Let’s face it: For many Supply Chain professionals freight and shipping matters may not be as scintillating a function to manage as, say, product evaluations, value analysis projects or dare we mention inventory data cleansing?
While freight and shipping may not pique interest, mismanagement and negligence can generate a peak in the expense column and scorn from the C-suite. It also remains a topic drawing interest around budget times.
Freight and shipping represent one of those so-called “low-hanging fruit” opportunities that inspire yawns and motivate many Supply Chain pros to reach beyond for some reason.
Whether esoteric or mundane, freight and shipping is a task that must be fulfilled as a key component of supply chain operations driven by materials, pricing and services.
Supply Chain pros saw their pulses accelerate a bit in the first quarter of this year as prices for fuel, then containerboard and linerboard declined. Their pulses revved more when freight and shipping prices failed to follow suit. After all, such a domino effect seems logical, right?
Maybe not.
“While these prices have declined, there is still a lot of concern for their volatility,” said Christopher DiBernardi, Director, Business & Product Development Healthcare, Ryder. “For one thing, fuel prices are beginning to rise again. There is also an increasing cost to operate — from driver and warehouse worker salaries to the manufacturing of goods. So a decrease in the price of fuel is just one variable in the equation.”
Jake Crampton, Founder and CEO,MedSpeed LLC, expressed mild surprise that the economics didn’t pan out. “It is unclear to me why freight and shipping prices wouldn’t decrease with the decrease in fuel prices,” Crampton said. “We believe in a reciprocal approach to fuel costs. We work with our clients to establish ranges around the prevailing fuel charge in the region and set surcharge and rebate targets when prices exceed or drop below that range.”
Still, Marc Mullen, Vice President and General Manager of OptiFreight Logistics, a Cardinal Health company, said he believes the industry is benefiting overall from these pricing moves. “Aggregate freight costs have benefited from declining fuel costs,” he indicated. “These reductions are reflected in the historically low fuel surcharges from this past year, even hitting zero lately. This represents significant savings for shipments and freight.”
Brandin Parrett, Vice President of Operations, Onsite Management Group LLC, offered a few reasons why Freight and shipping prices are not following suit and decreasing in line with fuel, containerboard and linerboard, the largest and most obvious of which is the “ability for shippers to increase revenue in a very competitive market. “While this might seem opportunistic, and in some cases might be, the stronger economic growth has increased demand for cargo space while the number of drivers is quickly shrinking,” Parrett continued. “This provides an added element to the competiveness of the shipping companies to provide better benefits to retain valued employees. Salaries and healthcare are one aspect, but you must also take into consideration the new regulations that limit driving hours as well, therefore increasing delivery times and/or the need for more drivers to keep up with the demand. All of these factors combined provide the bulk of the resistance to lowering shipping and freight prices.”
Mitch Blau, Regional Director, The Audit Group Inc., an accounts payable and purchasing audit services firm for healthcare organizations, pinpointed labor as a convenient crutch, too, even as freight and shipping companies are just beginning to dabble in driverless vehicles. “There has been a decrease in demand and an increase in supply for containerboard and linerboard, which is why price of those materials has gone down,” Blau observed. “Fuel costs, which have declined in the first quarter, could rise at any time. That being said, consumers are accustomed to volatility at the pump but not to changes in shipping costs. It’s difficult and unpopular with customers to decrease prices if you’ll only have to increase them later when the price of fuel increases. “While costs for fuel and materials are leading indicators to freight and shipping prices, they are not the only catalysts,” he added. “Labor, equipment, and state and federal fuel surcharges are also major indicators that seem to be increasing rather than decreasing.”
But Tracy Leatherman, Vice President, Sales, TRIOSE Inc., linked declining freight volumes as a reflection of a sputtering economy with overall declining growth. “Although fuel surcharges may be lower, the volatility associated with these costs creates additional uncertainty in the marketplace, which forces carriers to adjust via their bottom line,” he said. “It will take time for any impact on corrugated raw materials to have an impact on shipping costs if at all.”
Pricing threats
So what are the biggest threats to freight and shipping prices this year, besides, of course, a savvy, well-informed Supply Chain leader? Freight and shipping firm executives tallied the score.
“Transparency is a big threat to freight and shipping prices,” insisted MedSpeed’s Crampton. “Many times these costs are hidden or embedded into the cost of goods so there isn’t visibility into what an organization is actually paying in freight in shipping. By being transparent with these costs, they can be addressed on their own — outside of the cost of goods.”
