PROPER FREIGHT COSTS CAN BE THE DIFFERENCE BETWEEN PROFIT AND LOSS!
There are four key things that this paper will do for you:
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It will provide you with the tools to tell your client how to save money
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Show you a tool that will give you advantage over your competition
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Provide a new opportunity to increase your consulting practice
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Increase your revenue
Freight
cost management - topics covered:
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Size and place of the opportunity
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Definitions
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Description of the opportunity
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Description of the product/service to manage freight costs
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Ease of implementation
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How does Insourceaudit.com assist the professional accountant?
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Create switching barriers
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Increase your market share
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Open your market to value added sales (VAS)
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Freight transportation background/history
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1) Size and Place of the
Opportunity
Domestic freight transportation consumes between 6% and 18% of every sales
dollar. Truck freight expense exceeded $400 billion dollars in 1999
and continues to grow at an extraordinary annual rate of more
than 2% per year. The combined domestic logistics (supply and demand chain)
expense including motor, rail, air, ship freight and warehousing
will exceed $900 billion dollars over the next several years.
U.S. Gross Domestic Product by Major Societal Function: 1999
Source: U.S. Department of Transportation, Bureau of Transportation Statistics,
derived from U.S. Department of Commerce, Bureau of Economic
Analysis, Survey of Current Business
(Washington, DC: July 2000). Includes all other categories,
such as entertainment, products and services, personal care,
premiums for personal insurance, and payments to pension plans
2)
Definitions
Carriers are those companies that physically transport the freight and provide ancillary services such
as storage in-transit, special freight handling services, etc. They invoice for such services with an
airbill, freight bill or freight invoice.
The primary costing element of a freight bill is the
rate. Rates are developed from many different
forms such as: mileage,
per cwt., point to point, blanket, etc. Whichever method is used, the underlying mandate that must
prevail is, “each piece of freight must carry its own burden”.
Clearly, pricing is influenced by many other factors
such as: product
contamination, susceptibility to damage, density and a host
of other critical costing elements. Other factors that are sometimes considered are the backhaul/front-haul
opportunities and balance abilities.
Notwithstanding the preceding, each carrier has unique
considerations that need to be addressed so as to achieve efficiencies,
economies and profit.
Today,
there are in excess of 130,000 motor truck carriers operating
in the
United States. This
number is increasing rapidly, beginning its acceleration with
the elimination of the Interstate Commerce Commission and corresponding
state regulatory agencies in 1995.
In fact, prior to 1995 there were less than 5,000 regulated
motor truck carriers.
Shippers
are best defined as those who purchase the services of carriers. Shippers
needs vary to the extent of, and governed for the most part
by customer satisfaction, production planning, inventory turns,
and the many other factors which are dictated by the special
needs and requirements of each. Pricing, service levels, time-in-transit,
performance, and customer satisfaction are the key decision
criteria for carrier selection.
3) Description of the Opportunity
Accounting and financial management opportunities for
both carrier and shipper abound in the “transportation management
services” consulting and service environment!
Each
of the factors and decision criteria, when examined, analyzed
and counseled by the accounting professional will yield a significant
contribution to the corporate profit lines.
The skill sets offered by these professionals, coupled
with their experience and combined with business teams representing
multiple disciplines, offers an enormous potential to:
·
Drive down
costs
·
Increase profits
·
Achieve competitive
advantage
·
Offer superior
customer service
4)
Description Of The Product/Service
InsourceAudit.com is
an
ASP model (application service provider*),
freight pre-rating, audit, information management,
facilitating and payment tool.
It allows its customers to configure their carriers/shippers
and their associated rates, needs and services. It facilitates all issues attendant to effective and efficient
transportation management services.
(*An application service
provider (ASP) is a company that offers individuals or enterprises
access over the Internet to applications and related services
that would otherwise have to be located in their own personal
or enterprise computers.)
