I know I have you for about 30 seconds before you jump to another site so I am going to get right into it.

Two of the most common outsourced functions of the supply chain these days are transportation and warehousing.  With more and more companies feeling pressure to focus on outsourcing I thought it would be helpful to share some common reasons why companies ultimately reach outside themselves.

Let’s dive into it before you’re off to checking the stock market.

Reason #1:  The outsourced provider is more efficient and skilled and can perform the required service cheaper than the company can on their own.

Reason #2:  The service being outsourced is not a core to the business and a distraction for management.

Reason #3:  The business needs direct access to specialized skills, experiences and/or technology and does not want to invest in those assets directly.

If considering outsourcing, these three topics can be a great way to do a quick self-inventory of whether or not it makes sense for any company.

Observation From the Field

Considering I look “under the hood” of about 75-100 companies a year one observation that I have (and that I am completely jealous of) is that some of the most successful companies are total professionals in outsourcing.  I bet most people would be surprised how many $100,000,000 plus companies out there that consist of less than ten people in a business suite.  These companies adopt the philosophy that anything that is not core to their business gets outsourced.  Judging by the make of the cars in their parking spots, this strategy seems to be working pretty darn well!

Your Turn

What reasons do you have that support outsourcing or not outsourcing?

Boo!  Don’t be so jumpy!  It’s just a supply chain.  But don’t think you’re the only one that gets freaked out by this part of their operation.  The majority of U.S. companies operate a subpar supply chain.  In my opinion, less than 10% of companies have any kind of plan mapped out concerning this part of their company.

Even though Gartner spits out exhausting research on a monthly basis that shows companies who are focusing on operational excellence (Apple, Dell, Walmart, P&G, etc.) are continuing to outperform their competition (at a rate that is not the least bit funny), companies continue do the “same old” thing when it comes to their operations.

So why is everybody or at least 90% of everybody so chicken about doing anything with this vital part of their company?  Well, I believe the culprit is simply FEAR!  Nobody wants to rock the boat.  Nobody wants to introduce something and then be stuck having to do all the work.  Nobody wants to be blamed if a suggested change doesn’t work.

I see this every week.  I cannot tell you how many companies with multi-million dollar transportation spends that are hand writing bill of ladings.  Or how many customer service departments are calling some curmudgeon “in the back” for a tracking number.  Or someone is fearful of making a technology investment even when it has a 150% return investment within the first month.  Or how people’s #1 excuse for an ass-backwards process is “because we’ve always done it that way”.

Companies need to cut the crap and get through this fear!  First of all, developing a supply chain strategy doesn’t require a MIT graduate degree.  Everybody knows about customer service.  Everybody knows about technology.  Everybody knows about collaborating and working together with the end in mind.  Everybody knows about process improvement.  Everybody knows that change sucks but is necessary.

Americans are generally slow to change.  We still want apple pie don’t believe we get paid unless we receive a hard copy check (even if we have direct deposit).  Did you know that in England they haven’t used a check book for 20 years?  That’s because automatic banking provided an easier way to bank and the day after it was invented the Brits adopted it.  We Americans, on the other hand, are still forcing our banks to perform costly manual banking tasks because we are so fearful to freaking change.

It’s same fear that blocks businesses from adapting to the available technologies and process improvements that will help them become better, faster and more profitable.  In this day and age a company with $1,000,000 in sales can utilize and implement the same kind of strategy, with many of the same technologies that Apple or Dell use with an ROI that far outweighs the risks.

WHAT ABOUT YOUR COMPANY?

So what are YOU waiting for?  Maybe you are waiting for your competitors to adopt a supply chain strategy so they can take all your customers because they are easier to deal than you and your “that’s the way we always have done it” attitude.  I bet if that happened you would change.  So why not hedge the inevitable?

Okay, sorry for getting on your case!  I get passionate about this stuff!  The point I am really trying to get across is that it is becoming imperative for companies to create meaningful change in their operation.  And I want to reassure companies that they and their employees can do it.  Change is good!  Go for it!

YOUR TURN

Tell me how your company adopted an operational strategy or supply chain changes and how it became better for it in the end.

Recently I wrote an article titled Knowing How Freight Relates as a Percentage of Invoice.  That article might have hit home for some companies because, believe it or not, many companies have no freaking idea how freight relates as a percentage of invoice.  Nor do they know what to do even if they did know what that was.

