Dr. M. Theodore Farris II, Ph.D.
Dr. M. Theodore Farris II, Ph.D., Professor, University of South Alabama, Mobile, AL 36688, (334) 460-7911.
There are many opportunities available to improve the effectiveness of your traffic department. Primary principles, or "rules of thumb" may be used to help guide your effort. These rules, as discussed in this article, offer a strategic guide which emphasizes seeking the optimal total cost as you make the tradeoff between cost and service.
Rules of Thumb. The "Rules of Thumb" are as follows:
Look At The Big Picture. The management of traffic services is an effort to seek the lowest overall total cost.. This does not mean purchasing transportation services at the lowest possible rate. Nor is it an effort to get the product to the customer using the fastest means possible as this usually translates into higher cost. A lower cost mode of transportation may actually turn out to be more expensive once external factors such as inventory carrying cost and packaging costs have been considered. Consider the cost of all the logistical factor before purchasing transportation services.
Weight Makes Rates. A basic rule of thumb in purchasing is that as the quantity of the units purchased increases, cost per unit drops. The same opportunity exists in the purchasing of transportation services. The key component in transportation services is weight. Costs are directly tied to the weight of the freight and can be accumulated over time. A lower transportation bill can be attained through the pooling or consolidation of transportation shipments. This opportunity holds true for small packages as well as large shipments. Consolidation of freight often involves centralizing the use of transportation services by many different areas within your company. Centralization does not necessarily need to take the form of physical combination of activities. It may only need to involve the contractual element. For example, IBM had fourteen manufacturing facilities scattered throughout the United States. Imagine the opportunities to combine fourteen separate transportation efforts into a centralized contractual relationship with choice carriers. Your company may offer similar opportunities.
Consider your transportation carrier as a supplier offering many products. In this case, the product is the shipment of one unit to one location. Your transportation supplier will offer thousands of "products" particularly if you continue business with the transportation supplier over a period of time. The key difference wit this supplier is the availability of a common measurement of the "units" purchase for these many purchases -- weight. Enter into your rate discussions by offering a combination of the freight weight over time for all areas within your company.
Less is More. Under the same consolidation effort, consider reducing your transportation supplier base. Are you receiving redundant services from multiple carriers? Consider developing a core group of carriers which can address all your needs. The August 1996 Distribution Magazine cites Columbus-based Worthington Industries as an example. Over a six month period Worthington Industries reduced their carrier based from 130 carriers to 16. The net result of carrier reduction? You become a bigger fish in the pond. On average, Worthington Industries can now offer eight times as much freight to their reduced carrier base. As a larger customer to the remaining carriers they receive increased attention, better rates, and likely better service. Less IS more.
Know Thyself. Before you speak to a transportation provider make sure you have a solid understanding of your needs and the opportunities you can offer to the carrier. Shippers who do not have their historical shipping needs broken out by volume, frequency, and traffic lane are at a disadvantage. You wouldn't contact a supplier with an incomplete set of specifications. Don't contact a carrier without understanding your needs.
You may also find opportunities available in managing your inbound freight. Generally this involves creating an inbound routing guide for use by your buyers. Buyers designate the freight carrier to suppliers. While the cost opportunities are company specific, if you have a centralized location you may find the sum of your inbound freight may offer additional volume opportunities to roll into your carrier contract. Your volumes may be sufficiently larger than that of your suppliers and your administrative effort may be less expensive (or at least not include as much of an overhead and profit mark-up) as your suppliers therefore resulting in a lower transportation cost.
Know Thy Carrier. If you are going to consolidate your transportation requirements an on-going working relationship with your carriers is expected. Take the time to carefully investigate your potential partner before entering into an agreement. Understand what traffic lanes they can handle for you and which ones they cannot. Explore their expansion plans to see if they fit your future needs. Attempt to get a feel for which traffic lanes they are currently trying fill. Understand how they are pricing their services. There are many pricing opportunities for larger customers due to increased efficiencies such as fewer pick-ups, reduced administrative costs, and improved scheduling.
There is truly a win-win opportunity by working closely with your carriers. It is possible to improve the profitability for both companies if you have an understanding of each other's needs and problems. An empty backhaul by a carrier may be resolved through modifying customer operations. One beverage company in southern Alabama was running empty outbound to a Georgia brewery to pick up their product. They found an opportunity to fill their trucks with yarn produced ten miles from their distribution center in southern Alabama which could be used in Georgian carpet mills near the brewery.
