Overt, covert freight and shipping costs revealed

Marc Mullen, Vice President and General Manager of OptiFreight Logistics, a Cardinal Health company.

Overt:

• Inbound rates

• Outbound shipping processes

• Selecting the right mode of service (mode optimization)

For these methods, it’s all about making sure you’re shipping the right way. For example, with mode optimization you can determine how to ship packages fastest at the lowest rate possible without impacting the delivery date. Why choose overnight service if a lower cost ground service will get your package there the next day as well?

Covert:

• Supplier compliance

• Purchase order instructions

• Analytics/visibility to aggregate spend – then manage

• These are all strategies that need to be implemented to ensure the long term success of your program:

• Make sure all your suppliers are compliant with the program, so you can attain a discounted rate on every shipment.

• Reinforce this compliance by including instructions on every purchase order, every time. To ensure suppliers use a third-party account number for every shipment, remind them on every purchase order you issue.

• Finally, you can’t manage your freight unless you have full visibility to what you’re spending. Analytics will help you gain access to a high level of transparency that can help provide insights to inform better decisions in the future.

Tracy Leatherman, Vice President, Sales, TRIOSE Inc.

Overt areas (readily apparent)

• Prepay and add-freight expense. At a high level this is a good indicator. If a health system’s volume of patients and services has not increased, but their vendors prepay and add shipping costs have increased dramatically, you should take a closer look at what could be driving those costs.

Covert areas (hidden)

• Shipping that is bundled in the cost of the product. Just because you can’t see it doesn’t mean it doesn’t exist.

• Priority Services charged prepay and add by your vendor. Most invoices with prepay and add-freight costs provide little-to-no information on the particulars of that shipment and how it was shipped. How do you know if priority and next-day air services are being overused if you can’t identify how frequently it happens? Reducing use of priority services levels can save upwards of 65 percent on a single shipment.

• Claims are another area where costs are not readily tracked by the health system. When packages are lost or damaged, who manages the process to ensure that the claim paperwork is filed on time and ensures that claims get settled? Unless you have a third party managing this function, it is likely that the health system doesn’t know what costs are getting recouped versus the ones that aren’t.

Christopher DiBernardi, Director, Business & Product Development Healthcare, Ryder

Three of the most overt areas are on-time delivery, empty miles, and customer service levels. The most covert to find are driver turnover, missed deliveries and poor routes.

Michelle Robbins, Vice President of Product Management, Life Sciences & Healthcare, DHL Supply Chain

Overt: When it comes to managing freight the overt areas I would watch are my distribution fees across modalities, such as am I bringing in a pharmaceutical through my med/surg channels and now are paying cost-plus instead of cost-minus, have I looked to pairing with a pure-play logistics carrier, the use of overnight and other specialty modes and lastly my internal processes to ensure I have line-of-site to my actual freight costs. All of these are ways the hospital can easily take charge and manage their freight spend and reduce costs.

Covert: The more covert areas are more difficult for a hospital to manage and take effort, processes and sometimes systems to manage, and that’s why most health systems either accept them as they are and they often go unchanged. First, look outside of the typical Supply Chain scope, including engineering, food, marketing, etc. Next, look into the capital purchasing program as most health systems just accept the vendors shipping methods for large capital items when there could be large savings in challenging. Lastly, if I was using a transportation management company or distributor/wholesaler, learn whether you are matching your vendor contract shipping methods, mode and price or just accepting that these other companies are providing you best price. Additionally, look at hard at things like fuel surcharge for over the road, insurance per load – particularly important for high-value products – and less-than-truckload (LTL) rate components in combination, class, discount, and minimum charge.

Jake Crampton, Founder and CEO, MedSpeed LLC

We see the biggest underlying areas to watch as being hidden/embedded costs, over utilization of service (using more than is truly needed) and utility (not getting the most out of the transportation that is being used).

Brandin Parrett, Vice President of Operations, Onsite Management Group LLC

The most overt areas to watch are:

• Up-front shipping rates. It is important to rate shop among all of your available carriers and delivery methods. Ensure your organization is trained to properly rate shop and look for the best savings opportunities for your organization rather than the first one at hand.

• Incorrect usage of delivery speeds. A common mistake is to ship items to get them to you the fastest method. Many times the expense is wasted through uneducated use. To avoid wasted expense, use express delivery for true need or supplies needed in the short term and ship the rest by lower cost ground or truck freight. Likewise, use FedEx or UPS ground or USPS priority mail instead of express delivery for Zone 2 addresses, as the packages will arrive just as quickly.

• Seeking group discounts. Many hospital organizations belong to GPOs, which may or may not have lower negotiated rates than are available to an individual hospital.

The most covert areas to watch are:

• Billing errors. Oftentimes hospitals accept the invoice and it is submitted for payment without validation. Auditing your carrier invoices for errors. You can assume that 5 to 10 percent of invoices have an error or a reimbursable service failure that is costing you money. You can do your own checking or there are a number of third party vendors with the knowledgebase to examine your invoices.

• Undocumented charges at time of purchase or accessorial charges. It is important to fully understand the final bill received. If you are not properly auditing and asking questions on final invoices, you will often pay for unknown fees and miss out on the opportunity to have the charges reduced or waived.

• Carrier contracting. In many instances, the utilization of carrier contracts can save a company a significant amount. However, it is important to be educated on the subject. Carrier contracts have always been particularly challenging for shippers. They are deliberately confusing. Pricing, and the basis for it, has never been transparent, so it is impossible to verify on your own that you have fair and competitive rates. Typically these contracts are negotiated every few years, so it is not something that your sourcing team gets to practice much either. It is extremely helpful to engage a member of your team with the correct skillset and knowledge to handle this process or engage a trusted third party vendor to act on your behalf.

Mitch Blau, Regional Director, The Audit Group Inc.

The most overt areas of freight and shipping costs to watch are:

• Abuse of overnight deliveries. With better planning and oversight, overnight shipping – and their associated costs – can be significantly reduced.

• Accuracy of billings for third-party freight companies. Hospitals and health systems should demand detailed reports from third-party freight companies and assure that all deliveries are to/from their facilities.

• Freight overcharges. For some vendors, freight is a profit center by simply marking up freight passed along to the customer. For a hospital, simply questioning freight costs that appear inflated can often yield an adjustment. If possible, include specific terms for freight (both standard and expedited) in all vendor agreements to avoid any future overcharges or disagreements.

The two most covert areas of freight and shipping costs to watch are:

• Add-on costs. Add-on costs include freight errors, miscellaneous and handling charges and charges that may be hidden in electronic data interchange transactions or charged by vendors when using third-party freight companies. Depending on your system and the available controls and reporting, you may not be seeing the whole picture when it comes to freight and other add-on charges within your EDI charges. Because of the speed and hands-off environment of EDI transactions, an erroneous charge could be paid without any notice or challenge. Because charges such as freight may be manually entered, they may have the ability to be incorrect. Extra digits, transposition and math errors are just some of the potential mistakes that could cause incorrect, inflated charges.

• Theft. Because of the nature of a loading dock/receiving area, there are a lot of different people at different times. That, in addition to the variety of items that flow through receiving docks and the potential value of some items, presents opportunities for theft that hospitals need to be aware of. The internet has also created an easy marketplace for circumventing direct manufacturer purchases and the reselling of stolen items.