So in an effort to help companies take charge of their own costing deficiencies, I am requesting some class participation in the comment section of this article.  I am going to pose a question and I ask that you provide suggestions, answers and ideas that we all can benefit from.  Here we go.

What Can a Company Do if Freight is Eating Away Profits?

I’ll start.

George Muha:  One way is to create premium up charges.  I’m not saying you necessarily have to provide premium services.  I’m saying start adding premiums to good services you are already providing.

An example is next day deliveries.  Why not charge a premium for next day deliveries before noon?  Most regional carriers deliver 99.99% next day before noon anyway so why not charge a $29.00 premium to guarantee that?

So let’s do the math:  If your companies ships out three hundred shipments a week and one third of the customers want to guarantee delivery before noon (which they are getting anyhow) then you just made $2,900 extra a week.

By the way, I call you have to split that with me if your company decides to do that.

Your Turn

What other premium services can a company charge for?  Please feel free to share any expertise or ideas that you have.  Don’t feel shy either or think your idea is stupid.  Sometimes the simplest ideas have the best results!

Some popular business sayings that are relevant today are “companies don’t know what they don’t know”, “knowledge is power” and “you cannot manage what you cannot measure”.  Despite the fact that many executives agree with these quotes and can even be heard saying them, most do not utilize this methodology where it counts the most…within their supply chain.

One supply chain advantage that is significantly underdeveloped is the use of metrics and analytics.  When employed correctly these measurements can be a powerful tool in exceeding revenue goals and greatly improving shareholder value.  However, on the flipside, the lack of measurements can erode company profits without anyone having any way of knowing or ability to do anything about it.

A measurement that is especially underutilized is freight as a percentage of invoice.  As vital as this information is, too often companies just do not understand how freight relates as a percentage of the cost of their goods.  Whether a company has a delivered price program or freight is a pass through, it’s vital for this measurement to be in place and regularly monitored.

The Percentage of Freight as it Relates to Invoice Costs MUST be Monitored Regularly

By creating visuals like this map can be very impactful in identifying how freight impacts invoice prices. Tracking such data is very useful moving toward more profitable percentages.

Companies that do subscribe to a delivered price methodology need to especially understand how freight costs impact the cost of goods.  But companies that pass freight through on their invoice need to pay attention just as much.  It’s a competitive market out there and competitive freight can easily be the difference between winning and losing the business.

Obviously it costs more to ship one thousand miles away than it does five miles away.  It also costs more per pound to ship something that is one hundred pounds than it does to ship an item that costs two thousand pounds.  These two ideals are the backbone to making the most of these metrics.

Engineering a chart that shows freight as a percentage of invoice by customer or even by state can be wildly eye opening for a company who has never looked at the impact of freight on profits like this.  Looking at a healthy sample of time (like a year or more) can arm a company with some excellent data to react upon.

For delivered price customers, having this data will significantly improve their business intelligence.  It’s this intel that will help them to make meaningful changes.

Adjusting Delivered Pricing Programs

One common improvement this data provides is on a shippers free freight program.  Companies generally have a “free freight” threshold.  That is, they offer freight included if a customer buys over a certain amount of volume.  Generally this is a universal threshold to anyone who buys from them, despite where they are located.

However, there are big problems with this kind of logic.  First, the costs vary to ship all over the country.  The company loses much more profit on customers who are far away.  So having a universal freight allowed program over a certain buying amount doesn’t even make sense.

Having the proper metrics in place allows a shipper to properly evaluate such programs and create thresholds that make better sense.

By looking at the data, the exact profitability of each customer comes to light.  So it becomes evident which companies in certain geographical areas can have higher thresholds.  In the same regard, it might make good sense to reward closer customers by giving them a lower threshold.

Companies that pass along freight also should look at this data.  Identifying the weight breaks in the freight rates where the cost per pound drops can be significant.  It’s certain that customers will feel the love if the company their buying from lets them know of the cost breaks if they buy more.  In that scenario, everyone wins.

Understanding the Cost of Freight on Inbound

This article is leaning heavily on outbound freight but it’s just as important to understand freight as a percentage of invoice from vendors.  Data makes people smarter so if purchasing people are armed with the true impact of freight, the more intelligent decisions they can make.

There may be two vendors who sell the same product.  One vendor might have 5% lower product prices but because of where they are located, their “after freight” charge might make them 5% higher than the second vendor.  It’s having the data that makes such decisions a no-brainer.

