WHITE PAPER Freight Cost Management (FCM)

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1 WHITE PAPER Freight Cost Management (FCM)

2 Freight Cost Management Introduction Several developments have led to a continual increase in transportation costs. Globalization, volatile fuel prices, low cost sourcing, a more fragmented value chain, emerging markets, lower inventory levels, longer shipping routes, and higher demands for frequent, just-in-time deliveries, are primary drivers behind increasing transport costs. Increasing transport costs Logistics work and logistics costs are increasing continuously. For several decades now, the transport of goods has increased every year. During the global financial crisis in 2009, the growth trend was temporarily broken, but then quickly continued. During , worldwide GDP grew by around 3.4% annually. In the most developed countries, the average growth is around two percent. In fast-growing economies - including China and India - the growth rates are over 7% per year. Trade is increasing very quickly as a result of this, which also means increased transport volumes. Authoritative forecasts suggest that transport volumes will continue to increase to around 68% from 2010 until 2040 and most of the increase can be attributed to global transport flows. Around one- third to two-thirds of the expenses of enterprises logistics costs are spent on transportation Managing transport costs is a big issue Logistics, and a logistics system, can be described as the process of moving and handling goods and materials, from the beginning to the end of the production, including sales processes and waste disposal, in order to satisfy customers and add business competitiveness. As part of the logistics system the transport system is the most important economic activity among all the components. Around one-third to two-thirds of the expenses of enterprises logistics costs are spent on transportation. According to a survey based on data from a procurement panel in Sweden 2014 the logistics costs amounted to 14,1% of the total business cost and the cost for procurement of transportation amounted to 7,2% of the total costs. Two years before that the same figures amounted to 11,2% and 5,6%. The value of the transportation activities varies with different industries. For products with a small volume, low weight and high value, transportation cost is a small part of the sale, and for large, heavy and low-valued products, transportation is a very big part of the sale and affects profits more. 2

3 The costs for moving goods account for an ever greater share of the total logistics costs, often up to 75% Up to 75% of total logistics costs Rising freight costs have led to a shift from off-shoring to near-shoring, efforts to ship goods in a more efficient and less space-consuming way, development of more lean processes for both inventory and distribution, and a stronger focus on Freight Cost Management. In essence, persistent volatility in oil prices and capacity constraints mean that high-priced transportation is here to stay. The costs for moving goods account for an ever greater share of the total logistics costs, generally around 50% and sometimes up to 75% of the total logistics cost. And it is not unusual for freight costs to be up to 10% of an organization s total expenditure. As a consequence of rising freight costs, an increasing number of organizations have been more proactive in checking freight costs and many have chosen to outsource the freight audit process to freight audit specialists. Freight costs need to be managed In the near future many experts expect transport costs to rise even more due to volatile energy and fuel prices, increased personnel costs, and other charges, such as tolls and environmental certifications. As a result, managing transportation costs is more important than ever for preserving margins and profitability and for also improving sustainability and overall supply chain performance. On the following pages we will examine how Freight Cost Management (FCM) is a powerful concept for systematic settlement, monitoring, and analysis of freight costs. We will describe what FCM is, how it can be carried out, and the substantial results delivered by Freight Cost Management. What is Freight Cost Management? There is no one simple definition of Freight Cost Management (FCM). However, it can be described as the intentional and systematic settlement, monitoring and analysis of freight costs. Freight costs typically consists of the costs for packing, palletizing, documentation, loading/ unloading charges, carriage costs, insurance and administration associated with this. The purpose of Freight Cost Management is to gain control of a company's transport costs in order to lower the total costs for transport and ensure that you only pay for the services that have been agreed on and delivered and also the possibility to allocate and distribute the cost internally. More legal regulations and requirements on sustainability are additional reasons for analyzing and managing transportation costs and securing optimization, traceability and transparency in the transport flows. 3

4 Incorrect invoicing and overcharging The basis for the work with Freight Cost Management is the realization that a large percentage of freight invoices are incorrect and that there is a lack of control procedures to detect these errors. Authoritative estimates show that erroneous invoicing leads to overcharging by between 2-6% of just the transport cost and that only 17% of all freight invoices are entirely accurate. There are many reasons for this. First of all, overcharging or mistakes come from the widespread manual work, manual processes, and outdated IT-systems that are used. Furthermore, different carriers have many different cost-models, tariff structures, terms and conditions that further complicate things. Generally, there are many logistics providers and services included in a single invoice and invoices often look very different, are specified in different ways, are based on different parameters, and have varying degrees of detail. And the invoices are received via EDI, , as well as by post as physical invoices. Against this background it is easy to see that freight cost calculation and control and management is an ordeal and is becoming increasingly complex. Large potential for substantial cost reduction For most companies and organizations, it is impossible to check all freight invoices in the manner that is required. A truly thorough inspection requires knowledge and access to detailed information that is generally lacking or too time-consuming to obtain. With an efficient operation, processes, and modern system support for Freight Cost Management, erroneous invoicing can be reduced to an absolute minimum. The internal costs of managing and checking freight invoices can also be reduced by approximately 50-70% if outsourced to a professional service firm. A more professional and prompt handling of freight invoices also provides a better cash flow since shipping costs can be further-invoiced as early as the shipment date. In other words; the potential for substantial cost reduction is large. With an efficient operation, processes, and modern system support for Freight Cost Management, erroneous invoicing can be reduced to an absolute minimum 4

