Why Low Freight Rates Don’t Necessarily Lead To Lower Freight Spend

April 25, 2016 Steve Carr

So you’ve just spent months gathering freight data, building an air-tight RFQ, capturing and evaluating bids, and (finally) awarding business to your top carriers. Based on this hard work, you’ve managed to reduce your transportation rates with a mix of carriers that you believe will maintain (or perhaps even improve) the service levels that your facilities and customers depend on. This is all great news, and in due time, these new rates will work their way into the next fiscal year’s projections, showing senior management that your per-mile transportation spend will – ever so slightly – be decreasing rather than increasing.  And while you might not expect a ticker-tape parade, you do justifiably feel that you’ve earned your salary as the primary freight czar of your organization.

However – and this is important – what you have just accomplished is the lowering of freight rates – not actual transportation spend.  And that’s the rub, as they say. And even you would acknowledge that a lowered rate does not beget fewer dollars spent (although it certainly should!).

So…what’s next? How do you ensure that the work put into negotiating great freight rates translates into what senior management interprets that to really mean, i.e. a downward sloping trajectory of total freight spend in the coming year.

The good news is that there are some key steps you can begin immediately to ensure that your newly locked-in rates don’t evaporate, and all of these suggestions center around two key concepts:  measuring and tracking.  And while this isn’t an exhaustive list of suggested steps, these suggestions will go a long way towards keeping you and your organization on track:

Step #1:  Measure internal compliance.  Here, we’re asking a simple question:  do your shipping employees abide by the recommendations provided to them by your TMS system, which is typically going be your lowest-cost (or near lowest-cost) carrier for any given lane?  Or, if you don’t have a TMS system, have they been provided a routing guide for contracted carriers…and are they using those carriers?  Ideally, your transportation department or Freight Pay and Audit provider can track and measure this information, and determine when a sub-optimal carrier was used.

All things considered, however, it is difficult to achieve 100% compliance with your contracted rates.  In some cases, your preferred carrier may not have the capacity for a particular trip, so you would naturally opt for the next best option (typically the 2nd lowest-cost carrier as recommend by your TMS system or your routing guide).   Or perhaps you need to expedite your goods on a one-time basis for a particular customer, and your preferred carrier’s lead time is insufficient, leading you to choose an overnight delivery option.  Regardless of the circumstance, having a set of trackable reason codes and/or comment boxes to rationalize why a 2nd or 3rd-choice carrier was chosen for a particular route is very important, as it will help make a distinction between the best decision made among several sub-optimal options versus a truly non-compliant, undisciplined choice.

Step #2: Measure external compliance. This step is quite similar to Step #1, except that it involves your external trading partners, such as the suppliers that ship freight inbound into your facilities.  Ideally, you have provided these partners with a routing guide that leaves nothing to interpretation.  Thus, for a specific lane, they have guidance as to which carrier to use.   To the degree that they are not abiding by this guidance, and perhaps using their own choice of carrier, this could be quite costly…especially if your company is the one paying the freight.  While this information is harder to track since it is happening external to your company, you should still endeavor to track and measure all of this activity and determine where gaps exist.

Step #3: Keep an eye on your invoices. This step involves minding the smallest details with your freight bills and ensuring that your actual freight invoices reflect the rates that you locked down with your carriers.  And yes, this includes assessorials and fuel surcharges.  

Here, we are talking about having a dedicated organization – whether internal or external to your company – that pays your freight bills and keeps track of all of the minutia that makes up your total freight spend.    Internally, this could be your accounts payable department dedicated to transportation, whereas externally you might refer to this group as your Freight Pay and Audit provider.  Regardless of the structure, this very important group keeps tabs on what you thoughtyou’d be paying versus what you were actually billed.  And to the degree that there are discrepancies, particularly on a consistent basis, you need to act on it.   Thus, setting up regular reports to spot exceptions – say, plus or minus 5% of the contracted rate – might be a helpful and efficient way to know that you are getting the full benefit out of your contracted rates.  

Step #3a: Use your invoices to audit your day-to-day business practices. Another very important use of your internal or external freight payment and audit group is to perform root-cause analysis on the shipping discrepancies or outliers that you find.  It could be that these outliers are in fact legitimate charges due to how you presently conduct business.   For example, if you routinely ship relatively small LTL shipments, your carrier might be invoicing you for the “minimum” charge per pallet as opposed to the charge that you think you should be paying based on weight, freight class, miles traveled, etc. This finding might be a reason to analyze your LTL shipping practices, and ship pallets that don’t fall under the minimum weight threshold.    

