You’re the VP of Transportation and the CFO walks into your office and asks you a few questions:
- Are we leveraging our total transportation spend when negotiating with carriers, or is our spend fragmented across departments, business units, or Logistics Service Providers?
- Are we engaged with the right set of carriers, or are there other carriers that can meet our service level expectations at a lower cost?
- Are we consistently using contracted carriers and paying contracted rates, or is there a lot of “maverick” spending taking place?
- Are we being invoiced correctly, or are we paying too much? What’s the cost of our freight settlement process and can we streamline it?
- Are our transportation costs aligned with the rest of the market, or are we paying more or less than other companies?
Although these questions are simple to ask, they’re not always easy to answer because many companies lack the necessary data, metrics, processes, and/or technology to analyze, manage, and control their transportation spend.
There are some fundamental best practices that companies can implement to manage and control their transportation spend. The first step is to define upfront a set of Key Performance Indicators (KPIs) that align with your financial and operational objectives. Many companies, for example, measure “Compliance to Routing Guide” because this metric has both cost and service level implications.
The next step is creating a baseline, a starting point for tracking performance. Some basic questions to answer include:
- What is our aggregated spend across our network?
- What are our current rates and volumes per lane?
- How many carriers are we using?
- How much overlap (carriers and lanes) exists across our supply chain?
For companies without a transportation management system (TMS), the process of gathering and analyzing historical data is usually very time-consuming, especially if the data is spread out across multiple systems, departments, and external partners, such as logistics service providers and freight payment firms. In many cases, companies discover they can’t construct a complete and accurate baseline because they haven’t been collecting certain information or the data available is not detailed enough (e.g., use of average rates instead of actual costs; transportation costs aggregated with other expenses; assessorial fees not tracked separately, etc.).
For additional best practices in transportation spend management, check out this Talking Logistics episode from last June. Because the next time the CFO comes around, you want to make sure you have the right answers.