InsourceAudit.com:
Pre-rates bills of lading, purchase orders and delivery receipts
Pre-pays and adds freight charges to the merchandise invoice
Compares the selected transportation services with invoices
Collects information in the transaction stream
Analyzes shipping and receiving activity
Achieves freight cash asset management
Has data availability 24/7
Monitors freight terms and terms of sale
Expresses the freight expense across the chart of accounts
Provides standard reports and report writer
Allows you to Pay what you want, when you want to
Gives you full and complete access 24/7
Additional
product description will be found on our site:
www.insourceaudit.com.
If there is no transportation, there is no supply chain!
“Without efficient and effective transportation management, there can only
be an inefficient and ineffective supply chain!”
Transportation management functions at any company can be broken down into,
at least, three broad categories:
·
Inbound logistics, these functions include the management of purchasing, planning and returns
processing
·
Outbound logistics include the management of order processing, packaging, labeling, documentation,
customer service, and compliance.
·
Internal logistics focus on the flow of information, ideas, material, inventory, and assembly
Controls
InsourceAudit.com developed a routine to take the mountains of disparate
rates and put them into a template that enables a shipper/carrier
to create an immediate foolproof audit and rating. The cost for processing each transaction
is virtually eliminated because pre-rating, auditing, information
management, reporting and payment are integral to the system.
InsourceAudit.com
enables shippers/carriers to gain control of their total supply
chain and carriers gain insight into their lane/load/freight/profit
analysis.
Empowering them with:
Access to their data as they need it 24/7
A plethora of management reports in real-time.
Insight into accounting, operations, marketing, purchasing, customer service
and other corporate management areas.
Pre-pay and add—advancing receivables—improving the DSR’S (day sales receivables)
Auditing freight bills prior to payment
Controlling the entire freight payment process
Paying when and how they want it done.
Freight Cash Asset Management
Each client company is empowered with the right information at the right
time, so meaningful decisions become timely and accurate.
With accurate, real-time information available 24/7,
the entire supply chain is made visible. With correct freight rates and quality controls, the freight
expense can easily be converted to an asset. With this new found understanding
of the components of the freight expense, along with the associated
and attendant issues, cash flows will properly play off effective
negotiations.
Understanding Freight Costs and Digesting Them In
Your Chart Of Accounts
Because freight costs affect every business, at the very least, significantly
impacting the profit line, it makes sense to understand them.
This understanding is no simple task, but the rewards
are outstanding.
There are many starting points, and the selection of the proper one is dependant
upon each unique situation. However, the focus must be,
“recognition that the freight expense must be understood and
embraced by the corporate philosophy, customer satisfaction,
and operating needs”. Additionally, transportation purchasing must use the currency
that is best understood and easily and accurately digested by
the corporate accounting functions.
As an example, if the saleable product is rolled goods,
purchasing transportation by the standard form of measurement
such as, the yard, foot, meter, etc. would be a strong consideration.
On the other hand, if the saleable product is a base material,
freight cost expressed in pounds might be appropriate. Hotels purchasing furniture could
buy their freight transportation by the suite.
Another critical function is the ability to assign the general ledger code
to the freight expense. This task could be manually driven, but clearly an automated
routine that could drill all the way down to the SKU (stock
keeping unit) level is best. Automation eliminates the labor intensive, error prone clerical
tasks typically associated with this process and recognizes
and appreciates the size and importance of the freight transportation
expense and its microscopic ability examine other business disciplines. Additionally, we can’t loose sight of the fact that allocating
the codes and the cost across a shipment, and the various legs
of a shipment, as well as the other transportation contingencies
is tantamount to an effective cost understanding.
Additionally, an example of the power of understanding the important role
of freight costs is their point of impact on many aspects
of business. Imagine
incorporating the sales person identity in the shipment. The client could then track sales person
profitability by simply comparing invoice value and freight
cost.
Insourceaudit.Com
Partnering with the Professional Accounting Firm!