Same goes with weight break thresholds.  If purchasing has a good understanding of at what threshold does their freight cost per pound go down, they can be well informed to buy the proper quantities.

How Do I Find this Metric?

Some companies don’t utilize metrics because they think it’s too hard to gather or might require too many resources to pull.  But finding what freight is as a percentage of invoice might not be as hard to find as one might think.

Companies surely have their order data at their fingertips.  So locating that should not be difficult.  Companies probably also have the freight cost info keyed into their system as well.  Generally there is a common number that can connect the two (i.e. order number, job number, etc.).  So if this info lies in two separate spots, generally a simple merge in a comma delaminated format can be the basis for this reporting function.

There are many different metrics and analytics that should be used within the supply chain.  Freight as a percentage of invoice is a vital one.  Companies that don’t have visibility to this metric should strongly consider this as a viable measurement.  Freight can make or break profits if not properly managed.

Your Turn:

What effective measurements does your company utilize within its supply chain?  How does your company track freight as a percentage of invoice?

Most companies are not equipped to effectively audit carrier freight invoices, making outsourcing more and more a viable option.

I am not sure how to say this so I am just going to come out and say it.  You’re crazy if you are not currently working with a freight audit and payment company!  What makes me say this?  Because there are excellent service providers out there that can probably do this function better, faster and cheaper than you can.

I am qualified to make this bold statement too.  Why?  Because I evaluate this process in 75 to 100 separate companies every year.  I see firsthand the far fangled way most company’s process freight invoices and cringe in just about every instance at the wasteful use of time and money.

Processing Freight Invoices Internally is a Colossal Waste of Resources

Let’s set aside, for a minute, the fact that one must be Sir Issac Newton to evaluate freight or parcel carrier pricing, the time suck it takes to manually key punch every carrier invoice and the high costs of cutting multiple checks.  Instead, first look at two compelling statistics based on credible research that backs up what I’m saying.

Two Key Stats That Prove Freight Audit and Payment Has to be Outsourced

STAT # 1:  The Cost of Processing an Invoice – In 2008, one of the most well regarded research firms in the U.S. evaluated the real life financial impact processing invoices has on companies.  In their study, they reviewed the bill processing of close to 500 companies.  The study considered a lot of criteria; labor, cost of cutting checks, postage, time, etc.  Their findings showed that the top 20% of companies who had a best in class operation were able to process invoices for in between $2.00 and $3.00 and could process them in between two and three days.  Fifty percent of the companies they evaluated were considered “industry average” and were able to process invoices for just under $10.00 per bill in between fifteen and sixteen days.  And the bottom 30% of companies processed invoices for around $35.00 per bill and did it in over thirty five days.  *I am not allowed to share the name or exact results of this study but I’m happy to share the source of this study privately.

STAT #2:  The Cost Savings of a Pre-Audit – Last month, I was privy to a private study of the cost benefit generated by auditing freight invoices.  This study reviewed close to 1,000,000 freight invoices and the results showed a bottom line savings of a little less than 2% to clients by discovering freight carrier errors.  This study was done by a company that is highly rated by Armstrong Associates as one of the leaders in this space so their audit process is as tight as its going to get.  So it’s fair to say that 2% is a fair number.

Now that I’ve shared those compelling numbers you’re probably saying to yourself, “Okay Muha, those are nifty numbers.  But what kind of impact does that have on my company?  And what is the cost benefit of a freight audit and payment service to my firm?”

Great questions!  Since you brought them up, let’s have some fun with the real world benefits that could likely be available to you.  Most freight audit and payment companies charge between $1.00 to 2.00 per bill to utilize their services.  Knowing that, let’s see how the cost savings will play out to companies with several different transportation spends.

Examples of the Monetary Benefits from Outsourcing Freight Audit and Payment Services

Company #1:  $1,000,000 Freight Spend/4,000 Invoiced Processed Annually
Internal Cost to Process Freight Invoices:  $37,520.00
Pre-Audit Savings:  $20,000.00
Worst Case Cost of using Audit Service:  $8,000.00
Bottom Line Cost Benefit by Outsourcing:  $49,520.00

Company #2:  $10,000,000 Freight Spend/40,000 Invoices Processed Annually
Internal Cost to Process Freight Invoices:  $375,200.00
Pre-Audit Savings:  $200,000.00
Worst Case Cost of using Audit Service:  $80,000.00
Bottom Line Cost Benefit by Outsourcing:  $495,200.00

