2. Overview
Has your business seen an increase in
transportation spending over the last
twelve months? While fuel is a factor, it
may not be the only reason for the jump
in costs.
The challenge for businesses is little time
and even fewer resources to properly
research and review transportation
procurement best practices, benchmarks
or key performance metrics.
This puts the business at a distinct
disadvantage against the freight providers.
With most shipping companies expecting
transportation spend to increase despite
the economic recovery,creating a process
to gain an advantage can be cumbersome
for even the large companies.
Freight indices such as Shippers Conditioning Index (SCI) and Market Demand Index (MDI) reveal that
many motor carriers have the advantage when it comes to negotiating with the shippers on transportation
procurement best practices. This is definitely good news for reliable and safe carriers who are in a
better position to utilize favorable market situations. For the shippers, the prevailing market price is not
favorable and can lead to increased expenses and unforeseen issues.
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3. The changes experienced in the transportation market, coupled with the recession, are making it
necessary for transportation professionals to look for the solutions both externally and internally.
Airfreight,ocean and motor carriers continue to be affected by overcapacity issues and therefore look
to offset profit losses in certain segments with price increases as evidenced by survey respondents
by the shipper community (Figure 1).
Figure 1: Contract Freight Rates
The organization’s ability to identify the most reliable transportation procurement best practice
is therefore very important. Having the willingness to move beyond the tried and true will greatly
determine the company’s success now and in the long run. The process to research and award bids
involves numerous steps with many variables. While most bids are awarded based on price, service
and risk, each of those factors contain specific requirements that are unique for the company and
can create confusion when making decisions.
Figure 2: Most Important Measure of a Carrier’s Bid
The transportation procurement bid process for most businesses averages around two to three
months, and could take longer without the proper steps and processes in place. With the volatility
that the transportation rate market has seen since 2008,the importance of a thorough transportation
procurement exercise has become even more complicated,while businesses have less staff to actually
execute a proper bid process.
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Transportation
ManagementGroup
4. Steps in the Right Direction for Bottom Line Improvement
The following steps are essential if the manufacturer, retailer or wholesaler wishes to adopt transportation procurement best practice
to improve its performance.
Step I:Transportation Cost
It advisable for a company to take a pensive look at its shipping cost practices. For instance, in order for a company to reduce its
truckload cost, the company should start by looking at six to twelve months of freight history with the aim of maximizing every load.
Combining several LTL shipments into one multi-stop trailer load often results in a noticeable savings and can significantly reduce
uncertainties of consignment damage.This approach demands some extra coordination from the customers, but it is a transportation
procurement best practice that will yield a reduction in overall transportation spend. Also consider whether your business makes
transportation decisions in a centralized or decentralized environment (Figure 3). Some operations leave their freight negotiations up
to the individual warehouses or shipping locations. By centralizing your transportation procurement decisions, you can better leverage
your buying power, optimize resources and minimize rate increases as well as price volatility.
Figure 3: Centralized vs. Decentralized Freight Process
Step II: Knowledge of Procurement Strategy
Understanding the procurement strategy is the second step in achieving transportation procurement best practice.This is basically
done by studying and synthesizing a projected output both in the short and in the long run. Forecast sales, contracted or expanded
plans, and projected financial plans should be understood sufficiently by the freight managers so they are aligned with the corporate
objectives.Also the competitor’s plans should be thoroughly studied and analyzed to give room for better competitive schemes in the
shipper community. Purchase strategies on the other hand should be cost effective and should be managed with a group of suppliers
who are punctual on deliveries and deliver quality goods on mutual agreements to achieve transportation procurement best practice.
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5. Pg4 W H I T E P A P ER : 7 Steps to Bottom Line Results
Step III: Identification of Best Freight Providers
Efficient transportation practices could be achieved by developing a list of transportation providers
in the freight industry. By doing this, the company would be able to partner with those transport
providers that are relatively cheaper in providing their services both in the short run and in the long
run while keeping high quality and favorable terms.This will reduce the involvement with expensive
players in the industry which can burden the company.
