PURCHASING FREIGHT TRANSPORTATION IN YOUR CORPORATE CURRENCY

Executive Summary

Purchasing freight transportation services in a currency, one that is understood by finance and accounting uniquely offers the entire corporate team an important, comprehensive view of its industrial and commercial complex.  Viewing the corporate infrastructure and its operations from this perspective will provide management with new insights and expose areas of opportunity. 

Freight travels throughout the supply chain, and its alter ego simultaneously collects business rich data. The result of this activity is in the creation of a robust “information pool of corporate opportunity”.  This corporate repository of information makes the entire supply chain visible.  With the supply chain laid bare, and because of their exclusive corporate centric perspective, the Transportation and Logistics professionals now have a global view of the interdepartmental and interdisciplinary relationships.

Corporate income and expense are the life and fuel of every commercial and industrial enterprise.  Recognition of this simple fact is evidenced by the legions of effort assigned to the task of understanding and controlling money.  Notwithstanding the strong, relevant similarities between Logistics and Transportation on the one hand, and Accounting and Finance on the other, these business disciplines have operated, at best, as estranged partners wandering aimlessly in ocean of opportunity.  Unfortunately, if Accounting and Finance are the only two business disciplines focused on understanding and controlling money, the potential opportunities available from purchasing freight transportation with a currency that is corporately understood will never see the light of day .   

Considering that a significant portion of the average corporate budget is consumed by logistics, of which the freight transportation expense devours an ever increasing and very large part; it is appropriate to challenge the fact that, “it remains one of the least understood of all business expenses”.

In our “Convergence” white paper we demonstrated the value of intellectual cross cultivation.  Imagine the potential of a convergence work group comprised of Accounting, Finance and Transportation Management resources.  Their disparate knowledge, and unique perspectives, focused on developing a corporate currency to purchase freight transportation will break down corporate silos; and bridge the gap between the company and its access to its intellectual resources and other assets. 

This white paper will address the issues surrounding a corporate currency and discuss the unique advantages of purchasing freight transportation with that currency. 

Convergence Currency Partners

Corporate income is the fuel of every business and its expense is, amongst many things, a management tool used to measure performance and affect controls.  Unfortunately, income and expense management have been held captive by narrowly defined borders which have been supported by corporate silos.  The three (3) business disciplines that are directly involved with freight transportation expense are:  Accounting; Finance; and Transportation Management.  The discipline common to all three (3) is Logistics. 

The following words will be used throughout this white paper, and in order to establish a shared understanding, they are being described below:

Accounting is defined as, "The bookkeeping methods involved in making a financial record of business transactions and in the preparation of statements concerning the assets, liabilities, and operating results of a business".[1]

Finance is defined as, "The science of the management of money and other assets".

Logistics (industrial) is defined as, “the discipline that manages the flow of raw material through the finishing process and is ultimately responsible for customer satisfaction".

Macrologistics is, "the study and management of the overall aspects, process, and workings of logistics".

Micrologistics is, "the study of the operations and the application of the components of logistics, such as transportation, inventory, warehousing, purchasing, and customer service".

Currency is defined as, "money in any form when in actual use as a medium of exchange".[2]

Money is defined as, "A medium that can be exchanged for goods and services and is used as a measure of their value on the market, including among its forms a commodity", such as "?"

Finance and Accounting are responsible for the control and management of corporate income and expense; Logistics is responsible for managing the flow of raw material through the finishing process; and Transportation, as a micrologistics component is specifically responsible for managing freight.  When combined, these disciplines are responsible for “managing, integrating, and controlling the flow of information, material, and money”.[3] Viewed from this perspective, they are exceptionally qualified to develop and exploit a corporate currency. 

Transportation, the Least Understood Expense

Understanding why the transportation expense continues as the least understood of all business expenses, will provide the information necessary to break down the silos; and to unleash the capabilities of income and expense management that have been held captive. 

At the outset, freight transportation management was considered a “corporate outcast” and was treated as the “butt end foul up of everyone else’s mistake”.  This prevailing attitude may have developed because transportation management was always taken for granted; its only visibility occurred when there was failure.  To the credit of the Transportation and Logistics professionals, there were very few failures.  Unfortunately, this supported invisibility.  Invisibility supports many other reasons that contribute to this lack of understanding; below are a few examples: 

1.          Approximately one hundred years of transportation regulation, instilled a corporate accounting and finance belief that the freight rates and charges assessed by carriers were assigned by the government. 

2.           Regulation allowed the carriers to unilaterally structure the rates, and determine how much shippers would pay.

3.           Exemption from the Sherman Anti Trust Act supported the shippers’ belief that the freight rates and charges were exempt from challenge.

