Jack Ampuja and Ray Pucci are both supply chain veterans with more than 50 years of management experience working for various Fortune 500 firms including serving as vice presidents of operations and leading large private fleets. Both Ampuja and Pucci are certified members of American Society of Transportation & Logistics and Institute of Supply Management.
When sister magazine Supply Chain Management Review was launched in 1997, founding editor Frank Quinn asked me (Jack Ampuja) to serve on the editorial advisory panel, which I did for more than 20 years. Knowing that I taught MBA courses in supply chain management and had written many articles for industry magazines, Quinn asked me several times to write an article for SCMR. Finally, I told him I would like to write about managing inbound freight with my old friend Ray Pucci.
Early in our careers, Ray and I were on the same logistics management staff at American Can Company. Later we both got to the VP level—Ray with National Steel and I with Rich Products. Quinn told me that normally he would not publish an operational article because SCMR was focused on futuristic and technology topics, but because he had requested an article, he would publish what Pucci and I put together. When Quinn returned the edited version of our submission, the number of red marks, word changes, and repositioning of paragraphs made our work look like a disaster; but I did have to admit that Frank Quinn knew more about editing than I did.
So, our co-written piece titled “Managing Inbound Freight—Often a Missed Opportunity,” appeared in the April 2002 edition of SCMR. As time has passed, the article seemingly took on a life of its own. It is on the internet in Chinese and Thai and has been cited as a source by numerous authors including Chuck Poirier, who wrote five books on logistics. The article has been used as handout in college courses taught by Dr. Jim Kling of Niagara University and Dr. Terry Esper of Ohio State. There is also a university in Sweden that has used the article as a support piece in transportation classes. It is this widespread use of the original article that prompted current SCMR editor Brian Straight to ask us for an updated version. – Jack Ampuja
Financial shortcomings in managing freight
One of the ongoing problems for effective management of inbound freight is inadequate financial detail. At the top of the list is the lack of cost detail in many accounting systems. While purchased materials and inbound freight are invoiced and paid for separately because the two charges come from different sources—one for product and another for transportation—the often-used process is that purchased materials and associated freight costs are not separated but are lumped together as “landed cost of goods.”
This begs the age-old question of how can anyone manage anything for which they have no information? The obvious solution is to capture and report freight costs separately from the product. Because management of incoming material is usually the purview of corporate purchasing, while management of inbound freight falls to corporate transportation, separate reporting details should help both departments do their jobs more effectively.
The other side of the financial coin is a purchasing department that defers the management of inbound transportation to its supplier. We have often heard the misplaced logic of “if I buy materials on a freight prepaid and added or delivered cost basis it absolves my company of freight issues like loss, damage, and paying inbound freight bills…thus reducing administrative headaches for our company.”
The reality is that the supplier has little reason to manage the buyer’s freight expense more effectively because they have headaches of their own. Remember the advice that when one takes the easy way in business, it usually costs the company money and control.
Finally, there is the matter of private fleet—either the buying firm’s or the supplier’s. Here are two examples of how mismanagement of private fleets can increase the cost of inbound freight. One of our consulting clients had a large private fleet that operated extensively throughout most of the western states.
In examining internal data, we noticed that the fleet never brought in purchased materials that originated in the fleet’s service area. The transportation manager explained that the fleet received internal financial credits for making customer deliveries but due to company policy got no credit for hauling incoming material because there was no accompanying sales benefit. So, the firm paid for-hire carriers more money than it would have cost them to use its own trucks. A second example involves a supplier delivering with its fleet and charging the buying firm for the service, which is only fair.
However, when we saw the cost that was being charged, we told the buyer that we would recommend replacing the supplier’s fleet with a for-hire carrier. The buyer actually told us that the supplier was going to be unhappy because they relied on the fleet for revenue. Our response was that we were happy to support the fleet if it was cost competitive, but we would not endorse subsidizing a supplier’s inefficient fleet to help them out at our client’s expense.
Carrier rate negotiation basics
The first step in any inbound routing process is to have inbound rates negotiated with small package, less than truckload, truckload, airfreight, and expedited carriers. The ideal candidates for handling your inbound freight are the same companies already moving your outbound shipments.
Don’t rule out soliciting carriers that don’t want to handle or have been less than price-competitive with your outbound.
The geography of your outbound may not be attractive, but your inbound might be. Take advantage of a carrier’s need to balance its volume, fill empty backhaul lanes, or develop a new market. The question that you should ask your carrier representative every time you meet with them is where do you need more traffic.
Ask this question often, because just as dynamic as your customers and sources of supply are, a carrier experiences the same changes in its business mix. Ultimately, the same questions should be asked of the people who operate a private fleet, either your internal one or the supplier’s.
