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The part of a business where there can be a lot of low-hanging fruit is inbound transportation, particularly where vendors prepay and add freight to their invoice. Because these charges are usually padded with extra “shipping and handling” or “processing” fees, this area can yield a windfall of cost reduction for manufacturers.
Evaluating Vendor Programs
In my experience, companies know inbound transportation is an area where extra money can be found, but they don’t realize the full potential. They may think it is so minimal that they can’t be bothered to evaluate it, or they could be liable if something goes wrong. However, I believe there is almost always a healthy amount of money tangled up in inbound transportation.
Despite the fact that they are paying the freight bill, most vendors are likely transferring the liability of the freight the second it leaves their door, so there is typically no added risk of liability for converting. What people don’t realize is that vendors could be charging up to 200% of the original freight charges (or more). In fact, vendors sometimes make more money on freight than they do for their product. In addition, any smart vendor will ensure the free on board (FOB) terms clear them of liability the moment they ship it.
This area cannot be disregarded or taken lightly. Companies must evaluate all prepay and add vendor programs on a regular basis. Following is a simple, 10-step process that will dissect vendor programs to see if it makes sense to change.
1. Pull Vendor Invoices
Go to a vendor file who is charging freight as a line item on their invoice. Pull out the last 10 invoices.
2. Match Delivery Receipts
Pull all of the delivery receipts that match those vendor invoices. (A delivery receipt is that piece of paper that the carrier has you sign when they deliver their product.) This document is basically the carrier bill of lading and has all the details needed to quote a shipment.
3. Use Receipt to Quote
Once you have the delivery receipt, simply plug the appropriate figures (e.g., class, weight, zip codes and special services) into your carrier rating program to find out what the cost would have been had you shipped it collect under your own freight account.
4. Compare Quote with Vendor Charge
Now that you have the detail of what it would have cost if you shipped it with your own freight deal, compare it to what your vendor charged.
5. Evaluate Potential Savings
Since a lot of suppliers include additional “handling” fees into their costs, there could be a windfall of savings even if your freight rates are not as aggressive as your vendor’s.
6. Create Routing Instructions
If possible savings are detected, you’ll want to convert these shipments to ship collect to you with your preferred carrier. First, you need to develop some rules and instructions for your vendors to follow. Create a routing guide that outlines your preferred carriers and any specific requirements (e.g., order number on the bill of lading, shipping instructions, etc.).
7. Enforce Vendor Compliance
The point of creating a routing guide is to ensure that shipments get properly routed. If you’ve evaluated these programs properly and identified what it’s costing you under your vendor’s program, it is vital to make sure your vendors play by your rules.
8. Penalize Vendors for Non-Compliance
If a vendor doesn’t follow your instructions, they need to be nudged into compliance. Nothing enforces the rules like a little financial zing.
9. Enjoy Your Savings
Congrats! You’ve successfully converted your vendor’s prepay and add program to collect and are enjoying the windfall of savings!
10. Repeat for All Vendors
Now that you know how simple the process is, repeat it for all vendors who are prepay and adding freight to you.
One thing to think about when converting these programs is that some vendors will have exception ratings with their freight carrier. Despite the fact their product might be at a high class, the freight carrier is rating it at a much lower class. Unless your freight program has that same exception, you may want to let your vendor continue to prepay and add if you cannot justify the savings.
Any views or opinions expressed in this column are those of the author and do not represent those of Ceramic Industry, its staff, Editorial Advisory Board or BNP Media.