Traditionally, sourcing and procurement operations have functioned as a silo either at the corporate or business unit level. Direct product cost is given the greatest amount of weight in the decision making process, and many other variables that affect overall cost are often ignored. Success is based on market or previous contract comparisons, not the actual effect the decision may have made on manufacturing, transportation, warehousing, etc. This type of procurement planning can lead to increased costs in unexpected areas, or create additional work at the business unit or other functional team level.
One cost often ignored during procurement negotiations is the freight or shipping costs. If a supplier is going to bake the freight or shipping costs into the product costs, supply chain visibility will be negatively impacted overall. Rather than having transportation data from actual carriers, costs will now be hidden in the product or separate line item level at best. The vast majority of all companies attempt to use shipping as a profit center, the less a company controls their own transportation decisions the more likely they are overpaying for that supply chain function. