PROPER FREIGHT COSTS CAN BE THE DIFFERENCE BETWEEN PROFIT AND LOSS!

 

There are four key things that this paper will do for you:

• It will provide you with the tools to tell your client how to save money

• Show you a tool that will give you advantage over your competition

• Provide a new opportunity to increase your consulting practice

• Increase your revenue

 

Freight cost management - topics covered:

1. Size and place of the opportunity

2. Definitions

3. Description of the opportunity

4. Description of the product/service to manage freight costs

5. Ease of implementation

6. How does Insourceaudit.com assist the professional accountant?

7. Create switching barriers

8. Increase your market share

9. Open your market to value added sales (VAS)

10. Freight transportation background/history

Click here to read the entire paper

 

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:

Pattern recognition,

Terms of sale

Terms of purchase

Freight terms

Use taxes

Product profitability

Cash management

Sales performance

Value of promotional sales

Sales incentives

Passage of title. 

Professional accountants know how to:

Look at data,

Interpret data

Analyze data

Convert the data to important decision criteria

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 4^th 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:

 

·         Freight post audit

·         Freight pre-audit

·         Consulting

·         Overcharged claims

·         Undercharged claims

·         Loss and damage claim handling

·         Transportation law

·         Pre-payment

·         Post-payment

·         Other related services on an as needed basis

 

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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All 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)