Best Freight, Logistics & Supply Chain Cost Savings Guide
April 29, 2019 •Rick LaGore
Everyone wants to save money and keep their job, so when unprecedented moves in freight pricing occur, CFO's all across the USA begin calling their freight, logistics and supply chain teams into their office telling (not asking) them freight costs cannot continue to be a negative to the P&L.
This can be a tall order when rates hit record highs and market conditions become at odds with pure negotiated rate savings. Add to it, negotiated rates are not the end-all answer because many do not realize that the savings from their freight RFP process were purely market conditions and not “true” savings.
Top 11 Strategies to Reduce Freight & Logistics Costs
- Modal Conversion
- Consolidation & Pooling
- Manage Inbound Freight
- Transportation Management Software Technology
- Utilize Best Freight Negotiation Practices
- Play to the Market Conditions
- Ease of Doing Business
- Freight Carrier Development
- Freight Audit & Pay
With the general outline in place on how to save freight and logistics costs, let’s add a little more content to each category.
Details on Strategies to Reduce Freight & Logistics Costs
Packaging is particularly important on parcel and LTL because their tariffs speak specifically to the concept of dimensional pricing characteristics.
For LTL shipments, the terms used that are associated with dimensional pricing are:
- Cubic Capacity: LTL carriers impose this rule to protect themselves for lightweight freight that occupies more than their fair share of space in a trailer.
- Linear Foot Rule: Industry standard is shipments occupying 10 linear feet or more of trailer space are charged for 1000 lbs per linear foot.
- Oversize: This applies to any shipment with a dimension over 12 feet.
For parcel shipments, the term used dimensional weight pricing. The parcel carriers, meaning FedEx, UPS and the USPS, multiply length, width and height, then divide by a factor to come up with the dimensional weight. If the dimensional weight is greater than the actual weight, then the dimensional weight is charge.
The point in all this is design packaging for product protection and marketing, but keep a very close look at the unit, master carton and standard pallet size. Back in the day, we were able to save a particular wireless handset company 8% on its carton shipments, by having them reduce the size of their retail packaging by less than a quarter of an inch in width. The additional quarter of an inch on the 6 retail boxes in the master carton had the carton cubing out at a higher weight than its actual weight.
Before closing out this section, it is important to mention the concept of weighing out before cubing out on a truckload or intermodal container. Here again, pay close attention to the packaging to ensure that your company can load the most amount of product to take advantage of the cube of the trailer. Under this same point, if you do have “heavy” freight loads, there may be a potential to take advantage of the intermodal re-po (repositioning) market where steamship 20’s, 40’s and 45’s are moved between markets, as they work to position their containers into markets that help them on their export business.
We hear the words location, location, location when we buy and sell our homes. The same can be said for business, although it is not about the school system and tax base, as we have with our homes.
The importance of the shipping location relates to:
- the proximity to customers
- the proximity to suppliers
- the proximity to economical freight lanes that are not capacity constrained and can support seasonal business needs economically.
Not all shippers can change locations, but for those that have multiple DC sites now is a great time to analyze and evaluate whether the network still matches current customer and supplier base. For those that do not operate multiple sites, now would be a good time to determine if this is an option to bring in regional third-party logistics companies to build a multi-site network to take advantage of freight savings, with improved transits.
The strategy of moving freight via the most economic mode is another opportunity to minimize freight costs. In most cases, modal conversion typically center around converting truckload to intermodal, but modal conversion is all about moving from more expensive to least expensive.
Listed below, from least expensive to most expensive, by cost per pound:
Any time a shipper can move from one mode listed above to one that is above it, they will drive savings to their bottom line.
Consolidation & Pooling
Pooling and consolidations are a way to play the location and modal conversion strategy.
Through pooling and consolidation, shippers combine LTL volume for modal conversion into a 53' truckload or intermodal container for freight shipping to similar destinations, then break the freight at that destination for the final mile LTL delivery.
The cost of the OTR/intermodal line haul, plus the final mile LTL delivery is far less than employing an LTL carrier from origin to destination, while it also eliminates/reduces the opportunity for damage in the standard LTL hub and spoke model.
This same pooling and consolidation strategy can be reversed and used on inbound where suppliers in close proximity can be pooled into a central DC location, then line hauled to the DC via a 53' option when enough freight is collected to fill the truck. By using intermodal on the line haul, greater savings are had through conversion up two levels on the chart given earlier in the blog.
Some shippers have enough volume to pool and consolidate off their own docks, while others need to work with a transportation-focused 3PL to gain the density needed to work this strategy.
Manage Inbound Freight
The vast majority of shippers do a great job in driving their outbound freight costs down, but the same cannot always be said for managing inbound freight costs.
The phrase “prepaid & add” means the shipper will be in an arrangement with its suppliers where the cost of freight is added to the cost of the product shipping cost to the quote or purchase order from the customer. While it simplifies the supplier's dock, the additional layer in the freight transaction, typically means there is another party trying to capture a profit that could otherwise be avoided by sourcing the freight direct.
Through the management of inbound freight, companies will not only save themselves a great deal of money, but be able to better manage their flow of product which brings significant enhancements to a shippers supply chain.
