If you work in a procurement or purchasing role, you’re probably involved in purchasing inbound materials. These might be raw materials for a manufacturing facility or perhaps finished goods (if you work for a retail organisation). In any event, you and your team can make a positive impact on supply chain operating costs if you improve your understanding of inbound freight costs.
In many supply chain companies, the procurement department has responsibility for buying materials, but pays little attention to the cost of getting them into their companies’ hands. Here are some of the reasons for your procurement team to buck that trend and do a little inbound freight cost analysis.
Honestly, this is one of those areas where I’ve seen companies leave significant money on the table, year after year, simply because nobody thought it was their job to look at it. Procurement focuses on unit costs. Logistics focuses on outbound delivery. And inbound freight sits somewhere in the middle, often unexamined.
A Simple Need for Visibility
First and foremost, it’s well worth understanding how much your company is paying for the privilege of having the products and materials you purchase driven to your door. More often than not, suppliers roll their outbound transportation expenses up in the price of the goods they sell you. It makes sense to try and find out just how much of the price is covering transportation.
You can start by asking your suppliers to break out your invoices into separate lines for goods and transportation. This will at least give you an idea of the potential savings opportunities available.
I worked with a manufacturing client a few years back who had never once asked their primary supplier for a freight breakdown. When they finally did, they discovered transportation was accounting for nearly 12% of their total invoice value. They’d assumed it was maybe 3-4%. That gap represented a substantial opportunity they didn’t even know existed.
Transportation: A Profit Centre for Suppliers
When the volume of goods you purchase from a supplier is aggregated with all its other customers, there is a good chance the supplier is getting a great freight rate from its carrier. At least there is likely to be some discount on the carrier’s base rates for transportation.
Is the supplier passing on the costs to you at the discounted rate though? There’s every possibility that you are being charged the base rate for transportation, while the supplier pays its carrier the discounted rate. That can mean the supplier is making a tidy profit on transportation, in addition to the mark-up on the actual goods you buy.
The thing is, suppliers aren’t doing anything wrong here. They’re running a business, and if you’re not asking questions about freight, why would they volunteer information that costs them margin? But once you understand this dynamic, you’re in a much better position to negotiate.
Understanding the True Cost of Inbound Freight
Before you can control inbound freight costs, you need to understand what’s actually driving them. The total cost typically comprises several elements that aren’t always obvious on a supplier invoice.
There’s the base transportation charge, of course. But you should also consider fuel surcharges (which can fluctuate significantly), accessorial fees for things like liftgate service or residential delivery, detention charges if your receiving dock keeps drivers waiting, and any handling or consolidation fees.
A guy I consulted for who ran purchasing at a building supplies company discovered his team had been approving invoices with detention charges for months without questioning them. Turned out his warehouse was chronically understaffed on certain days, causing delays at the dock. The suppliers were passing those charges straight through, and nobody had connected the dots.
Put Inbound Freight Cost Control in Your Company’s Hands
Of course it’s not likely that your suppliers will disclose the margins they make on transporting goods to your facilities. However, you can safely assume they are making something, unless you have an agreement in place which stipulates otherwise. Once you have the knowledge of what your inbound freight costs are, your logistics team can make plans to take over management of inbound logistics.
This won’t necessarily be easy. Aside from the fact that managing inbound freight can be a pretty complex process, your suppliers may try to put roadblocks in the way. This is understandable, because as well as losing the mark-up on transportation, they are losing transport volume, which may impact the price they have to pay their carriers.
On the other hand, your company can benefit from lower overall transportation costs if it arranges for existing transport providers to move your inbound shipments. Plus you won’t be paying the freight costs that your suppliers were charging.
When Taking Control Makes Sense
Taking over inbound freight management isn’t always the right answer. It depends on your situation. If you’re a small buyer with limited purchasing power, you may actually get better rates through your supplier’s consolidated volumes than you could negotiate independently.
But if you’re already moving significant outbound freight, adding inbound volumes to your carrier contracts can improve your negotiating position considerably. Carriers like predictable, balanced freight. If you can offer them loads in both directions, you become a more attractive customer.
Collaborating for Value
Given the savings potential, the effort required to amend terms with suppliers and take on the task of inbound freight management can be well worth making. As a procurement specialist, you and your colleagues might be in the perfect position to take the first step and unravel current inbound freight costs. Armed with that information, the logistics department will have good reason to thank your team and work with you to investigate next steps.
The first conversation doesn’t need to be complicated. Simply ask your top five suppliers by spend to provide a cost breakdown on your next few invoices. See what comes back. You might be surprised at the variation in how different suppliers handle the request, and that variation itself tells you something about where your opportunities lie.
