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How digitization reduces your freight spend

18 May 2018

Although Freight Spend usually makes up 5% to 10% of a company’s Sales, details of this important cost element are often unknown to manufacturers and besides that they often don’t have the tools at hand to control and improve these costs in a standardized yet flexible way

The information available often remains a high level figure without understanding the underlying cost drivers, the necessary data to understand the costs is coming from disconnected systems or even only from the Logistics Service Provider’s invoice.

When Freight Spend reduction programs are being initiated the first reflex is often to run a transport tender or try to squeeze the margins of incumbent logistic service providers.

As a result of these exercises lump sum savings on the basic freight costs are being calculated resulting in selecting a single service provider per service level or geographical area.

To reap the highest benefits from freight spend reduction exercises it is important to understand the specifics of your transport flows and have the flexibility to easily manage multiple transport partners in an efficient way using standardized processes. To obtain this level of transport intelligence and optimized processes, digitization of logistics is essential.

First of all it is important to understand the different cost elements and how they are being calculated: Freight rates, Fuel surcharges and accessorial charges. Since no carrier rate card is alike, a system needs to be capable of maintaining different rate  formats, multiple chargeable weight conversion factors and a range of configurable surcharges to be able to compare costs of different providers.

Most modern e-sourcing tools are able to do that and will give  a strategic overview to select main carriers and backup carriers but companies often limit themselves to one carrier per lane or region because managing multiple partners would be too complicated with the tools (often a rigid ERP or excel spreadsheets) they are using.

But if a system that is able to capture all tender results and store them in a powerful rate engine that is capable to calculate all the available rates for an order on the fly, while taking the specifics and constraints of the order, like transit times, weight and dimensions, temperature control or dangerous goods capability,  into account and present you with the available options or automatically select the best available rate and corresponding carrier, costs would be optimized on order level instead of country or product level and increases the savings potential enormously.

Of course the system must be able to communicate the order to all carriers in the same way and should be able to handle further communication and billing method in the same structured way for all partners to avoid that the freight spend reduction is being replaced by additional overhead to manage the increased number of used carriers.

This dynamic carrier selection might be a risk to volume discounts companies sometimes negotiate with transport companies, to avoid losing these discounts a system should be able to take allocation rules into account during the dynamic carrier selection process.

Technology can turn freight rate optimization into a day to day operational process instead of a once per year strategical exercise and will deliver actual results that are greater than the usual theoretical calculations.