Transportation Management Software Technology
Supply chains drive a competitive advantage, which has played out in the retail market with Amazon becoming the 8,000-pound gorilla. This group has continued to push the envelope of driving value to its customers through various supply chain innovations.
One of the best places for shippers to begin their transformation on service and price is to bring in a top tier transportation management software (TMS).
A TMS brings efficiency, optimization, transparency, unified communication and a database of every transaction associated with a shipper’s supply chain.
The cost benefits a shipper can expect with a TMS are:
- Reduction in freight costs by utilizing the technology to find consolidation and modal conversion opportunities.
- The database of each and every transaction allows companies to cut and slice their data for the best possible analysis to improve costs, negotiate from a position of strength and drive the KPI’s to ensure the savings is obtained and not just an unrealized dream.
By utilizing the TMS for both inbound and outbound freight takes the supply chain up even another step.
Utilize Best Freight Negotiation Practices
This topic could have easily just been a bullet point under the TMS section, but it cannot be overstated how important a TMS is to placing a company it a position of strength for the freight rate negotiations.
We repeatedly see companies negotiate their rates through a spreadsheet using averages-of-averages and not pulling in market rates into their analysis, meaning they are only judging their improvement or decline on rates on what they had last year.
We like to call this practice as "negotiating with yourself".
A TMS allows a shipper to peel back the onion in their bids to find the sweet spot for each of their freight carrier partners.
The new freight rates can be plugged into actual volumes and forecasted volumes to measure true performance, along with carrying the data into the actual world for ease of variance analysis. All too often companies lose the results they had planned for and it is very difficult for them to analyze why and the TMS takes all the guesswork out of the equation.
For LTL shippers, a TMS is a must. Shippers lose big when working in an Excel spreadsheet because there is no way to figure rate discounts off base, czar or whatever tariff, along with understanding how the weight breaks and transits play into the overall equation.
Play to Market Conditions
Earlier in this article, we made a comment on freight is a supply and demand market and many shippers that thought they had amazing savings from one year to the next may have only been riding on the market curve downward versus actually negotiating best rates and service.
With that said, the way to save money on your freight is by comparing your actual rate performance in each lane shipped every month against every other shipper that moved freight in your same lanes.
This can be accomplished by partnering with a logistics service provider that taps into the vast market data or if the shipper has a top TMS that allows them to participate in the same freight consortiums. The point for shippers looking for savings is they do not have to align with the largest logistics providers to understand those rates; instead, they need to align with LSP’s that tap into the billions of dollars of freight spend.
Any way a shipper goes about it, there is tremendous transparency in freight today through consortiums that do allow shippers to easily benchmark their performance on a monthly basis to ensure they remain competitive against the best rates in the market.
Ease of Doing Business
Shippers often forget that their freight and logistics competitors are every shipper in the market moving freight in their same lanes, not just the companies they battle it out for consumer mind and shelf space.
With that said, by being a carrier-friendly shipper a company will be able to save money and gain the capacity required through their contractual commitments, which will keep them out of the freight spot market.
Carrier friendly involves everything from the initial point of contact when freight is tendered to behavior on the docks to consistency of the message to paying accurately and on-time. Missing any combination of these will put your company at the bottom of the list for capacity and competitive pricing.
Freight Carrier Development
Speaking of the freight spot market, this is the last place a shipper wants to be accessing its capacity. The reason is the freight spot market is the most expensive freight capacity because freight brokers know they have the shipper over a barrel.
The key to staying away from the spot market as much as possible is to build a carrier pool that meets a shipper’s requirements and is as much a partner to the companies it serves as the companies are to them.
Before leaving this topic, if a shipper does need to go out to the spot market, we highly recommend not throwing the bid out to several freight brokers. The reason is many operate within the same freight load boards and you end up bidding against yourself and pushing the rates higher. Pick one or two freight broker you trust and know do not play in the same sandbox and go with them.
Freight Audit & Pay
So, a company does an amazing job, but they lose it out the backdoor from a poor freight audit and process.
Know & Measure the Total Cost of Freight
To close out this article on how to save freight costs, measurement of cost is of utmost importance. When measuring the costs and understanding them to their fullest will allow shippers to get every dollar of value out of their freight spend.
With that said, measure your freight costs by breaking them down in the following categories:
The last two do not come through your freight invoices, so this detail will need to be pulled out of other systems, but the first three will be a part of a company’s TMS and freight audit and pay software.
It’s critical to measure the costs against contracts and market to stay in tune with ensuring your company has the best freight rates. One point to add here about breaking costs down and analyzing from there some freight providers pricing strategy is to bid low, then tack on accessorial quickly to meet the margins they wanted. This freight pricing strategy is not a win for the company and hurts the ethical freight and logistics companies in the market.
If you found this article useful and you want to take an even deeper dive into freight costing and pricing to put you in the buyers seat we recommend the comprehensive article entitled Freight Costs: An Insider’s Look on Freight Pricing Buyers Should Know.
Hopefully, you found this article useful, and if you find yourself looking for a logistics provider or supply consulting coach to help in market analysis, freight audit and pay or RFP assistance, we’d love to be a part of the conversation.