Clips/ Feature Article

Are you ready to take control of your inbound freight?

WHEN Industrial Distribution Group, Inc. looked at ways to improve efficiency and customer service, it targeted the transportation and logistics function, says Lori Martin. As director of organizational development, she is responsible for inbound and outbound freight for the Atlanta-based distributor.

"I spent a day in the warehouse and it was immediately clear that inbound transportation could be handled more efficiently," Martin says. "Four rigs were waiting to be unloaded, 30 more deliveries arrived in the morning and five trucks came in the afternoon."

This hectic flow of deliveries contrasted with the smooth outbound flow, she says. It was clear that the associates knew how to efficiently handle the outbound freight. She says IDG decided to take control of its inbound freight function.

"We needed to start with reducing the number of inbound carriers," she says. "We made partnerships and went from 180 to 10 core carriers."

According to Martin, the carriers gained access to more and better information. With this better understanding of IDG's requirements, deliveries can be consolidated and fewer trucks need to be sent.

"In some cases, a carrier will simply drop off a full trailer," Martin says. "It is unloaded, loaded with outbound freight and then they come back to pick it up."

This greater collaboration led to considerable cost savings. She says freight, as a percentage of sales, decreased from 2.41 to 0.88 percent.

"It has reduced freight invoices by 5,000 per month," adds Martin. "It has also led to increased customer service."
The most critical aspect is an infrastructure that enhances communication, she says. IDG has better information from customers, vendors and carriers.

One advantage of integrating the companies that formed IDG is that with better control and improvement of processes, the associates understand the capabilities of the carriers. They can answer customer questions and provide better customer service, she adds.

Another advantage is the leverage of scale, says Martin. As one of the largest North American distributors, IDG was able to demand compliance from its vendors.

Manufacturing consent

Martin says most of IDG's vendors went along with its requests. While a few resisted, some simply did not have the systems necessary to comply.

"Our strategic carriers work with our vendors to help make it go smoothly? she says. "Our vendors know our relationships, our carriers and how we ship."

But not all manufacturers are willing to give up control of their freight. Freight charges are typically a part of the cost billed to the distributor by the vendor.

Leominster, Mass.-based Pferd, Inc. says requests for third party billing of freight below the company's minimum are on the rise. Executive vice president of sales and marketing Gene Huegin says it is a classic case of cost shifting.

"When the issue first came up we discussed it with our reps," says Huegin. "They pointed out that distributors are trying to reduce costs in every way."

But Huegin says that as distributors increase their volume with a carrier and reduce their rates, the manufacturer's volume drops and rates increase. He says this doesn't take cost out of the supply chain.

"I understand that if they are paying the freight, they want to have control," says Huegin. "However, the ultimate goal is to reduce costs to the customer. We need to take costs out of the channel and this doesn't do it."

It is also a logistical nightmare and a cost issue, he says. In one example, meeting a customer's demands would have required accommodating 160 different permutations of shipping and billing scenarios.

"I have to be delicate, it isn't a line in the sand," says Huegin. "We have simply decided not to participate in their freight requests."

A balanced approach

F. Barry Lawrence, Ph.D. says that when a distributor takes control of their inbound freight it can be cost shifting or it can lead to good supply chain management.

Lawrence, the director of information systems consortium at the Thomas A. Read Center for Distribution Research and Education at Texas A&M University, says many companies build profitability into their freight and since it is billed as part of the product cost, the actual cost of freight is difficult to determine.

"Distributors, especially larger ones, want it to be visible so they can negotiate a better deal," says Lawrence. "They also want to increase their volume with carriers to increase their discounts."

Manufacturers want to maintain their volume with their carriers and don't want complicated relationships with numerous distributor logistics departments, he says. It becomes an adversarial relationship.

"In this struggle, usually the larger and more powerful business wins, but it's the customer who should win," says Lawrence. "This can happen through better transportation management."

When the distributor balances inbound and outbound freight, the opportunity for large savings are great, he says. If the distributor can tie up most of a truck's activity by providing back hauls when deliveries are made, the carrier will usually offer large discounts.

To have adequate volume and influence, a distributor needs to transact as much as $100 million annually, Lawrence says. The number of branches and distribution centers, territory, and number of suppliers figure greatly into the equation.

"In some cases, distributors can take advantage of regional characteristics to gain leverage with a carrier," he says. "However, it often comes down to sheer size."

It is also necessary to have the people and transportation algorithms in place, adds Lawrence. It is still possible that there will be costs in the short run due to mismatched inbound and outbound while the algorithms are being coordinated.

Joint intelligence

Some distributors have gained real collaboration success with their vendors when taking control of their inbound freight. One example is automotive parts distributor, R&B, Inc. of Colmar, Pa., which has annual sales of approximately $200 million per year.