InsourceAudit.com has developed a unique system that puts the client back
in control, handling the daily activity, facilitating all of
the pre-rating, auditing, payment and information functions.
It provides a highly secure portal to the clients’ accounting
professionals so that they can review the information and offer
their counsel to
help
the client run the company by the numbers.
5) Ease of Implementation
An
impressive feature of our unique design is that, as the set-up
information is being loaded, it is being memorized. Likewise, those data fields are capable of memorizing new
data during the transaction entry or EDI process. Since the
initial configuration supports all of tomorrow’s processing
needs, the typical labor intensive and error prone clerical
tasks are completely eliminated along with the costs. Data collection is also facilitated by EDI, our EDI Enabler,
and the Bill of Lading generator (BLGen).
One
of the significant benefits of our process is to accommodate
the fact that data needs to be collected.
InsourceAudit.com has perfected the method both to collect
and to interpret the data.
6) How Does Insourceaudit.Com Assist
the Professional Accountant?
Transportation is the life bloodline to the marketplace.
Key insights into freight transportation will make the
entire supply chain visible. With this newfound visibility the professional accountant,
for the first time, can offer knowledge and experience to its
clients thereby helping to run the company by the numbers!
Yesterday’s Freight Audit and Payment Practices
Deregulation forced the role of freight audit bureaus and traditional in-house
traffic departments to change. Instead of auditing freight bills
using standardized published tariffs, auditors are now assigned
the task of matching freight bills.
Some of these bills have their basis in telephone calls
using pieces of scrap paper that may have recorded the spot
rate, and separate rate agreements and contracts for each carrier
and each move. Unless the methods, operations, and systems are in place,
it is impossible to obtain the benefits of market opportunities
that prevail in this new transportation market driven industry.
Of equal importance is the probability of subsidizing
competitors through uncontrolled, exorbitant pricing.
Further, without an efficient and effective method to collect the data,
it is impossible for the professional accounting firm to provide
their clients with and effective and meaningful freight expense
audit.
Unfortunately, most companies have yet to develop the appropriate sourcing
and purchasing processes that would allow them to achieve competitive
advantage and best practices.
Typically, they still source yesterday’s market, continually
distancing themselves from the opportunities that abound. Spiraling costs, service failures and lack of marketplace
knowledge are just a few of the myriad problems associated with
using yesterday’s practices to purchase freight transportation
today. Likewise, for these companies, auditing, managing, paying, controlling and
understanding the costs are as effective as pinning “jello”
to the wall.
The problem is manifold; if you don’t understand the marketplace, you can’t
source or purchase effectively, nor can you develop “should
costs”. The natural extension of this is that other corporate
areas suffer and typically subsidize the transportation department’s
missed opportunities. Without these basics, the subsequent year’s transportation
budgets are carrying an abused asset. Proper audit controls not only reconcile
the amount charged to the agreed amount, they also identify
“should costs” and then validate the findings against the market.
Subsequent year’s transportation budgets, only then,
have a true basis.
Most audit bureaus now specialize in service to a small client base because
there is no commonality among shippers or carriers, and the
cost for acquiring the knowledge base to compete in a larger
environment of unlimited variables has grown beyond the level
of practicality. For many shippers, the cost of engaging
an audit service externally is far greater than conducting the
audit internally; primarily because of the number of rejected
bills and questions that abound.
Yesterday’s audit and payment practices produce an inordinate
amount of exceptions, and the cost associated with these exceptions
and the lack of standards have caused freight audit costs to
soar. These costs can reach $25 to $50 per
processed document.
This
is why it’s time for InsourceAudit.com!
TransportGistics
anticipated the importance of the most significant changes in
freight transportation and, early on, developed an appropriate
and effective strategy. One of the key elements in their strategy
was to initiate and deploy an automated method to continually
monitor freight transportation so that a company’s management
could find solutions as quickly as new challenges occur. The goal was to empower management with the ability to, "Manage, Integrate, and Control the Flow of Information, Material, and Money."
