Freight costs can be as much as 3 to 5 percent or more of gross revenues in many companies. This can represent tens or hundreds of millions of dollars in expenses on an annual basis. During the recession, the Transportation Directors in many firms were tasked with some new realities. Customers cut back on order sizes. Inventory reduction became a top priority. Staff cuts were demanded. The challenge faced by many shippers was how to reign in freight costs and maintain customer service with fewer employees while shrinking inventories. Some companies learned a number of important lessons during the recession.

Bring Freight Spend Under Management

You can only manage what you measure. To effectively control freight costs, it is essential to gain visibility into the key cost elements of freight. This includes being able to capture data on line haul costs, fuel costs and accessorial charges. It encompasses data on shipment sizes, modes, carriers, by day, by postal code/zip code. A recent Aberdeen Group study reported that every dollar brought under management results in a 5 to 25 percent savings. Visibility is a key to cost savings.

Focus on those KPI’s that mean the Most to Your Organization

In a recent Hackett Group study it was reported that of all the jobs lost during the recession, less than half will be replaced. This suggests that there will be fewer people available to monitor and act on a company’s freight spend data for an extended period of time. This requires companies to focus on those key KPI’s that mean the most to the organization. While many transportation organizations monitor the same data elements (e.g. on-time service, OS and D’s), there are often some specific variables that are most relevant to that specific industry or company. This may be a cost per ton, freight costs as a percent of revenue, freight spend by mode or inventory turns. With fewer resources, it is critical to focus on the key transportation related cost drivers that have the most impact on profits and service.

Revisit Current Benchmarks

Order fulfillment levels and transit times evolve over time. These need to be constantly re-evaluated and re-assessed. Cost savings can be derived from shipment consolidations and/or from modal shifts. With good quality data, shippers can revisit established benchmarks in consultation with customers to see if ordering patterns and/or shipping processes or modal changes can drive freight spend savings.

Don’t Forget About Inbound Freight

Inbound freight to some companies is viewed as an indirect or landed cost. It is managed in the Purchasing silo and sometimes does not command the same scrutiny as do outbound freight costs. However inbound freight costs can represent a large component of a company’s total freight costs. These expenditures have the same cost elements as outbound freight and can represent an important opportunity for synergy (e.g. creation of round trip or continuous moves) and leverage (e.g. integrate and strategically source at same time as outbound freight services are sourced).

Expand Carrier Base

As highlighted in last week’s blog, many shippers limit their opportunities for freight cost saving by approaching too small a base of carriers. Certainly in this day of staff cuts, it is challenging to find the time to perform one’s basic job functions while having the time to research the market. The fact is that this can be a very fruitful path to securing cost savings.

Upgrade Freight Procurement Management Tools

Since many transportation departments now have fewer resources, this makes it necessary to make the procurement and management of freight services less labour intensive. This means less dependence on manually created documents and spreadsheets while increasing the use of both freight procurement and freight spend management tools. While it may be difficult to justify the cost of purchasing a spend management tool specifically for freight, it may be much easier to justify piggybacking on a corporate spend management tool and applying it in the company’s transportation. In fact, the additional savings gleaned from more effective management of freight costs may be a key element in selling management on the value of this investment.

Identify and Collaborate with Key Transportation Vendors

The cutbacks in truck capacity make it that much more important to align your company with its key transportation suppliers. These companies can often identify wasteful transportation expenditures and provide insight and wisdom as to how to remove unnecessary costs from a company’s transportation expenditures.

Final Thoughts

In 2010, the message is do more with less. This applies to the freight transportation side of the business. Shippers that do not aggressively attack freight spend management may find themselves at a competitive disadvantage. Following these basic principles can help shippers deal more effectively with the realities of the slowly recovering economy.