Expect resistance from suppliers in managing shipments from their facilities to yours. Nobody likes change and the excuses for “why not” will be many and varied. They need to be addressed and worked through. This requires an active role from your procurement group to drive the high-level importance of this change home to suppliers.
It is highly recommended that before any type of carrier negotiation is undertaken, all carriers are asked to complete a capabilities survey. Questions on the survey should include the number and types of trucks and trailers operated, location of terminals, yards, and offices, whether the drivers are employees or leased operators, what percentage of their business is brokered, DOT safety rating, limits of cargo liability, lanes of particular need, and worker’s compensation insurance.
Depending on the volume that you are negotiating on a combined inbound and outbound carrier spend package, you may elect to use online bid software. These tools offer tremendous advantages for analysis, comparison, and simulation, and are usually based on awarding lanes to the low bidder. But our experience shows that they must be used in conjunction with old-fashioned “market making.” What is market making? It is the use of logistics expertise and experience to evaluate outcomes of the automated bid process to ensure a successful outcome.
Can the low bidder consistently provide the service required? A cardinal corporate sin is awarding lanes of traffic to and reporting savings from carriers that can’t provide consistent levels of required service.
Although it potentially complicates the inbound routing process, don’t avoid pursuing a multi-carrier program based on geography or specific lane of movement to gain a cost and service advantage. Again, a basic question to ask is: “Where do you need traffic from and to?” Involve procurement, receiving, and manufacturing in the process. Input from major suppliers is also helpful in identification of potential carriers.
As part of the negotiation, prepare a scope of work to give carriers a clear understanding of your expectations, requirements, and operations. This documentation will include all of the labor details involved in the transportation. These details may include whether the carrier will be involved in loading or unloading, what the handling fees will be, whether there are special temperature considerations, and whether the carrier should drop the trailer at your dock.
The routing challenge: Vendor compliance
The assumption of responsibility for inbound freight management within your organization requires buy-in and support from the highest levels of the supply chain department. Whatever method of managing inbound freight is chosen, evaluating, designing, testing, training and implementing the program requires the engaged involvement of your procurement, systems and finance functions.
Vendors need to understand how important compliance will be and that it will be part of their overall vendor evaluation. Procurement involvement is critical in the change process. Constructive supplier feedback is invaluable. It is absolutely crucial that the carriers you select are capable of providing a service (on-time pickup, operational and safety compliance) that doesn’t adversely affect a supplier’s operation.
Remember: “Only a wet baby likes change.”
Clearly, communicating the proper carrier routing for a product is not just an internal challenge but an external one as well. There are various methods of communicating inbound carrier routings to suppliers. The most basic is to issue a hard copy set of blanket shipping instructions to your suppliers. The supplier then knows your options, and you depend on them to make the correct shipping choice.
The options outlined should include when (based on weight or service required) to use small package, LTL, truckload, rail, air, expedited, or your private fleet, and which carrier to use for each of those modes in a given lane. Assuming you have a current database of vendors, their addresses, and contacts, a hardcopy blanket set of routing instructions has the advantage of being relatively easy to issue and change.
The downsides are that they are only issued once, pieces of paper get misplaced, and you are dependent on the skill level of your vendor’s shipping department to spend your money wisely.
Another option is to include blanket shipping instructions on every hard copy or electronic purchase order, and let the vendor execute the routing decision. Repetition and ease of change are the advantages of this method. Potential problems may arise, however, depending on the format of your purchase order and how much space is available on it. Additionally, you still must rely on the skill of your vendor’s shipping department to select the best and most economical route for your shipment.
However, if your enterprise resource planning (ERP) system is robust enough, you could let it make the routing decision and instruct the vendor on each purchase order or release. Standard EDI transactions can be used to communicate transportation instructions and requirements to material suppliers, third-party logistics suppliers, and carriers.
You need to be aware, however, that order releases may or may not equal shipments. Multiple releases made on the same day to the same destination should be shipped on a consolidated shipping document for freight and receiving efficiency.
Given the problems with these methods of communicating shipping instructions, companies may prefer to establish an “inbound routing center” for vendors to contact on a transactional basis. The center could be operated either internally or through a third-party logistics provider, and it could either be manned or on the web.
If the company decides to have a web-based routing center, it can either host the site internally or use service providers that specialize in hosting internet “route guides.” The benefit of a web-based guide is the potential for current information, which would take advantage of changing transportation market conditions. Your route guide website could also have hot links to carrier websites, which would aid in compliance. The company, however, must somehow ensure that all suppliers know that the website exists and that they use it.
In addition to potential freight cost savings, increases in private fleet efficiencies, and the subsequent reduction in landed material costs, there are
several other benefits for both you and your supplier.
