Transcript IMA Northeast Regional Council 4th Annual Conference
Smart Transportation Management
IMA Northeast Regional Council 4
th
Annual Conference September 20, 2011 Freight
“The Forgotten Bottom Line”
Presented by H Logistics LLC (860)853-8609
Who we are and why we are here
1) Introduction: presenters and overview
Aaron Miller is the Vice Present Operations at H Logistics LLC, a leading Third Party Provider of Transportation and Logistics Management Services. In 12 months, H Logistics has increased its sales by over $2m and its success is the direct result of the support and resources it offers that bring immediate and tangible benefit to its clients. Before joining H Logistics, Aaron was the Director of Transportation for an automotive aftermarket global manufacturer and distributor based in New Haven CT and controlled a $25m global freight spend annually.
Bill Heffernan is the President and most recently Director of Northeast US/Canada Sales for YRC. Bill managed 16 Account Executives and managed the largest portfolio at Yellow Transportation, topping $140m in annual revenue.
Together, we bring you nearly 70 years of industry experience!
Our hope is that your ‘take-away’ this afternoon will be that transportation is about the driver seat. There are many drivers to the bottom line and the subjects in this presentation will expose a number of risks and benefits that will impact your business and directly and indirectly affect its bottom line. This is not about FRIGHT it is about FREIGHT. The difference is the ‘E’ for education. The more you know, the better you will manage…and that, our colleagues, always drives success.
Doing it on MY Terms
2) Basic Terms of Sale and Freight Payment Terms (sold and purchased goods)
Key point: Terms of sale determine what party (seller or buyer) owns the goods while in transit. Freight payment terms are completely separate and determine what party will pay (and bear) the freight cost to ship from origin to destination.
Terms of Sale: There are two critical questions: 1) Who owns the goods?
To determine who owns the goods while in transit, we look to the terms of sale; which states when the title and risk passes from seller to buyer. These terms are just as integral and relevant as item, quantity, price, etc. The term FOB means “Free on Board.” It names the place when ownership of goods passes from seller to buyer. The following table (1a) summarizes the common terms as a reference guide.
2) Who pays the freight?
To determine who pays the freight cost, we again review the terms of sale. The purchase order should be noted with the FOB point and, separately, who pays and bears the freight cost associated with shipping from origin to destination (i.e. FOB Origin, Freight “Collect”). Please again refer to table (1a) to see the impact of the various terms when looking at the responsibility for freight payment. The party that “bears” the freight cost is the party that ultimately pays the freight cost.
Please be aware: there is no such thing as “The freight is FREE!”
------------------------------------------------------------------------------------------------------------------------- Note: When a shipment is ‘prepaid’ – it should be assumed the freight cost (and often a handling fee) is included in the cost of goods sold (COGS). Therefore, this cost is not clearly and separately identified and freight increases vs. product cost increases, are not individually defined. As tax (when applicable), is calculated on the purchase price,
tax would then be applied to the cost of freight
.
Table 1a
FOB Freight Payment Term FOB shipping point (origin) FOB shipping point (origin) COLLECT PREPAID Pays Freight Charges
Buyer Seller
FOB shipping point (origin) PREPAID and ADD
Seller
FOB receiving point (destination) FOB receiving point (destination) COLLECT PREPAID FOB receiving point (destination) PREPAID and ADD
Buyer Seller Seller
Bears Freight Charges
Buyer Seller Buyer Buyer Seller* Buyer
Owns Goods in Transit Files Claims (if any) Explanation
Buyer Buyer Buyer Buyer Buyer Buyer Title and control of goods passes to buyer when carrier signs for goods at shipping point (origin) Seller pays freight charges and adds to invoice. Title and control of goods passes to buyer when carrier signs for goods at shipping point (origin) Seller Seller Seller 4 Seller Seller Seller Title remains with seller until goods are delivered Seller pays freight charges and adds to invoice. Title remains with seller until goods are delivered
Stake your Claim
3) Freight Claims – Loss & damage to goods, incurred in transit
a. How to document ◦ Make sure the delivery receipt is noted with specific damage or shortage—AT TIME OF DELIVERY ◦ Notify the delivering terminal immediately, recording name, date, and time of notification ◦ If there is damage, request an inspection (if waived, record the name of the carrier contact making this decision) b. Who files claim with the carrier?
◦ The owner of the goods is legally responsible for filing claims (as a practical matter…and for customer service, shipper/seller may offer to assist on behalf of the owner—given relationship with carrier and the buyer’s potential refusal to pay for the goods) c. Claim process (from receiving through claim filing) ◦ Know the process and time limitation for filing; which varies by mode of transportation (i.e. 9 months from date of delivery for LTL v. 21 days for FedEx small pack)
A La Mode
4)
What modes of domestic carriage and services does your company use?