"We invested in an enterprise resource planning system in 1998," says vice president of materials David Lynch. "In order for it to work properly, we realized we needed better control of our information."

To ensure timely, accurate data as well as save costs, R&B decided to control its inbound, says Lynch. The business system provided the necessary infrastructure and the results across the supply chain have been positive. Most vendors have accepted the arrangements, he says.

"We've not done anything to significantly increase costs to the vendors and we provide better and more streamlined information, which allows them to plan better," says Lynch. "By sharing information from our carrier base, we can work on deliveries to reduce costs."

He says information sharing and collaboration allows for better control of inventory throughout the supply chain and improved service to the customer.

Consolidating freight volume has meant increased discounts as well as practical benefits with the carriers. Since some of the distributor's locations aren't in major metropolitan areas, the carrier couldn't easily consolidate loads or locate back hauls with other customers in the area.

Buyer beware

There are some risks to taking control of inbound freight, cautions Lawrence. The distributor owns freight from the minute it leaves the manufacturer and assumes the risks during transport.

"This is more than just an insurance hassle in some cases," says Lawrence. "It can be a matter of legislation and liability, especially in hazardous materials transport."

Distributors who work frequently with chemicals are well aware of the issues and liabilities associated with them, says Lawrence. Many general line distributors are not aware of the risks and problems associated with transporting some of these items, however.

Atlanta-based Cendian Corp. specializes in the outsourced logistics of chemicals. With $1 billion in purchasing power, says CEO Mark A. Kaiser, Cendian can offer advantages enabled by scale as well as take cost out of the supply chain.

"In the chemical industry, many bulk containers are sent merely 30 to 40 percent full," says Kaiser. "Information technology and volume allow us to make sure more of the containers are full."

Cendian can also assist in intermodal transportation using truck, rail and shipping for maximum efficiency. This can drive freight costs down considerably and remove costs from the supply chain, he says. A third party logistics provider can offer economy of scale and an immediate savings with no initial investment, says Kaiser.

"Distributors are a part of our market we are excited about," he says. "The small customers don't have the volume and don't get the best price or service, but we level the playing field."

Even smaller distributors can share in the advantages of the larger players. He says they can depend upon on-time deliveries and superior service, which can help them open new markets or expand their customer base.

"Outsourcing is a larger trend abroad than it is in the United States," says Kaiser. "IT spending is currently down but outsourcing spending remains strong."

Delivering solutions

Clicklogistics offers a combination of logistics technology and management, says CEO Thomas K. Sanderson. The Billerica, Mass.-based firm offers a hosted solution, available through the Internet, which determines the best mode and the best carrier, he says.

"With clicklogistics, orders are handled electronically and the system takes care of the bill of lading, tracking and making sure the contracted rates are applied, among other features," says Sanderson. "It provides visibility of all of the details and big savings."

The distributor can get the cost and service advantages of controlling their inbound without a costly transportation management system, says Sanderson. This outsourced ASP allows vendors to easily and securely interface into the distributor's account to simply comply with distributors' routing instructions.

"We also provide shipment optimization," says Sanderson. "It is not just routing compliance, by combining shipments, we can build larger orders to provide significant savings."

One of the advantages of this hosted solution is its simplicity, he says. Transportation software can be complicated and may require operators with a background in mathematics.

"Compliance for vendors is easy and it removes the hassle and expense of maintaining a rate book," says Sanderson. "Getting vendors access to a distributor's system is difficult and involves collaboration and trust issues while hosted solutions are secure, simple and make collaboration easy."

Another provider of Web-based logistics is Lenexa, Kan.-based Freightquote.com. The company provides advanced tools for inbound freight solutions, says chairman and CEO Tim Barton.

He says if you control your outbound, you should try to control your inbound as well. This allows better information and a better understanding and control of costs.

"Large distributors clearly have a lot of inbound freight," says Barton. "Some have been successful in using their leverage to gain control of their inbound."

He says Freightquote allows for accurate pricing of freight which can be five to 25 percent of the cost on heavy industrial shipments. It can be the most expensive cost on some used products.

"Leaving that component out can hurt planning," says Sanderson. "It can cause the loss of a sale or even a customer."

The ultimate leverage is communication, not size, he says. Collaboration and communication can win over reluctant vendors.

"Many of the competing software programs are lacking the promise and advantages of the Internet," says Sanderson. "This system is set up to notify vendor, arrange shipments, confirm charges, provide embedded electronic documents with no paper records, and more."

He points out that transactions are limited to carriers on the freightquote network, but it is an extensive network.

"Other providers have a more open-ended solution and users can use any carrier they choose but orders go over fax or email," says Sanderson. "In our network, the distributor is not left on their own to finish the transaction. It is fully electronic and we enforce it end to end."

COPYRIGHT 2002 Cahners Business Information in association with The Gale Group and LookSmart.