Using
TransportGistics tools, the cost of conducting an internal audit
decreases to about $0.05 per processed document.
7) Create Switching Barriers
As astute business people, professional accountants clearly understand “erosion”
both the erosion of customers and the erosion of beneficial
process input. By continuously seeing constantly
refreshed information, the entire performance process is easily
achieved with an exception report that identifies and pinpoints
variances and areas of opportunity.
This 24/7 ability gives the professional accountant the
wherewithal to be a constant part of the management process,
while simultaneously performing the usual functions, services
and tasks associated with the financial, treasury and accounting
practice.
All of this adds up to one simple fact, “you are now positioned to have
a much stronger, day to day presence”.
8) Increase Market Share
InsourceAudit.com
provides the professional accountant with the facilities and
tools to run the company by the numbers so that a newfound freedom
occurs and the ability to increase influence and market share
is just one step forward.
9) Open the Market for your Value
Added Sales (VAS)
The
information produced by InsourceAudit.com, combined with the
knowledge, expertise and experience of the professional accountant,
makes this combined resource one of the most powerful tools
to significantly increase consulting opportunities.
Mining the information base is just one example.
This process will allow you to assist your clients, at
the very least, with:
InsourceAudit.com gives you the springboard
to leapfrog your consulting practice over your competition. InsourceAudit.com provides the necessary
facilitating tools, functionality and features, and data entry
tools to achieve this..
10)
Freight Transportation Background
Freight Transportation Before Regulation
Freight
transportation, at the very least, is one of the most significant
forces in achieving industrial success! Individual and powerful enterprises that were capable of market
manipulation utilized the nations rail system to beat, and in
many cases destroy, their competition. These statistics, on individual
balance sheets, could be considered highly valuable, but from
the perspective of industrial growth and development it stifled
competition, and placed the hands of the future into a highly
concentrated and limited focus.
Prior
to 1887, special incentive freight rates and charges were given
to the few at the expense of their competitors and nation’s
industrial health and success.
While this was the most pronounced abuse, there were
other more subtle abuses, such as not charging the rates that
were agreed to, duplicate billings, or not delivering the service
that was promised. Each and every
one of these abuses had, at their focus, the cost of transportation,
vis a vis, the freight rates and charges. Back then, as today, freight transportation
expenses consumed a very significant part of the sales dollar.
In
order to harness the energy of the industrial revolution, and
the continuing proliferation of manufacturing capability, coupled
with output consistently exceeding their limited market and
distribution areas, transportation became the most
prominent opportunity to take the competitive advantage.
Perhaps
out of sense of fairness or pragmatism, it was realized that
a purely “market driven” transportation industry, at least,
in the then current form, was not conducive to the nation’s
industrial health and success.
Freight
Transportation Is Regulated
Therefore,
after much debate, The Interstate Commerce Act was approved
February 4, 1887 and enacted by the Senate and the House of
Representatives of the United States of America in Congress
assembled.
“That the provisions of this Act shall apply to any common carrier or carriers
engaged in the transportation of passengers or property “…..
While the February 4th promulgation
was applicable to railroads, the subsequent years saw the other
modes of transportation (motor, water, and freight forwarders)
being added to the Act as parts two (2), three (3), and four
(4) respectively.
During
the ensuing years of regulation, and the highly successful growth
and development of the industrial base, some thought that regulation
was stifling the continuation of the growth and development
and that it was time to allow any fit enterprise to become a
carrier while others felt that it was politically expedient
to eliminate governmental regulation.
The
end result of this process was deregulation on January 1, 1995. The most visible effect was an extraordinary
increase in the number of motor freight carriers from a few
thousand to well over 130,000!
Benefits, Chaos, Benefits, Winners and
Losers, Benefits, Chaos……..OPPORTUNITIES!