Control them all!
a. Small package (UPS, FedEx, and USPS) b. LTL (less-than-truckload) c. Volume LTL, Truckload (over 6 standard size pallets) d. TL (truckload) and intermodal (truck/rail) e. Airfreight f. Ocean (international)
You Pick and Choose
5) Freight Routing and Controlling Goods in Transit
a. Inbound (purchased goods) Select the carrier and send the vendor a routing letter—requiring shipment via the specified carrier, then charge back the vendor any difference for non compliance should misrouting result in a higher cost pay freight separately (collect), so apples are just that---apples b. Outbound (sold goods) Select the carrier and negotiate best cost for service options, using any leverage possible Volume shipments (over 6 standard size pallets) should be price-shopped as there are tariff provisions that allow many times the standard cost to be assessed Attractive product (higher density/lower value/easy handling) or attractive and repetitive shipping lanes may lower the cost Bundle modes when possible---small pack, inbound routing, etc—with core carriers c. Third party (between parties, other than you) If you own goods shipped between parties, route this freight and 3 to your company. This becomes part of your overall volume and contributes to leverage rd party bill
Know your Doc and Treat it Right
6) Shipping documents
a. The Bill of Lading (BOL): Contract of carriage between the Shipper and the Carrier If wrong, incomplete, or product is mis-classified…your cost can increase substantially!
b. How to ensure you are billed correctly and protected legally DTRT – do the right thing – THE FIRST TIME in preparing the BOL. Sign Section 7 of the BOL when shipping “Collect,” so there will be no ‘recourse’ – should the receiver not pay the freight
Cost not Accosted (1)
7) Transportation Cost and Payment
Determining cost STEP 1: Classify your product
The National Motor Freight Classification (NMFC) is a standard that provides a comparison of commodities moving in interstate, intrastate and foreign commerce. Commodities are grouped into one of 18 classes—from a low of class 50 to a high of class 500 [with class 100 as the mean average] based on an evaluation of four transportation characteristics: density, stowability, handling and liability. Together, these characteristics establish a commodity’s “transportability.” The lower the density, the higher the expense or the risk of hauling the commodity, the higher the class designation. And, the higher the class, the higher the corresponding per hundredweight rate. The NMFC provides both carriers and shippers with a standard by which to begin negotiations and greatly simplifies the comparative evaluation of the many thousands of products moving in today’s competitive marketplace.
(Excerpt from: http://www.nmfta.org/pages/nmfc.aspx
)
Cost not Accosted (2)
STEP 2: Determine freight cost
Rates are generally determined by 5 factors:
weight, distance, commodity, discount, and fuel surcharge.
There are three ways to rate a shipment: 1) call the carrier for quote 2) have the particular rate schedules saved in your computer (for each carrier) 3) use a TMS rating system.
The rate will be based upon the combination of class, distance, and weight of the shipment, then the negotiated discount will be applied. Note: there is a minimum charge that must be met. The fuel surcharge is then applied to the net charge as a percentage (currently averaging 22%) for LTL shipments and cents per mile (currently averaging between $.40 and $.60) for TL shipments.
Special fees and charges are then added (i.e. inside delivery, notification, single shipment surcharge, lift gate, etc).
Cost not Accosted (3)
b. Benchmarking: know how the competition stacks up in net cost by shipping lane c. Negotiating: > Rule #1: everything is negotiable (including discount, classification, fuel, special fees/charges) > Rule #2: leverage increases buying power and drives down cost > Rule #3: don’t be all things to one carrier, competition is a good thing! > Rule #4: establish a relationship, it goes a long way in resolving disputes and maximizing negotiations > Rule #5: Place your company in the best position—with invoice payment on time > Rule #6: If appropriate, sign Service Agreements—which will keep increases annual (not sooner) and is a commitment that is mutually beneficial and implies a longer term relationship is desired
d. Freight bill audit and payment
1) Accurate invoicing is a shared responsibility, between you and the carrier. Be sure to correctly describe and classify your goods. Weigh ALL shipments; don’t use round numbers—charges are based on weight…each pound counts and costs.
2) If possible, use your TMS to pre-audit the freight cost. Then, it is a simple match and pay process.
3) Ensure payment is within terms
TMS = STM (Smart Transportation Management)
8) Transportation Management Software (TMS): value and benefit
Simply…you need technology to perform analysis effectively and to harvest value at the time of engagement.
38% of companies are using a TMS presently and this is expected to increase by 11% annually…is your company next?
Among the TMS benefits… > Cost reduction – in labor (calling/faxing) and ensuring accuracy > Route optimization = best transit times > Electronic communication with carrier and your customer > Cost effective carrier selection and management of carrier roster (dock efficiency) > On demand web-based TMS software available at NO COST > Increase productivity: moving from manual to automation, increases productivity, and provides the opportunity to re-deploy resources to higher yield options---while the TMS does the detail work
Simply stated, TMS is a key component for success -- maximizing your proficiency and cost effectiveness.