Another example can be found with small parcel shipments and dimensional weight fees.  Specifically, parcels that have relatively low density relative to their cubic volume are far more likely to have dimensional weight fees charged, due to the fact that you are using up more space in the delivery truck than you are paying for (see below for more on dimensional weight).  To remedy this, you might want to take a hard look at how much “air” you are shipping in your small parcels, because your small parcel contract very likely charges you additional fees when you ship boxes with lower than normal density.

Another assessorial example would be the frequency of trailer detention fees, which your carrier would charge you when you keep the carrier’s truck longer than the contracted amount of time (i.e. beyond the two hours that would typically be allotted to load or unload the truck).  If you see consistent fees for excessive detention, it could be a sign that your facility is having trouble keeping to its committed appointment times, or possibly that it takes longer to load or unload a truck than previously thought.

Step #4: Use optimization to achieve your lowest-cost scenarios. In this step, we’re talking about using math to achieve the optimal performance for a given service level. Here are a few examples:

Optimized inventory levels and replenishment logic: tailoring your inventory management system to hold enough inventory to maintain a 95% in stock level at all of your distribution centers, and setting up replenishment triggers that are synced with your suppliers’ lead times.  
Optimized supply chain network and flow of goods:  this is perhaps the toughest challenge in the supply chain world, and that is to choose not only the precise physical location of your facilities, but also the flow of goods into and out of those facilities.   Optimizing these choices will ensure that you maintain service levels to all of your customers while simultaneously minimizing your total supply chain costs (including your total freight spend).  What makes this challenge even tougher is the realization that all of the inputs necessary to make these changes will likely change on a regular basis (e.g. seasonal sales level, freight costs, labor costs, fuel costs, the cost of materials, interest rates, etc.).
Optimized mode selection from supplier to plant to DC to customer – this step involves the choice of mode that your goods are delivered by.  For example, many items routinely ship on pallets via an LTL carrier from one location to another, and therefore you pay LTL rates.   But in the event that your total shipment weight exceeds 20,000 pounds (made up of many pallets all going to the same place), it might make sense to ship via full truckload even if part of the truck is empty. Why? Simply put, full truckload rates become cheaper than very large LTL loads at some threshold (typically around 15,000 – 20,000 pounds, all else being equal). The same can be said for relatively heavy small parcel shipments which, at a given threshold (typically over 100 lbs.) start to look more attractive via LTL delivery. This is due to the fact that excessive parcel rates start to kick in very quickly when you exceed 70 lbs., or have boxes whose longest dimension exceeds 60 inches. 
Optimized packaging – this steps involves the density of a package, which is a measurement of a package’s cubic volume (length X width X height in inches) divided by its weight. Since January 2015, density has become an important factor when shipping boxes via the main small parcel vendors, and it is now becoming more prevalent in pricing LTL loads as well.  With respect to shipping small parcels, you want to pack your boxes with density in mind, which means that (in most cases) you don’t want a lot of excess space and/or dunnage surrounding your merchandise.  This is due to the fact that the small parcel shippers charge a penalty for packages that take up a lot of space relative to their weight (this is known as a dimensional weight, or “dim weight”, fee).   This makes sense considering that parcel delivery trucks have a finite space that fills up quickly. The same phenomenon is finding its way into LTL pricing as well.

Step #5: Strive for continuous improvement, and ask for feedback. Considering all of the information above, it makes sense to track and measure just about everything you do and use this information for both internal and external continuous improvement.  Even if you are starting from scratch, the first year that you invest in a measurement system will begin to pay handsome benefits during your second year (and every year thereafter). Therefore, a benchmarking exercise – although painful – will be invaluable in making future improvements. Additionally, once armed with operational and cost data – also known as key performance indicators, or KPI’s - you will be well-positioned to hold frequent discussions with your carriers.  In these discussions, you should not only ask your carriers for feedback as to how you might improve (and bring your costs down), but you can also give them feedback as to how they are performing, and how you might mutually work towards lowering costs and improving service levels together.  The beauty of this is obvious: you can turn a once adversarial discussion into a win-win where both sides benefit.

The above steps, taken as a whole, are clearly a lot to manage. They involve a great deal of discipline and consistency, and even potentially investments in technology and specialized skills among your employees.  But for all of the effort you put towards your freight sourcing events, you can ensure that you get the most bang for your buck with your newly-earned freight rates if you pay just as much attention to your operational practices and the measuring and tracking of all of the moving parts that result from moving that freight.

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