Five Strategies for Controlling Transportation Costs
By Sarah Banks
Manufacturer, 2007 Issue No. 2

In today’s international economy, transportation is a necessary cost of doing business, as suppliers and customers are scattered across the globe. Rising fuel costs, which transportation providers pass along to their customers, have been a wake-up call to many companies; these costs can no longer be ignored.

While there’s little a company can do to control the rising fuel costs, there are other, often overlooked factors that contribute to a company’s transportation expenses and may be addressed to reduce overall transportation expenses.

Understand Inbound Freight Costs

There are two significant factors that lead some companies to underestimate their inbound freight expenses.

First, inbound transportation costs are commonly rolled into the purchase price of goods. This may mistakenly be thought of as “free freight”; however, there’s no such thing! The cost is typically buried somewhere else on the invoice, usually in the piece price of the purchased item. In general, your transportation cost for an item should not be more than 2–5 percent of the cost of the product shipped. Unless the freight cost is identified separately, there’s no way to know how much you’re actually paying in freight.

Moreover, it’s not enough to simply identify the freight cost on each invoice; you must have the capability to easily and effectively capture, extract, and analyze this data. The lesson? Always insist that the transportation price be broken out as a separate line item, include the data in your accounting or transportation database, and review your transportation costs regularly.

Second, inbound freight may be broken out as a separate line item on the invoice, but companies typically don’t investigate these charges to ensure the cost is at a fair market value. Research indicates that suppliers/sellers can mark up the inbound transportation line item on their invoices anywhere from 15–40 percent. You should regularly benchmark the inbound transportation rates charged by your suppliers against transportation provider (a.k.a. carrier) cost data to ensure rates are appropriate. Should costs exceed market levels, negotiate your own carrier contracts.

Set Up Carrier Negotiation Cycles

Transportation is a dynamic and ever-changing industry. For example, in 2006, shippers suffered an increase in less than truckload and truckload rates due to capacity constraints. Today’s news is better: current and future forecasts indicate that there’s plenty of capacity to meet the demand. This means that you should expect to see a reduction in rates.

However, if you’re not regularly monitoring the transportation market and maintaining regular carrier rate negotiation cycles, you could be leaving money on the table. Establishing a regular negotiation schedule ensures your company is taking advantage of the best available rates.

Establish Regular Meetings With Transportation Providers

Regular meetings with transportation providers not only improves the quality of service your company receives, such as on-time delivery performance, but also improves communication and the overall relationship between your company and the carrier. A recent study indicated that strong carrier/customer relationships ensured the availability of assets (trucks, drivers) in times of tight capacity. Regular carrier meetings also provide an opportunity for carriers to share ideas to improve service levels and/or reduce transportation costs. While attending a meeting with our client and its carrier, we recently discovered that the client was paying 8 percent of its transportation spending on driver waiting hours. This led our client to change delivery times with the carrier from mornings to afternoons, ensuring less congested docks and, ultimately, reducing the waiting hour fees.

Ensure Mode and Route Relevancy

Businesses change over time. In today’s world, a single-site operation with only a few suppliers and customers can quickly become a multi-site operation with overseas suppliers and customers across many states. This may mean that certain transportation modes, such as rail, that may not have been a relevant option in the past could become a money-saving option. In addition, new supplier and/or customer locations could mean an opportunity to consolidate shipments to take advantage of full truckload pricing. This is why it’s so important to conduct a regular assessment of your company’s supplier and customer network; otherwise, you may not be optimizing your transportation efficiency and paying higher transportation costs.

Consider Freight Classification and Rate Audit

When was the last time you audited your freight invoices? Due to many factors, preparing an accurate freight bill can be a challenge for transportation providers. The burden, then, is on you to ensure that the rates you’re paying are correct.

Many invoice issues stem from carriers applying the wrong rate. One rate audit company reported finding errors in one out of every nine bills audited with an average adjustment of more than $10 per freight bill.

However, rates may also be misapplied due to the carrier not using the rates under the appropriate rate class. In this case, the carrier will use the class that you’ve provided to them. Shipments are classified on a scale from 50 to 500, according to the density, value, fragility, and storage requirements. The higher the class, the higher per-pound costs. If your product characteristics have changed, or you suspect that your product is classified under a higher class than required, work with your carrier to establish the appropriate class. You may also consider hiring a rate audit firm that can assist your company in auditing your freight bills and assessing your freight classification.

Our work indicates that if a company is spending more than 2–3 percent of sales on freight, then there is a strong likelihood that meaningful cost reduction is possible.