Company #3:  $50,000,000 Freight Spend/200,000 Invoices Processed Annually
Internal Cost to Process Freight Invoices:  $1,876,000.00
Pre-Audit Savings:  $1,000,000.00
Worst Case Cost of using Audit Service:  $400,000.00
Bottom Line Cost Benefit by Outsourcing:  $2,476.000.00

*This review assumes that it costs a company $9.38 per invoice (“industry average”) and that the average freight invoice costs is $250.00.  Pre-audit savings were calculated at 2%.  Bottom line results are by adding the cost of a pre-audit & payment company and the pre-audit savings and subtracting the $2.00 maximum fee for processing invoices.

Obviously, these numbers are pretty compelling!  In my opinion they are conservative.  But an honest self-appraisal of your own business will probably shed light on the actual cost to process an invoice to your company.

Okay, Now What Do We Do?

You go and hire a freight audit and payment company!  Oh yeah, please be thorough when choosing the right firm for you.  There are a lot of great companies out there.  However, just like any industry, it has its share of sub-par players.  Just be sure to check references or get a recommendation from a trusted source.

Your Turn:

Is there a reason your company has not utilized a freight audit and payment company?  Do you have an argument for keeping this in house?  Is your company currently using a service like this?  What other benefits is your company realizing?

Understanding what a customer needs can save a lot of time, energy and money.

Replace tech rider to engineer, FOH mixer to sales person, artist to customer service department, tour accountant to budget manager, local sound company to inventory manager and instead of saying “what the venue actually needed” to “what the customer actually needed”.  Now isn’t that life imitating art, I don’t know what is.

For those of you who tend to be concerned with fuel prices (in other words, all of us), I thought this was a good visual.  Fuel prices have not peaked to the levels of mid 2008 which is a good thing.  But diesel did rise 29% from 2010 to 2011.  However, the Department of Energy is projecting fuel to remain at 2011 levels through 2012.

Courtesy of the DOE.

I wanted to give a word of advice to shippers out there they may be using a freight carrier who is on shaky financial ground.  If you are shipping with a freight carrier (I don’t want to say any names) who happens to be having a fire sale of assets, is facing a dilution of preferred stock, has a loss of customers and dealing with a very competitive LTL market you may want to make sure you pay attention.

When a larger LTL carrier goes out of business, it typically happens very fast.  It kind of like you show up to work and you get a phone call from someone you know saying, “Hey, did you hear so-and-so went under?”  Then you’re like, Oh crap!  What are we going to do?

Generally speaking, shippers don’t have to worry that much about the shipments that are in that carriers system.  The freight carrier will likely keep a lean staff on board so they can make sure they clean out their system of all remaining freight.  However, some of those shipments may take longer than normal to deliver.

But what you do need to concern yourself with is which carrier is going to handle your business now, and how competitive of rates you will be able to secure.

When a large motor carrier leaves the business it helps out the surviving carriers because of the influx of new business.  Carriers immediately get very selective of the business they want to move, generally keeping the more profitable business and dumping less attractive business.  Conversely, what this means for shippers is that rates rise up or it becomes impossible to negotiate aggressive rates.

So a suggested solution if all of your eggs are in the shaky carrier’s basket is to hedge it and start mixing it up now.  Engage another carrier and secure good pricing while you can.  It’s wise to start feeding that carrier some business to keep them in the mix.  That way, when that inevitable day comes for your carrier you won’t skip a beat.

Listen up you bean counters that are already fretting about going over 2012 budgets.  Over the last two years diesel fuel prices spiked nearly 29% ($2.99 average for 2010 vs. $3.84 average for 2011). However, according to the Department of Energy, diesel in 2012 is expected to average $3.85 per gallon, which is basically the same average for 2011.  You never can predict these things for sure, but the chatter around the transportation industry aligns with these forecasts.

Source: www.eia.doe.gov

In an effort to keep our roads safe from sleepy truck drivers the US Government is making changes to the hours of service rules.  On December 22, 2011 the Department of Transportation and the Federal Motor Carrier Safety Administration (FMCSA) announced regulations that mandate a new limit on the hours per week truck drivers can work.

Under the new rule, effective July 1, 2013, drivers will only be allowed to work up to 70 hours/7-day period, down from 82 hours currently. The rule maintains a limit of 11 hours of continuous time a driver can be behind the wheel.

Source: www.fmcsa.dot.gov