TMS EXAMPLE (Courtesy of MESCA Freight Services)
Rater
TMS EXAMPLE (Courtesy of MESCA Freight Services)
RAPID RATE ESTIMATES
9) Forward-Looking
The Crystal Ball (1)
Short-Term Energy Outlook September 7, 2011 Release
Highlights
EIA's economic growth assumptions have been lowered substantially compared with last month's
Outlook
. This forecast assumes that U.S. real gross domestic product (GDP) grows by 1.5 percent this year and 1.9 percent next year compared with 2.4 percent and 2.6 percent, respectively, in the previous
Outlook
. World oil consumption-weighted real GDP grows by 3.1 percent and 3.8 percent in 2011 and 2012, respectively, compared with 3.4 percent and 4.1 percent in the last
Outlook
. With weaker economic growth and lower petroleum consumption growth, EIA expects the U.S. average refiner acquisition cost of crude oil to rise from an average of $100 per barrel in 2011 to $103 per barrel in 2012, compared with an increase to $107 per barrel in 2012 in last month's
Outlook
. EIA expects that on-highway diesel fuel retail prices, which averaged $2.99 per gallon in 2010, will average $3.85 per gallon in 2011 and $3.87 per gallon in 2012. Projected U.S. refinery diesel fuel margins increase from an average of $0.38 per gallon in 2010 to $0.65 per gallon in 2011, then fall to an average of $0.58 per gallon in 2012.
The Crystal Ball (2)
Transportation pricing trends
--Logistics Management 8/1/2011 Trucking
Buyers of LTL services have been hot under the collar even without a summer heat wave. Why so steamed? Because in July 2011, shippers saw average LTL prices surge 10.4% above year ago levels. That was the single largest such price hike since the Labor Department began reporting these prices in 1992. LTL tags are forecast to increase 8.2% in 2011. Justifying all price hikes, the trucking industry's costs (excluding labor) shot up 8.3% in the year-over-year period ending May 2011. Cost escalation to operate trucking companies is accelerating, with only one speed bump in the offing—a possible double-dip recession. Our aggregate trucking price forecast stands unchanged, up
Air
Drewry Shipping Consultants' international air freight price index has registered year-over-year declines for seven straight months, but prices for flying freight in the belly of U.S-owned planes on scheduled flights has flown in the opposite direction. In June 2011, this U.S. air cargo price index registered its third month in a row of year-ago gains exceeding 11%. From 2001 to June 2011, our airfreight price index increased 60.6%. That's about on par with the airline industry's 58.4% escalation rate in total costs that took place over the same ten-year period. (Our 10 year cost analysis includes a 344% increase in fuel cost escalation.) For all of 2011, our air cargo price index will be up 9.3%.
The Crystal Ball (3)
Water
U.S.-owned barges and cargo vessels on inland waterways, excluding towboats, boosted their average transaction prices by 3.3% from May to June. Ships on the Great Lakes/St. Lawrence seaway as well as domestic deep-sea freight carriers also hiked prices 4.6% and 2.1%, respectively. Looking at year-over-year escalation rates, the three respective inflation numbers entered the books at 18.6%, 13.1%, and 9.4%. Unlike trucking and airfreight, the U.S. waterborne freight industry continues to beat the underlying cost inflation devils. Year-over-year cost escalation in this industry increased only 2.8% in May 2011. The U.S. water transportation industry's price escalation forecast remains 6% in 2011 and 3% in 2012.
Rail
Intermodal rail operators reported average transaction prices dropped an unexpected 1.2% from May to June 2011. Nonetheless, year-over-year intermodal tags have increased for 11 consecutive months, ending June at 7.6%. Also escalating for seven months in a row, carload prices were up 6.4% in the 12-months ending June. For every $100 of rail services sold, ALERT data analysis shows the rail industry spends $13.38 on a budget category called "financial, insurance, and capital management professional services." Keeping those costs under control may yield some price concessions for shippers. In any case, we forecast rail transportation tags to rise 7.8% in 2011, before falling 1.4% in 2012.
Keys for the Driver
10) Summary: KEYS for your KEY RING that will keep you in the driver’s seat (not a passenger), driving your bottom line and your business success!
> Know your terms of sale—do not put your company at risk for the cost of goods----unaware (ignorance is rarely bliss) > Control your freight terms—collect inbound (purchases) and prepaid outbound (sales) allows you to negotiate lowest cost option and to know freight as a component of Purchased Goods and Cost of Goods Sold > Control your freight cost—by managing all transportation cost, you create leverage. Then, know the market and conditions so you can NEGOTIATE competitive pricing using the leverage and advantages you have > Know your Docs and treat them right—DTRT with shipping and receiving documents (freight charges will be accurate and claims will get paid) > TMS - you need technology to perform analysis effectively and to harvest value at the time of engagement (shipment) = it provides the better use of resources and ensures accuracy, which optimizes cost - administrative and freight > Call a car dealership (like H Logistics (860)853-8609) for help and advice!