Freight Transportation Before Deregulation
Prior
to deregulation, freight tariffs were required by Federal and
state law to be published and made available to everyone. Carriers were exempt from the Sherman Anti Trust Act and they
banned together to publish, for the most part, identical freight
rates and charges. They did have the right, under the Reed-Bulwinkle Act, to
take independent action; such provision allowed astute shippers,
with knowledge of the national transportation system, to take
advantage of this provision by utilizing the limited number
of carriers to produce beneficial freight rates and charges.
This was highly selective and difficult to achieve. Thus, the overwhelming preponderance of shippers was relegated
to only those rates and charges that the government regulated
carrier monopoly chose to publish. As carriers competed for
customer acquisition in this environment, the labyrinth of published
tariffs grew to accommodate hundreds of thousands of product
descriptions and countless load sizes, mileage parameters, and
other variables. Identical
product moves could easily be classified differently and therefore
be subject to different rates. By necessity, freight audit bureaus and transportation attorneys
proliferated to sort through the mountain of documentation that
followed shipments moving regionally, intrastate, interstate,
and internationally.
Back in 1929 transportation leaders and innovators offered the first outsourced
traffic department services to assist Transportation and Distribution
Managers by replacing the error prone labor-intensive clerical
tasks, and delivering information and services. The "INDUSTRIAL
SEEDS” were planted. The services included were:
For the most part, these necessary services were affordable only by middle
and upper tier companies.
The
continuing evolution of this process witnessed a host of non-integrated,
disconnected software such as rating, routing, optimization,
claims handling and Bill of Lading generators. Here too, affordable
only by middle and upper tier companies and difficult to implement.
Deregulation had and technology continues to have a profound effect on transportation
management services!
In the mid 1990s, motor and rail freight transportation and related services
had to deal with DEREGULATION! At the heart of deregulation was the need for competition to set pricing
that was free of government intervention. A primary objective
was to open up the carrier market to literally any enterprise
that was fit. The impact of this objective significantly increased the number
of motor common carriers from a few thousand to well over 130,000.
With competition and competitive pricing, shippers were finally positioned
to realistically select the best of a highly populated carrier
market, rather than being subservient to the carrier monopoly,
and to effectively negotiate efficient pricing and services. With this newfound market driven
industry, the necessity and applicability of the
old third party audit bureaus, large overstaffed audit departments,
and the burdensome and costly tariff libraries, meant that yesterday’s
practices could now be replaced.
Clearly,
all of the results of deregulation were not predicted…
and in many ways, have clouded supply chain visibility, and hampered management’s
understanding and ability to effectively utilize the abundant
opportunities that freight transportation services now offer.
The maze was no longer the labyrinth of governmental
regulations; it became the maze of providers, freight rates,
charges and services from unregulated, independent carriers.
Given that there is no longer the tariff publishing demand, and that carriers
provide “telephone spot” and contract rates, shippers are therefore
compelled to individually maintain all of this information.
This allows them to competitively shop and, of equal
importance, validate the freight rates and charges that are
assessed.
Since deregulation was finalized
in 1995, chaos has resulted; rates do not have to be filed,
and neither a national marketplace nor consistent pricing mechanisms
have been developed. The number of carriers has grown from a few thousand to well
over 130,000 and still growing. The transportation and logistics
disciplines have been embraced by intelligent corporate level
management as a means to gain a competitive advantage and ensure
customer satisfaction, but have come to realize that integrated
and collaborative tools, in an ASP model are necessary to maximize
the opportunities.
Continuation
Please consider this white paper as a beginning, succeeding white papers
will address common issues and address them with common solutions.
We encourage our readers to direct any specific questions or
comments to
papers@transportgistics.com.
Disclaimer
The
information presented above represents
the opinion of the author and not necessarily the opinion of
TransportGistics, Inc. nor is it presented as a legal position.
***************
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content copyright by TransportGistics, Inc. All rights are reserved.
The authors of the articles retain the copyright to their articles.
No material may be reproduced electronically or in print without
the express written permission from TransportGistics, Inc. or
the individual authors (papers@transportgistics.com)