Without “regulation” the monopoly advantage evaporates, and barriers of the past crumble.  Absent these obstacles the mysteries surrounding freight transportation expense are more easily challenged

A New Era of Transportation and Logistics Potential, Breaking Down Barriers

Deeply instilled attitudes are difficult to change; in the case of freight transportation expense, it took the deregulation process, and ultimately the Motor Carrier Act of 1995, and the Rail Staggers Act to usher in a “new era of enormous transportation and logistics potential and opportunity”!  This new era was based upon a mature understanding by carriers and shippers that greater opportunities, in addition to cost reduction, could abound and that creativity and innovation would provide mutual advantages.  The time and environment were ripe for change, and astute shippers began to understand that there was enormous potential that could be realized through understanding, exploitation, and manipulation of the freight transportation expense.

Contributing to the shift in attitude was the recognition that freight expense is sizable enough to warrant proper attention; it consumes between 6 and 18% of every sales dollar in the average company. 

Technology was another powerful messenger of change.  In our white paper, “The Dimensions and Dynamics of Connective Technology” we demonstrated the influence that technology in general and more specifically connective technology played in creating change.  Collaboration and trading partners continues to reinforce changing global business attitudes and the need to develop and enhance transportation and financial management systems.

With the spirit of change, empowered by enthusiasm, enabled by experience and knowledge, industry continues to seek opportunity by testing the boundaries.  Transportation and Logistics professionals now have a seat at the corporate table alongside their Finance and Accounting colleagues.  Together they stand on the threshold of this new era and are poised to further unravel the freight transportation expense mystery and exploit its capabilities. 

The Freight Transportation Costing Model

“Distance traveled”, and “space utilized” are the fundamental costing description for freight transportation services.  The costing elements that are used to create freight transportation rates and charges are based upon this fundamental and have come to be expressed in compatible units.  Their antecedents are rooted in the first commercial transaction that involved a fee for transportation services, or the inclusion of a transportation cost component embedded in the merchandise selling price.  

Freight rates continue to be expressed in cents: per cwt.; per mile; per trip, per package; per rail car; container or truck.  They mimic the original rail rates and were embraced by the early motor carriers and their use was authorized by the Interstate Commerce Commission after motor carrier regulation in 1935.    Shortly after motor carrier regulation, the rail carriers protested the use of their freight rates; and what came to be known as the “Docket 28300 series” of tariffs was the legalization of their use by the motor carriers.  Essentially, the motor carriers copied the rail structure as a marketing expedient in order to more easily acquire rail customers.

Carriers continue to express their rates in this manner because there is no compelling reason to change.  Further, this currency is, at the very least reasonably appropriate for the carrier business model.  Shippers neither buy nor sell their “goods” in the same currency.  However, shippers continue to superimpose carrier currency on their accounting and finance activities.  This is not only unnecessary, it serves no useful purpose.  In fact, if nothing else were learned from the history of freight transportation, “that it is paramount to recognize and appreciate the differences between the two”, this lesson would be sufficient to sustain a reasonably healthy economy.  Only until appreciation and use of the difference occurs, will carriers and shippers be able to maximize their own business models and the relationship.

Accounting for Freight Transportation

The business rich data embedded in the “freight transportation process” resides in the information pool of corporate opportunity.  The primary device for extracting the information has been the “general ledger code”.  Although reasonably capable, the limitations imposed by traditional search techniques prevented total visibility of the supply chain.  Another inhibitor is the natural tendency in corporate culture to build and defend silos.  Silos are reinforced by the presence of barricaded resources, be they intentional or unintentional.  The inherent characteristics of the general ledger concept, embrace coding at the detail level.  As such, it immediately eliminates the benefits of interdepartmental and interdisciplinary understanding and appreciation.  Therefore, benefits derived from the “pool” are minimal and because of the level of detail, of little or no interest to the corporate intellectual resource. 

Events of transportation importance, the size of its expense and connective technology have exposed and democratized the macrologistics strategies.  In doing so, every user of freight transportation was grandfathered a license allowing them to travel to the “information pool of corporate opportunity”.  With their use of the system, each corporate citizen brought their own needs and understanding.  However, without a cohesive and uniform corporate understanding, its limitations were being exposed.

Reporting the freight expense across the general ledger, although adequate, continued to support the past inefficiencies and issues.  Individual departments and disciplines improved their lot, but no corporate advantage could be achieved until Accounting and Finance could unlock the door to the information pool of corporate opportunity.  The key to the pool and its enormous potential required joining Accounting and Finance on the one hand and on the other, Transportation and Logistics.  Purchasing freight transportation with a “corporately understood currency” is an effective method.

There is no compelling reason for either carrier or shipper to demand that their relationship support a common freight rate structure.  In fact, the carrier, the shipper and their relationship have all undergone significant beneficial change.  This change is manifested in the three (3) phases of freight transportation in the United States: no regulation; regulation and deregulation.  To maximize the benefits of the change, we must respect the importance for differential appreciation.  Carrier and shipper must be encouraged to employ those systems, procedures, and processes that best support their respective business models.  