The transportation manager can develop list of freight providers to also evaluate competition
strategies and adopting transportation best procurement practice.The company should try to identify
all the players in the freight industry.After identifying the players, look at the quality of services they
offer, reviews from their customers and how competitive they are in the industry. Compare this
information to your business needs to find the right freight providers for your company.
Step IV: Bid Package Development
Developing a bid package is a key step in realizing
transportation best procurement practice.The most
essential success factor in the freight procurement
bid is making an executable outcome. The output
of any bid involvement should reflect realistically
the characteristics of your transportation and the
actual capabilities of the shippers.With ocean freight
for example, a bid must help understand total cost
for drayage. What is the cost to get the container
from the port to its destination? If the information
submitted to the carriers is not correct or lacks
pertinent details, the carriers will definitely base
their commitments and rates on the insufficient
information provided. The service, price and risk
associated with the bid should be carefully measured
and evaluated.
StepV: Selection and Negotiation with the Best Service Providers
Selecting your providers and negotiating with them is another significant step in realizing
transportation procurement best practice. Selection of freight providers should be diligently done
by the freight managers in order to avoid wrong choices of freight providers.A wrong selection may
make companies engage themselves with providers that offer poor services,perhaps at an exorbitant
cost. Conduct market research on the prevailing cost trends of freight providers.This will assist in
the negotiations by giving you the intelligence for implementing transportation best procurement
practices.When transportation providers are carefully selected there are higher chances of selecting
a provider that will deliver services at a convenient time, with quality cargo and at a relatively
cheaper cost.
Transportation
ManagementGroup
6. StepVI: Implementation of Transportation Procurement Best Practice
To achieve transportation procurement best practice the next step is the implementation of new freight providers. Keep in mind the
sole outcome should be dependable and reliable carriers. Implementing your chosen freight providers should give your business the
advantage that it needs. Unless you have long time credible information about certain freight providers, it is difficult to establish with
certainty that the carrier provider is reliable and safe.To be sure, conducting a comprehensive background examination of the freight
providers can help identify the best in breed.The background check should include a thorough analysis of insurance coverage,sufficient
review of motor carrier documents, plus Compliance Accountability (CAS) merits and information regarding monitoring services.
Implementation of transportation procurement best practice should not favor carriers with lower threshold scores.
StepVII: Performance Benchmarking
Benchmark performance is the last and most important step for the company to achieve its transportation procurement best practice.
Companies should benchmark two main factors:
1. Comparing yourself with manufacturers, retailers and wholesalers that have been voted best in Class.
2. Aggregated Key Performance Indicators
The application of benchmark key performance metrics will enable the shipping company to adjust its strategies,services or management
skills with the primary purpose of becoming the dominant company with exceptional transportation best procurement practices.
Benchmarking against under-performing shippers will undercut the goal of improving overall performance and gaining superiority.
When benchmarking transportation provider performance, measurements should include but not be limited to activities such overall
freight costs, fuel, accessorial costs, on-time dependability and claims.
Conclusion: Resources are Available to Implement Transportation Procurement Best Practices
The priority for choosing the transportation procurement best practice is to set-up a committee of people that will be affected by
the change.This allows them to execute a formidable strategy that improves the company performance, which in turn benefits the
organization and the stakeholders. Since transportation procurement best practice brings together people of different skills, the team
has to allow dynamic opinion to play a role in decision making throughout the process. However, the group’s dynamics could affect its
operations and choices for the best transportation and procurement practices to use. Establishing a change management policy that
explains how and who will make final decisions should be addressed at the very beginning of the project.This will keep the group’s
focus on the primary agenda.
Other Significant Issues
A transparent procurement team should exist to achieve definite objectives; its activities should be aligned to the specific ideals of the
organization.All stakeholders should have the ability to review documentation and decisions to achieve complete transparency. Often
the work involved requires an objective and unbiased party to facilitate the effort.The company could provision consultancy services
for implementing transportation procurement best practice. Since many people and other companies use effective procurement
strategies for enhancing transparency in their operations, it helps in promoting the organization’s culture and position in the market.
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