Without this, an accurate view of transportation spend at the enterprise level is simply not possible. However, even though there is not a standard set of codes and terms, you can still reduce your transportation spend through careful observation.
When periodic analysis of this data becomes part of a formal business review process, your organization will be well on its way to controlling your transportation expenses. You will be meeting defined objectives and reviewing performance with your carrier partners in real terms. Reducing your transportation spend while meeting performance objectives is possible!
Bill Petersen of Precision Software can be contacted at
361-779-7195 or e-mailed at bill.petersen@precisionsoftware.com. Steven C. Beda of Accuship can be contacted at 901-271-1956 or sbeda@accuship.com.
Sidebar:
Accessorial charges can be reduced in a number of areas:
Upstream: Contract Management
Better contract language and negotiation
Central repository and inventory
Change control
Periodic review
Midpoint: Shipment Execution
Routing guides
Import and export documentation
Address verification and denied parties verification
Production and non-production activity
Multi-modal event consolidation
Performance metrics and alerts
Proactive intervention when possible
Downstream: Payment and Information Management
Contract compliance
Cost allocation
Financial settlement
Shipment vs. invoice variance
Appropriate accruals
Normalized view across all carriers
Performance analysis
