Aberdeen report points to ways shippers can reduce transportation expenses
published: cw 13, 2007 in Logistics & ShippingShippers can see significant reductions in their overall freight budgets by doing things like centralizing freight procurement operations, implementing a formal spend management process, and mining transportation and freight spend management data to improve cross-functional business decisions, according to a survey of 380 shippers conducted by Aberdeen Group, the Boston-based research firm.
The report, entitled “Winning Strategies for Transportation Procurement & Payment,” indicates that best in class shippers can save an average of 8.8 percent on their freight budgets with a sophisticated procurement or payment/audit system, which comes out to $4.4 million in potential savings for a shipper with an annual $50 million freight budget, said Aberdeen. And 90 percent of shippers surveyed in the report said they have recently enhanced or are looking to improve these processes over the course of 2007.
And as freight rates continue their upward climb, it is resulting in a renewed focus on transportation procurement and payment processes, with shippers realizing they need to institute better spending control to ensure that their purchasing volume is being maximized, according to the report. Beth Enslow, Aberdeen vice-president of enterprise research and author of the report, explained that the Best in Class companies surveyed in the report are 1.5 times more likely to see a reduction in freight costs by managing procurement operations through a centralized process.
“Whether you are a small company or a large one, you should be looking at centralizing freight procurement,” Enslow told Logistics Management. “The benefits of doing this range from being able to negotiate [rates with carriers] better and having the oversight to ensure a company is following spending plans, among others.”
Along with rising freight costs, which 62 percent of surveyed shippers identified as their biggest pressure in driving transportation and freight spend improvements, other cited factors were the need to improve transportation flexibility and reliability to support supply chain objectives (51 percent), and the need to improve spending control (44 percent).
Enslow also stressed that technology becomes a larger part of a shippers spending strategy when they go in this direction. She said technology makes processes more efficient, provides data consistency and better visibility to actual freight rates so shippers can better measure total landed transportation costs, manage gross margins, and avoid unexpected jumps in freight costs that can wreak havoc from a financial control perspective.
Enslow described total landed transportation costs as the expenses for products, buying products from suppliers, handling, shipping and third party-logistics and broker fees.
While it appears that there are various ways for shippers to cut down on freight costs, some shippers reported that there are barriers that are preventing them from taking action. These barriers include: lack of adequate staff resources (52 percent), hard to collect internal data to create and analyze bids (47 percent), and lack of sufficient technology, such as bidding and analytics tools (42 percent).
OUTSOURCING YOUR WAY TO LOWER FREIGHT COSTS
Shippers with an annual freight spend budget of $50-to-100 million or more are seeing a cost reductions by using 3PLs or procurement specialists to manage procurement processes, according to Aberdeen.
“Outsourcing partners have a good understanding of when to tell shippers to go out to bid [to carriers for transportation services],” said Enslow. “They can base their advice on what they are seeing with their other clients and can time when they go out to bid when the market is softening, so they can get good rates.”
Ted Augustine, director of purchasing and logistics for Goodyear Tire & Rubber Co., can corroborate this sentiment, as he explained that Goodyear uses two partners for reducing freight spend. He said Goodyear counts on ICG Commerce for things like carrier identification, qualification, rate negotiation, and contract management processes. And it turns to Exel Logistics to manage its transportation management system (TMS) load planning center.
By working with these two partners, Augustine said Goodyear finds a good balance—for reducing freight spend—between them. And he added that there have been several benefits from working with these partners.
“Over the last couple of years, we have been working in a very volatile environment,” said Augustine. ICG had negotiated some rate decreases for us prior to Hurricane Katrina, but a major event like that throws a monkey wrench into everything from a capacity standpoint. And based on those existing market capacity conditions, ICG initiated a truckload bid event, based on [our] major velocity lanes that yielded a high single digit rate reduction.”
He added that Exel’s role in managing Goodyear’s TMS load planning center is maintaining the company’s carrier base, tendering freight and executing against contracts.
For a copy of the Aberdeen report, click here
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