January 2007 | Commentary | Viewpoint

How Do You Spell Transportation Budget Relief? TSM

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The increasingly complicated nature of global shipping, coupled with a shift in transportation budgeting from basic transportation costs to a base plus accessorial charges billing standard, has made managing transportation budgets extremely challenging.

The good news? This cloud has a silver lining—it is called Transportation Spend Management (TSM).

TSM is the practice of targeting specific areas of transportation before, during, and after shipment execution to reduce overall transportation spend.

TSM's three main areas of focus are contract management, shipment management, and payment management.

Contract Management

The logical place to start the TSM journey is the contract. Contracts include guidelines that define the services, performance levels, and pricing details between shippers and service providers.

Transportation carriers usually provide their own contract, which can be used to manage the relationship.

The problem most shippers have, however, is that the person skilled in negotiating transportation contracts doesn't usually possess the detailed information needed to fully understand the organization's shipping profile. Without this information, even the best negotiator is blindly considering pricing based on industry standards and best guesses instead of using actual data.

Apply this scenario to global shipping profiles, where total landed cost formulas are more complicated, and the situation becomes even trickier.

Another common contract management trap shippers fall into is not considering total costs, which include accessorial charges—these are negotiable as well. While preventing accessorial charges in the first place is a better approach, the fact is they do exist and you must manage them.

How does TSM help combat these problems? It promotes the use of contract management best practices and technology to:

  • Provide a central contract repository.
  • Convert contracts to a rules-based format for validation.
  • Benchmark against industry standards.
  • Promote contract change control procedures.
  • Provide tools for analyzing contract changes.
  • Provide tools for comparing contracts.

The potential return on investment in this area is significant, based on the number of contracts and the volume of shipping transactions your company processes. Shippers often reduce their annual transportation spend by an average of 5 percent by applying TSM to contract management alone.

Shipment Management

Shipment management includes all activities involved in executing a shipment, as well as the visibility and management of events from pickup to delivery.

Let's start with shipment execution—both from the non-production side, which includes the desktop and small mailrooms, to production shipping from large mailroom operations, warehouses, distribution centers, and other high-volume facilities.

Though shipping execution can vary from a few easy steps to a complicated set of requirements, many of the core processes are the same. TSM promotes the following activities at the point of execution:

  • Routing guide compliance.
  • Address verification and validation.
  • Denied parties screening.
  • Cost allocation confirmation.
  • International documentation.

In this area as well, the amount of ROI a company receives depends on the number of contracts and the volume of shipping transactions it processes. By managing carrier selection at the point of execution, shippers can reduce their annual transportation spend by an average of 2 percent to 5 percent.

Payment Management

Does this sound like your transportation organization? Contracts are negotiated, signed, scanned for imaging, and stored electronically according to a series of business rules representing pricing scenarios and service guarantees. You manage outbound shipping from your warehouses via a robust routing guide, ensuring that international shipments are accompanied by the appropriate paperwork and properly reviewed using trade compliance guidelines.

You use the same routing guide to manage inbound traffic, however, it is up to your inbound suppliers—who use your shipping accounts—to adhere to the guide when fulfilling purchase orders. You have done everything right up to this point.

Most shippers assume that if they are careful when negotiating contracts and use robust inbound and outbound routing guides for shipment execution, there will be no surprises when they pay carriers' transportation bills. But they are wrong.

No matter how thorough companies are in using best practices and proactive means to reduce transportation spend upstream, actual transportation costs vary from 5 percent to 15 percent higher than estimated or accrued transportation costs.

Thankfully, TSM helps address this problem through a process known as payment management.

Payment management focuses on several key aspects of managing actual costs incurred during upstream shipment execution and carrier activity. These areas include:

  • Automated carrier invoicing.
  • Validation of carrier contracts and service levels.
  • Protection against invoice duplication.
  • Invoice adjustment claims management.
  • Automated cost allocation.
  • Routing guide compliance.
  • Establishing payment rules.
  • Integration into accounts payable.
  • Electronic funds disbursement.

The ROI for payment management varies based on the number of carriers a shipper utilizes, as well as the complexity of its shipping profile—how many distinct modes of transportation does it use?—the percentage of spend attributed to inbound shipments, the volume of paper invoices, the complexity of cost allocation, and the amount of its international transportation spend.

Typically, companies can achieve hard-dollar savings solely from contract compliance. Based on the complexity of cost allocation and the average number of exceptions, however, the ability to cut costs significantly requires a commitment to automating at least 95 percent of cost allocation rules.

Companies can typically reduce transportation spend 5 percent to 10 percent by optimizing payment management processes through a blend of automation and best-practice methodology.

Information Management

As the old saying goes, information is power. A robust and comprehensive data warehouse can bring tremendous value to an organization by:

  • Creating a dynamic routing guide.
  • Enabling business intelligence.
  • Providing carrier performance analysis.
  • Enabling more effective contract management.

By implementing an information management process, shippers can reap significant ROI based on number of contracts, volume of shipping transactions, and number of locations, among other factors. Shippers can reduce their annual transportation spend by an average of 3 percent to 5 percent with information management.

In addition, shippers gain soft-dollar savings associated with increased operating efficiencies.

Start with Your Painpoint

Where do you start when developing a transportation spend management program? The good news is that options abound.

It makes sense to start with the area of TSM that attacks your greatest painpoint, and/or the area that will bring the highest return on investment. Performing a formal ROI analysis by area will guide you to a logical starting point.

Possessing the appropriate level of information is important to any decision-making process. If you do not have ample shipping data, you will need to start TSM with payment management and work your way upstream.

Payment management—and more importantly, the data collected by managing the payment process—along with a robust data warehouse, will provide the information you need to continue the TSM journey through the shipment lifecycle. At each step, look for opportunities to reduce transportation spend.

You can begin benchmarking current processes to build your case for ROI in the other lifecycle areas. As you integrate solutions into your organization, you will be able to show tangible results that support your suppositions.

Use these results as further proof to facilitate change within your transportation organization.

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