The Freight Debate: How should businesses approach freight spend management to achieve the greatest results?
When businesses suffer from high operational costs, they don’t start by making indiscriminate cuts to balance their budgets. Instead, they look for intelligent ways to reduce wasteful expenses without compromising productivity.
In an effort to rein in spending, business leaders may turn toward freight optimization. After all, trends like low diesel costs push many companies to invest more in ground transportation over air travel. With ground freight worth more to operations, it would be wise to ensure nothing about logistics is left to chance. How should businesses approach freight spend management to achieve the greatest results?
Know your organization’s ‘lanes’ inside and out
Manufacturers, in particular, always have a complex, multifaceted network of materials and finished goods coming and going. That said, these businesses open themselves up to potential failure if they do not complement this “big picture” view with a more nuanced understanding of each dynamic logistics component.
Gathering information on all supply lanes is a great place to start, but this data collection isn’t enough. What businesses find therein must feed into models for change. For example, if a company has experienced significant growth in its time contracted to a legacy freight handler, perhaps it’s time to negotiate for better rates or services, seeing as though the company has provided the logistics provider with more business.
Not all pieces of the logistics puzzle are the same
Picking and choosing where to hone logistics spend may not be an exact science, but it certainly isn’t something that can be done without a little research into the largest cost areas. According to the Federal Highway Administration, average overall logistics costs break down into three major expenses: transportation (63%), inventory-carrying costs (33%), and logistics administration (4%).
“Nearly 80% of transportation logistics spend goes toward trucking freight.”
Right from the start, it’s plain to see where the weightiest expenses lie. Within transportation costs exclusively, nearly 80% of transportation logistics spend goes toward trucking freight. Discovering methods to optimize shipping for grand transportation rates – as well as the rate at which materials and products get shipped – therefore deliver the highest potential for return on investment.
Similarly, when looking exclusively at inventory-carrying costs, two-thirds of costs stem from issues like taxes, insurance and general materials depreciation. Programs aimed at reducing shrinkage may help mitigate spending, but ultimately manufacturers may want to move away from traditional inventory models to truly rid themselves of seemingly unavoidable costs associated with a full warehouse.
Sticker price isn’t the only thing worth bargaining for
The Council of Supply Chain Management Professionals reported nearly half of all logistics providers plan to see “strong revenue growth” in 2016. However, the survey also showed freight handlers expect to invest in equipment and services that will simultaneously optimize costs for their customers. In fact, more than 40% anticipate rate negotiation with their clients, as well as increased attention to things like freight consolidation in trucks (40%) and process automation (34%).
What does this mean for the businesses working with these providers? Simply put: Ask and ye shall – most likely – receive. If business leaders bring a well-conceived plan to the negotiation table that benefits their operations and helps freight handlers advance their service portfolios, the chances of both sides walking away with an agreement are considerably good.