If There Is A Way They'll Find It -- Caveat Emptor. Since the federal economic de-regulation of motor and rail carriers in 1980 there has been a great shake-out of carriers. Imagine an industry previously heavily regulated. Price was determined through a series of published documents and did not take into consideration the unique operating characteristics of a specific traffic lane or carrier. Suddenly, carriers are allowed to set their own rates. The last seventeen years have proved to be both innovative and unstable for the transportation industry. There have been abuses where operators have taken advantage of the change in operating rules.
Key areas to look out for include off-bill discounting and changing auditing requirements. Off-bill discounting involves a situation where a shipper (such as your supplier) and a carrier negotiate a rate discount. If your company is paying the freight bill, the carrier fails to include the discounted freight rate, yet shares the "overcharge" with the shipper. It is questionable whether off-bill discounting is illegal. Off-bill discounting is currently allowed but freight invoices must include a statement indicating such.
The Trucking Industry Regulatory Reform Act of 1994 (TIRRA) eliminated the need to file rates with the Interstate Commerce Commission for "individually determined rates." Common carrier rates and rules can now be in the form of price lists, purchase orders, or "exempt-circulars." While tariffs are not required, most carriers will continue to utilize them. The tariffs will not be formally filed with the ICC.
The other key change resulting from this bill is the establishment of a 180-day limitation for contesting bills. This may change some of the operations within a shipping company. Freight bills should be audited much more frequently to allow time to contest any the freight bill.
The Only Thing Constant Is Change. The transportation industry continues to undergo regulatory changes which affect the operations of your transportation provider. Of recent note is Federal Aviation Administration Authorization Act of 1994. FAAAA does for the motor carrier industry on a statewide basis what the Motor Carrier Act of 1980 did on a federal basis. The 1980 legislation economically deregulated the industry and there were ramifications to large and small shippers. Similar changes should be experienced with the new intrastate economic deregulation. FAAAA prohibits states from regulating prices, routes, or services of motor carriers and promotes free entry into intrastate trucking. States still have the responsibility to regulate safety and insurance.
An important lesson learned from the federal regulatory changes was that regulatory management of rates artificially control the true application of financial burden. Large shippers benefited from economic deregulation with lower rates by understanding what and where they were shipping. Smaller shippers found freight increases as the rates began to realistically reflect the true unsubsidized cost of shipping their volumes and traffic lanes. The intrastate deregulation should serve to emphasis this point again. To benefit from these changes, the purchaser will need to work closely with the carriers, understand what their freight is and what it means to the carrier, and learn how to be better business partners with carriers.
In the past, buyers of freight services received ample notification of rate changes when the carriers had to file all rate changes with the Interstate Commerce Commission. The absence of filing requirements suggest a greater flexibility in pricing. Prices can immediately change based on a verbal agreement between two parties. Protect yourself by formalizing shipping agreements. Public rates allowed benchmarking to compare how your rates stacked up. These new rates will be confidential. This change will increase the workload for the purchaser, adding yet another variable to the purchasing decision. Finally, before the deregulation, motor carriers were exempt from anti-trust laws due to public filing of rates. Now collusion on rates and service will be subject to anti-trust laws. As a purchaser, expect a variety of rate quotes from different carriers. James A. Calderwood, partner in a law firm specializing in transportation issues suggests, "If you call a couple of different carriers and get the exact rate quote from them all, start wondering."
The new operating environment of the 1980's resulted in a fallout of carriers through bankruptcies and mergers. Understand the financial stability of your carriers. Ask them what their operating ratio is and compare this information to that of comparable competitors. Proactive questioning helps to avoid later unpleasant surprises.
Freedom of ratemaking at both the interstate and intrastate level will increase the importance of effective negotiation skills. The negotiator will have to keep an eye on all aspects of transportation services as carriers will likely attempt to modify non-cost variables as a means of increasing profits. Pay attention to the carrier's rules and terms. A change in liability obligation or a restriction on how long your company can take to file a claim can add up to a significant cost impact and a change in the way your company conducts its shipping activities. Negotiation of these terms will become key to effective transportation purchases.
There are many opportunities for the purchasing professional to improve the effectiveness of the transportation services provided to the company. The greatest weapon in your arsenal are your professional purchasing skills.