5 Different approaches to FCM There is no single way to manage transport costs. Depending on your level of ambition or resources, there are different approaches and solutions available. There are at least four alternatives or approaches to Freight Cost Management that can be seen as different steps in creating an excellent FCM: 1. Manual Invoice Control Here, you review the invoice based on carrier data without matching it against your own data. This is a widespread but costly approach. Still around percent of all companies use an entirely manual process for invoice control. 2. Automated Cost Control This approach is based on shipping data and use of TMS or TA system that gives you option for an internal check. The checking process is manual but you get the data from the IT-system. 3. Freight Audit Freight auditing is a process where the shipper or a professional audit firm examines, adjusts and verifies freight invoices for accuracy. For most companies it is not possible, effective or efficient to check and calculate that all the freight invoices are correct. In addition, the efforts required for a internal freight audit often become more expensive and less professional than outsourcing the process to a freight audit specialist. Freight Auditing is generally done as post auditing, which means that costs and invoices are checked afterwards. 4. FCM as a Professional Service This is a combination of real time three-way checks, invoice handling, cost allocation, and payment administration with a support function with professional personnel, which is proactive and makes continuous developments. As stated earlier, it is not unusual for freight costs to consist of up to 10 % of an organization s expenditure. As a consequence, an increasing number of organizations have outsourced the freight invoice process to specialists normally professional service firms. These professional service or freight audit firms have the necessary resources the competencies, processes and tools to make substantial cost savings and long-term improvements. Normally, the professional service firm receives its clients freight invoices directly from carriers and other logistics providers. When the invoices are received, either via EDI, or manually and are matched against the original agreement and what has actually been delivered. Once the invoices are entered they are audited. Items such as validity, mileage, duplicate payments, supplementary charges, and use of correct tariffs are checked. After auditing, the charges are coded and reconciled and the invoices are paid. If a variance outside the defined tolerances are identified actions are taken to claim them. 5

6 Outsourcing of freight cost management is growing fast For many transport-intensive companies outsourcing may be the most economical way to properly audit and process freight invoices. The whole process to verify, process and ultimately pay a freight invoice internally costs around EUR, and the cost of outsourcing is around 30% to 50% of the internal cost. That does not include the cost savings from invoice discrepancies or double invoicing. In North America, approximately 60% of all companies outsource their handling and payment of freight invoices. In Europe, the number of companies that outsource is still significantly lower, but outsourcing is growing fast. How much money am I leaving on the table by not auditing my freight invoices effectively and accurately? Benefits from professional Freight Cost Management Professional Freight Cost Management delivers substantial results. As we have indicated, there are very large potential benefits with planned and systematic management of freight costs. The most obvious benefits are increased control and an automated, simplified handling and auditing of transport costs and all the transport invoices. This in turn leads to substantial cost savings and builds a foundation for increased sustainability. Control a systematically efficient and effective process It is always extremely complex and time consuming to handle freight invoices manually by checking carrier data without matching it against your own data. This is still a widespread, costly approach. Therefore, a first step is to take control of all freight costs and invoices so it is possible to match carrier data against internal information about what has been ordered and subsequently delivered. A first step is to take control of all the freight costs and invoices and make it possible to match carrier data against internal data 6

7 Substantial cost savings There is a solid proof of concept for Freight Cost Management and the cost savings it produces. The potential for substantial cost reduction is clearly large. With the necessary competence, efficient operation and processes, erroneous invoicing can be reduced to an absolute minimum. As stated earlier, internal costs for managing and checking freight invoices can be reduced by 70%, at least if it is outsourced to a professional service firm for continuous proactive auditing and management of the freight cost process. Erroneous invoicing results in overcharging by between 2-6% of just the transport cost. The professional and swift handling of freight invoices also provides a better cash flow since shipping costs can also be further-invoiced as early as the shipment date. A well-managed Freight Cost Management process prevents duplicate or erroneous invoices and the charging of unwarranted additional costs. It also automates the settlement process and freight cost verification and builds a foundation for a stronger negotiating position when sourcing carriers and other logistics providers. Improved sustainability Environmental and sustainability issues continue to grow in importance in global trade and transportation. This applies globally, regionally and locally, and that applies to the entire supply chain. More stringent legal regulations and compliance requirements are also good reasons for closely analyzing freight costs and optimizing the transport flows and securing traceability and transparency. Against this background a more professional Freight Cost Management will also support your sustainability work and performance. The systematic settlement, monitoring and analysis of freight costs will generate information that can be used to further reduce emissions of greenhouse gases. For instance, this can be done through better transport consolidation, more active selection of suppliers and transport modes, and in general, a smarter, fact-based transport planning process. Basis for negotiations As a result of a professional Freight Cost Management process you will generate a fact base with consistent and valid data that will give you better negotiating power when sourcing and renegotiating with carriers and other logistics partners. 7

8 About Sonat Sonat is a professional service firm within logistics and supply chain management. We increase our customers competitiveness by developing and operating their supply networks/supply chains with world-class cost efficiency, quick reaction time, and the ability to implement change. For more information about Sonat s Freight Cost Management Service please visit our website. 8

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