Meanwhile, OMG’s Parrett pointed to pure market competitiveness as the culprit.
Oversupply, better supply chain management and low fuel costs have made the market so competitive over the last 18 months that ‘what’s in the box’ has no foothold in pricing negotiations,” he emphasized. “There are simply too many boxes chasing too few spaces. Negotiations for pricing have been based on weight or measure and what’s in the box. Everything was designed to bring maximum revenue to the carrier without regard for the customer.”
Smart Supply Chain leaders are moving more towards short-term contracts, or spot-rate hunting, according to Parrett. “Those that have been utilizing this strategy have been getting much better deals than those with long-term contracts,” he said. “Even those that are infrequent shippers can use today’s Internet-based technology to comparison shop among the many excellent regional and national shipping service providers.”
Parrett further noted that customers are becoming smarter — and more skeptical — about the notion of free delivery.
“If delivery is included in the price of the merchandise that you buy, it would be a good idea to have the shipment quoted with and without free delivery,” he said. “You can then price the shipping cost as a stand-alone transaction to see if you are overpaying for delivery. Suppliers may also be willing to share any in-bound or out-bound shipping discounts that they have negotiated with their shipping/freight companies. Utilizing the technology at your fingertips provides the single most devastating threat to pricing, simply due to the fact that you are an informed customer and know your options.”
Concentrating on rates simply isn’t enough, according to OptiFreight’s Mullen, especially when you overlook the big picture.
“Everyone likes to focus on rates, but truly maximizing savings is all about the breadth of your freight management program,” he said. “A high discount looks great, but if only a portion of your suppliers actually participate, then your percent of ‘unmanaged’ freight will be high — and discounts don’t apply to your ‘unmanaged’ freight. You need to focus on managing your vendors or work with a freight management provider that can maximize vendor participation.”
Developments in fuel efficiency may shift some of the costs, The Audit Group’s Blau predicted.
“As vehicles — both consumer and commercial — are increasing their fuel efficiencies, less gas is being purchased, which means fuel-based highway taxes are decreasing,” he indicated. “As a result, many states are looking to increase their fuel surcharges in order to pay for necessary maintenance of bridges and roads. Ultimately, this increase in shipping costs will be passed on to the end-user.”
Look to labor, Ryder’s DiBernardi insisted.
“Trucking remains a labor-intensive industry,” he said. “Trucks don’t go anywhere — and freight doesn’t move — without professional drivers, and they won’t stay in service without skilled maintenance technicians. Yet more and more companies are finding trucks idle and shipments delayed because of a shortage of drivers and technicians.
“It all comes down to supply and demand,” DiBernardi continued. “Experts predict that demand for commercial truck drivers will grow by 21 percent through 2020. But the supply of drivers is shrinking. The American Trucking Associations (ATA) estimates the trucking industry is short 40,000 professional drivers today, and the shortage is expected to grow to 330,000 by 2020. Ninety percent of transportation carriers report they cannot find enough drivers to meet their requirements. And tougher government safety regulations being put in place to help reduce accidents have already made the shortage worse. The core issue is that the number of drivers retiring or leaving the business is higher than the number of new drivers entering the profession. The median age of a professional driver today is 50 years old. Fewer than 11,500 people are trained to be drivers every year.”
TRIOSE’s Leatherman noted that healthcare organizations simply should improve inventory management processes to make a difference, along with certain regulation changes.
“Typically, an overall increased focus on inventory management can allow transportation costs to be lowered by bundling orders and by allowing the shipper to use a standard service level rather than an expedited, and more costly, service level,” he said. “Potential future changes to government regulations surrounding hours of service would lead to additional costs for extra trucks and extra drivers for the same shipments that needed less previously.”
Focusing on a metric
While some may feel that freight and shipping represents a massive and monumental auditing task, industry experts and observers acknowledge that starting with a specific metric to benchmark third-party logistics company performance may be just what the dock ordered.
“Your freight management services provider must be able to deliver competitive rates and drive down your cost per pack, but that’s not possible unless they have a comprehensive process or system to manage your vendor participation,” Mullen said. “You can have a low cost-per-pack and feel good about your freight management, but if your percent of freight outside of your program is increasing, so are your costs and the cost-per-pack is only part of the story. You’ve got to be looking at both metrics, cost-per-pack and unmanaged freight, and be sure your freight management provider is driving improvement in both areas.”
For DiBernardi, the “best-in-class” metric is as simple as the “perfect order” — on-time, in full, right condition/quality and at the right cost combined with “total cost to serve.”
