The Spend Analysis and LTL Shipping – This is How You Do It Part 1

on Thursday, March 15, 2012

I recently did a podcast with Purchasing Insights where I explained how to initiate a strategic sourcing initiative for Less Than Load (LTL) freight. You can listen to a replay of the podcast here, but due to the complexity of the category, I thought it would also be useful to summarize some my points on the blog.

Before getting started in LTL (or any category) it’s important to understand the pricing structure. Pricing for LTL shipments is somewhat comparable to that of small parcel. The primary reason for this is that both types of shipments utilize the traditional “hub and spoke” distribution model, where shipments are normally taken from their origin point to one or more local or regional distribution centers before getting to their final destination.

Because the distribution model is the same, the pricing strategy is similar. Carriers provide a discount off of a pre-established tariff, and account for additional charges such as minimums, fuel, and other special delivery types separately. Tariff pricing structures for both also include distinctions for weight and zone – two primary factors for shipping a package, but for the most part, the similarities end there. For small parcel, the other big factor that will determine price is delivery timeframe (1 day, 2 day, etc), while for LTL pricing, freight classification matters most.

By far, the biggest challenge you will face in this category is analyzing the difference in cost between carriers. While all carriers will follow a similar pricing structure that is discount driven, the tariffs they use to base their discounts on are often times different. In fact, most carriers utilize their own tariff rate base, which includes lower gross pricing for lanes where they are strongest, and often much steeper gross costs for lanes where they have little or no representation.

This means that for particular lanes of traffic, one carrier’s 50% discount might be more competitive than another carrier’s 60%, or even 80% discount.

Another key consideration in analyzing carriers and costs is transit time. Stronger carriers may be able to provide door to door service in 2 days, and the less expensive option could take 4. These are distinctions you need to be aware of when developing a carrier network.

There are a multitude of LTL shipment types that can be considered as part of a freight cost analysis and LTL sourcing initiative. Typically, someone going down this road will focus on outbound shipments, or outbound shipments combined with inbound collect. These are the shipments that you, as the shipper, will receive invoices for. However, there are others that should be considered as well. The two primary examples are inbound pre-pay and add shipments, and inbound delivered pricing shipments.

Both of these shipment types are impacting your bottom line, but gaining visibility into their true cost can be difficult.

For an inbound pre-pay and add shipment, you will see the freight charge on the bottom of the invoice from your materials supplier. So you know the cost, but you still need to understand the origin point, the weight of the shipment, and its freight classification. This info is not usually going to show up on a statement from your supplier.

For shipments that include a “delivered” price, even the shipment cost is not spelled out.

Before you get started, you need to develop a strategy based on the types of shipments you want to capture as part of the initiative. Many times, purchasing professionals will take the approach of working in waves, from easiest to most difficult, in order to get savings as fast as possible and build momentum to carry them through the more challenging stages.

In part two of this blog post, we will review the data you want to collect to begin your spend analysis, and the types of analytics that will best help you develop a sourcing strategy and go to market. In the meantime, we have a whole chapter dedicated to the subject of LTL spend in our book, Managing Indirect Spend. Check it out!

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