Benefits to your organization include the following.
- Increases your carrier spend and its positive impact on total carrier rate negotiations.
- More accurate information for the transactional management of materials purchases and production scheduling. It’s easier to answer: “Where is it?”
- Improved scheduling of unloading operations (manpower, truck docks, bulk racks, storage space).
- More accurate information for developing vendor on-time shipping information. Did he have it available to ship on time? This will probably be a new metric in your organization for on time. Delivery is now controlled by you.
- Develop opportunities for using your inbound carriers to unload and reload with outbound shipments (impactful particularly when the supply of drivers/trucks is tight).
- Reduction of panic calls such as: “Vendor XYZ just called, they can’t get a truck for the material that we needed two days ago. Can we help them out?”
- If you have a carrier safety vetting/compliance program, it will increase the percentage of com- pliant carriers entering your facilities.
Benefits to your supplier. As a customer you will manage transportation. This will remove their responsibility for obtaining carrier capacity, freight bill processing, dealing with potential carrier pricing volatility, and eliminate tracking, tracing and expediting functions they perform on your behalf.
Controlling premium freight costs
You’ve given the vendor adequate lead time on your order. He’s agreed to a firm delivery date that meets the requirements of your business. He falls behind in his schedule, and with collect freight terms ships via a premium [more costly] mode to make the required delivery date.
What does your organization have in place to control this occurrence? Is the vendor responsible for excess freight charges incurred? Within your own organization, who has the authority and accountability to deviate from routing standards? Clearly define what discretion, if any, your vendor has in changing routings or modes of shipment, and the consequences for unauthorized deviations.
Control of premium costs (air and expedited) should rest with the department that is accountable for inbound freight costs and has access to pertinent information about the unique peculiarities of transportation including at a minimum an understanding of carrier service capabilities and comparative costs.
Although seemingly extreme, the following is an actual occurrence, which unfortunately happens on a regular basis in most organizations. A project engineer directly contacted a supplier on the delivery of a casting required for a project and instructed the vendor to “ship it the best way—get it here as soon as possible, we’ll pay the freight charges.”
The casting, which weighed 200 pounds, was given “exclusive use” to an expedited trucking company and driven 1,400 miles at a cost of $2,279. If the project engineer or vendor had contacted the purchaser’s transportation department, they would have learned that contract air rates were in place that would have delivered the casting the next day at a cost of $229. Ironically, the casting had a product cost of only $1,200.
NMFC changes will probably raise shipping costs on light-density products
One significant change still ongoing is the trend in the less-than-truckload and parcel sectors to use density-based pricing. Both UPS and FedEx, the two largest parcel carriers, implemented dimensional weight pricing in 2014 but the National Motor Freight Classification (NMFC) intricacies prevented LTL carriers from applying a similar across-the-board pricing action.
While density has been an LTL pricing consideration since the 1930s, in recent years it has become the No. 1 cost factor. This summer, the National Motor Freight Traffic Association (NMFTA), the nonprofit national agency that manages the NMFC system, which serves as the basis for less-than-truckload pricing in the U.S., embarked on a mission to “reimagine LTL pricing.”
As a result, NMFTA conducted a series of user meetings to gather info on how the current system is working and suggestions for improvement. Stated goals are to:
- simplify the NMFC;
- enhance user experience; and
- Improve efficiency.
Since the NMFC was created as a result of the Motor Carrier Act of 1935, less-than-truckload pricing has been based on four shipment factors: density, stowability, handling characteristics, and value (including susceptibility to damage). The NMFC changes, which will not go into effect until 2025, are designed to standardize the density scale for LTL freight with no handling, stowability, and liability issues.
While no one knows the exact impact of the upcoming changes, it behooves all companies dealing with LTL freight (which is virtually everyone) to watch this situation carefully because companies dealing with light-density freight will probably see bigger pricing impact than those with heavy density products. The bottom line is that a more accurate LTL pricing system that recognizes that freight carriers are selling space utilization of their trucks will be fairer for all parties.
While the total price impact nationwide may be small, shippers of light-density products may feel otherwise. Overall, we view the upcoming NMFC changes as a way for the LTL sector to catch up to the parcel carriers in density-based pricing.
Glossary of common transportation terms
- Allowance: A dollar rebate or concession for performing a function (for example, loading or unloading of a trailer by non-carrier personnel).
- Fak or freight all kinds: A group of products or commodities that the carrier agrees to transport at one inclusive rate regardless of the products’ actual class in the national motor freight classification.
- Fob or free on board: Contractual terms between a buyer and a seller that determine when the title for the goods is transferred from buyer to seller and the point where transportation responsibility is shifted from buyer to seller.