Crampton emphasized the comprehensive. “We believe a logistics company should be measured for its quality, experience and ability to provide strategic value beyond just transportation itself,” he said. “We look at the logistics we handle, intra-company logistics, as a strategic asset that works as a means to help healthcare organizations achieve greater operational efficiencies, reduce risk, more effectively utilize scale, eliminate redundancies and centralize services.”
Bonni Kaplan DeWoskin, MedSpeed’s Vice President, Marketing, and Crampton’s colleague, chimed in metaphorically that “freight doesn’t stop at the water’s edge — with the water’s edge being the bubble around the health system.”
Parrett urged Supply Chain pros to watch out for “accessorials as a percent of total freight,” cleverly billed to cover up sins.
“Many freight carriers will charge extra fees to help offset costs,” he said. “These can be extra fees for trailer detention/demurrage, re-delivery, fuel increases/surcharges and any other expenses or extra services. Often, these are extra costs incurred due to inefficient processes. The biggest difference between accessorials and surcharges, special service codes, and other fees that the major carriers charge is that, for the most part, they are assessed and applied post-shipment. You can plan and budget for surcharges to a certain degree, but accessorials, which are typically neither applied at the point of manifest nor included in regular invoices, can be extremely difficult to factor into your company’s logistics and supply chain budgets. For this reason and others, they can be a major thorn in your side when you have to answer for losses that are nearly impossible to pre-determine, difficult to uncover, and at the same time, very hard to ignore.”
Accessorials account for a major portion, (20 to 50 percent), of a carrier’s total annual revenue, according to Parrett. “Carriers have almost no incentive to reduce accessorials or provide detailed billing,” he noted. “As you continue to try and manage transportation costs, you’ll soon understand that most carriers are using accessorials to make money. By performing thorough analyses of your company’s shipping history and characteristics internally or with the assistance of a qualified third-party logistics provider, it is possible, to see that your accessorials are discounted or waived entirely. By making it a priority to manage supply chain and logistics by optimizing processes, implementing cost-saving ideas, and creating solutions, you can combat the accessorials that may be causing you to go over your shipping budget or forcing you to cut corners that you don’t need or want to cut.”
Michelle Robbins, Vice President of Product Management, Life Sciences & Healthcare, DHL Supply Chain, advised Supply Chain pros to step back first and determine whether they have “true visibility” into their freight costs before moving forward.
“Having been a consultant for many years, this is where I believe the true struggle lies for many health systems,” she observed. “Typically freight is being charged or allocated to different general ledgers or strictly buried in the cost of product, inconsistent across departments or facilities. Does the health system have a strategy that details how freight is captured, charged or reported? The first step to a good benchmark is having true line of site to the process and total costs. Has the hospital/health system worked with finance and accounts payable to develop a process to ensure freight is captured and visible?
“There are many statistics out there that range from the best freight cost based on spend or even bed count, but more importantly I think the best benchmark is against one’s self,” she continued. “Where are you starting from? Can you account for your freight and shipping cost by type, such as shipping costs — both inbound and outbound, distribution costs for med/surg and pharmacy, lab, food, radiology, etc., and other miscellaneous distribution costs? I also like to be able to see my overnight shipping cost overuse because it can point to other supply problems. Once you have your baseline, how are you performing? Is it consistent? Are you saving money? How much? If you’re reviewing your metrics on a regular basis you should be able to identify spikes, deviations from process and quickly adjust to account for or fix underlying problems.”
Robbins further noted that for those hospitals with a self-distribution platform an important metric to monitor would be “the perfect order,” which includes the percent of orders with on-time delivery, the percent of orders shipped complete, the percent of orders shipped damage-free, and the percent of orders sent with the correct documentation, including bills of lading, packing lists, and an accurate freight invoice based on the freight terms.
Leatherman cautioned against searching for a simple, single solution.
“I don’t believe any one single metric is most important,” he said. “They all have to work and be in line together. For example, it’s great if the health system can save money, but if the carrier is unreliable then Supply Chain gets a black eye. When looking at logistics companies for freight and shipping services it is of paramount importance the depth of services and management the company provides is reviewed. A good logistics company should have an enterprise-wide view of health systems logistics needs and build business plans to drive behaviors.”
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Rick Dana Barlow | Senior Editor
Rick Dana Barlow is Senior Editor for Healthcare Purchasing News, an Endeavor Business Media publication. He can be reached at [email protected].
