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.
Click here to read the entire paper
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
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