The carriers have benefited from their “currency” and now the shippers are positioned to do likewise.

Corporately Understood Purchasing Currencies

As expressed in all of our white papers, transportation and logistics are dynamic, highly capable processes and systems that touch every part of every business; Freight Transportation is the industrial life bloodline to the marketplace and Logistics is the discipline that manages the flow of all material through the finishing process and is responsible for customer satisfaction.  Finance and Accounting are responsible for managing and controlling money.  Money is as pervasive as the freight alter ego.  The combined resources of these disciplines are causing the barriers of the past to fall every day, while their attributes harvest the corporate information.  

Money is a “medium” that can be exchanged for goods and services whose value can be in the form of a “commodity”.  This usage of “money” is the very basis upon which the corporate currency should be selected.  In some instances both shipper and carrier can share the same monetary denominator, and in others the exchange will determine the medium.

A carpet distributor buys and sells carpet by the yard.  It seems reasonable that they should be able to purchase the respective freight transportation services by the yard as well.  In this example, both carrier and shipper could easily embrace the same currency.

Consider the architectural division of a hotel; they recognize income and expense in “architectural” terms.  Building hotels eventually addresses the building-out, completion and furnishing of the room or suite.  In this regard the currency that might best satisfy their needs would be to purchase the freight transportation services by the room or suite. 

This example presumes that the suite or room components would be held at a marshalling point so that all of that material could be delivered simultaneously.  This method of shipment would satisfy the need to have an installer meet the shipment to satisfy proper furniture receipt and placement.  This example also works in conjunction with the “carpet” example because carpeting would not be installed with the delivery of furniture.  However, by purchasing the freight transportation by the yard and by the suite or room, only two tracking components would have to be combined to identify the entire freight cost for the completed or delivered suite or room.

Freight Transportation, an Expense, and an Asset

When the freight transportation expense is understood at the interdepartmental and interdisciplinary levels, it is corporately understood.  At this global level, the corporate intellectual resource has complete visibility of the infrastructure, operations and supply chain.  From this perspective, business disciplines such as Treasury should be able to recognize and exploit this new found visibility. 

Many consider the freight transportation expense simply as an expense.  In fact, it is very effective as a cash management opportunity.  As an example, consider the following application:

The total costs of the entire supply chain, and other known costs, as well as the associated income are the essential requirements for identifying capital need.  If the cash flow is insufficient and your knowledge based freight transportation negotiations include extended payment terms, the budgeted freight expense could be used as a current asset to compensate for the cash flow timing differential.

This example was actually used to assist a very large computer manufacturer that had very distinct and predictable buying, manufacturing and selling cycles.  It is only presented as an example and the detail sufficient to employ this example has been omitted because it is dependent upon many factors including company specific information.

The above examples are representative and should not be construed to be the only capability of a corporate currency, nor should the concept of a corporate currency be limited only to freight transportation.  If you accept the notion of this concept, you will be able to exercise it when the need and opportunity occur.

Conclusion

“Purchasing freight transportation services using a corporate currency” is a goal that crosses new frontiers, and therefore requires risk, creativity, and imagination along with a keen knowledge of the three (3) involved disciplines.  When crossing new frontiers, it is both necessary and appropriate to: identify the goal and its stakeholders; and to gather strength by forming partnerships with those that can obtain an appreciable benefit. 

With their newly gained seat at the corporate table, Transportation and Logistics professionals can now share ideas and thoughts with their colleagues.  Of utmost importance is their unique perspective that can offer significant insights into a highly visible supply chain.  The breadth and depth of the supply chain contain a vast resource of business rich data waiting to be extracted, manipulated, and exploited.  Because of the highly specialized ability of the freight alter ego to collect data as goods are transported through the supply chain coupled with the convergence practice, industry has a new perspective and tool that can successfully break down corporate silos and barriers of the past. 

Corporate currencies are on the threshold of creating new opportunities.  This practice area of TransportGistics combines the rich experience of its Consulting Group with the performance capabilities of TransportGistics’ specifically designed TMS tools.  This unique combination can help you identify and exploit the “information pool of corporate opportunity”.  To learn how TransportGistics can work with your professionals in developing a corporate currency, please feel free to contact jwest@transportgistics.com.

Crossing new frontiers creates new paths and increases the opportunities for success.

Continuation

Please consider this white paper as a continuum in this subject area; succeeding white papers will address common issues and address them with common solutions.  We encourage our readers to direct any relevant questions or comments to papers@transportgistics.com.

Disclaimer

The information presented herein represents the opinion(s) of the author(s), but not necessarily the opinion of TransportGistics, Inc.  This white paper is not presented as a legal position or opinion.

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[1] Excerpted from the American Heritage Dictionary 

[2] Excerpted from the American Heritage Dictionary

[3] Registered sales mark of KLM Associates, LLC