- Freight terms: The designation of when the title of a product is passed from the buyer to the seller and who is responsible for paying for the shipment.
- Freight collect: Buyer pays the carrier.
- Freight prepaid: Shipper pays the carrier.
- Freight collect fob destination: Buyer pays the freight, and title passes from seller to buyer at destination.
- Freight prepaid fob origin: Seller pays the freight, and title passes at origin.
- Freight prepaid fob destination: Seller pays the freight, and title passes at destination.
- Motor carrier act of 1980: This federal act attempted to promote competition by substantially reducing federal motor carrier regulation. it permitted price competition but continued provisions requiring motor carriers to file interstate tariffs with the interstate commerce commission.
- National motor freight classification: A pricing tool that provides carriers and shippers with a standard rate for transporting a type of commodity. commodities are grouped in classes 50 through 500 based on an evaluation of their density, stowability, ease of handling, and liability. the higher the class, the higher the rate.
- Prepay: Freight is paid before shipment.
- Prepay and add: Seller pays carrier and adds the freight charges onto the invoice for goods purchased.
- Prepay and allow: Buyer pays the carrier and freight charges are embedded in the invoice price of the material.
- Routing: The process that determines how a shipment will move between an origin and destination. it requires designating the carrier, the route of the carrier, and the time en route. whoever holds the title to the goods en route (seller or buyer) should retain the right to route the shipment.
Note: Definitions are based on material from Joseph Cavinato’s Transportation and Sources: Logistics Dictionary (The Traffic Service Corp., 1982), R. Neil Southern’s Transportation and Logistics Basics (Continental Traffic Publishing Comp., 1997), and the National Motor Freight Traffic Association’s Website (nmfta.org).
Transportation management systems
A TMS is a computer-based system that can make the management of transportation more efficient for any user. Prior to computerization the typical traffic manager at any company would get a pile of shipping documents for outbound shipments and a similar pile of purchase orders for incoming product.
The traffic manager would call trucking companies to line up carriers for outbound shipments but would normally wait for carriers to contact him for inbound appointments if he was lucky, or more likely just show up with a shipment that needs to be off-loaded. A modern TMS can present the transportation manager with a list of all possible carriers that can handle the shipment and show the decision-maker service time and cost for each transaction, allowing for more informed intelligent decisions on carrier selection. If desired, the TMS can also trigger payment without an invoice from the carrier because both parties can see the specific cost of each shipment in the TMS.
Transportation management systems are available from many sources, including software companies, freight carriers and logistics service providers. Some TMSs are embedded in enterprise resource planning systems and are very expensive while others can be used on a cost-per-transaction basis and some are even free to use.
While we don’t advocate any specific type as each user should select what fits their company’s needs best, we do highly endorse every firm shipping or receiving freight to utilize a TMS.
Following is a comment from an MBA student who got to see a class demonstration we arranged for them on a transportation management system:
“Before this class I had no idea how much technology was actually available to aid in logistics planning. I’ve worked for two companies since graduating college, and I’m realizing now just how far behind in logistics technology both companies have been. I was cringing through the transportation management system demo because I was realizing how much easier my life could have been if my
company had invested in TMS technology.
Although I’m not in the warehouse myself; I’m in customer service/order processing, so I’m part of the logistics group as a whole. A TMS system like the one that was presented in last week’s Zoom call would make my life so much easier. Our team receives so many ‘where is my order’ questions a day that we’ve had to assign one person to just field those questions for the entire day. We have a lot of people ask: ‘Why weren’t we told that there was an exception with our package?’ That question always annoyed me, because the answer was always: ‘Because nobody told *us* there was an exception with your package.’ When the guest speaker described how his TMS system automatically sent emails whenever there was a delivery exception, I was impressed. I knew from my own personal shopping habits that it was possible to be alerted when a shipment was delayed (Amazon sends push notifications), but I always assumed that was just a big company having better technology. I didn’t realize that there are commercially available solutions for all users.”
Perhaps most importantly for managing inbound freight, a TMS can keep the receiver informed about delivery status including estimated time of arrival. The TMS can also assist with cost detail so the transportation manager can make better choices for his company. A TMS is not intended to replace people or to make decisions for them, but to make good people better—which obviously benefits the business enterprise.
Affirmation of TMS value comes in a recent survey by Peerless Research Group that found 72% of those evaluating TMSs focused on cloud-based technology and the top reason for wanting a TMS was to better manage inbound shipments (cited by 94% of respondents).
The last word
The thing that surprised us in reviewing the original article from 2002 is that many of the issues and solutions that we identified have not changed.
What has changed, though, is technology and its impact on access to information and the opportunities for cost reduction, operating efficiencies, and inventory management. The basics remain unchanged.
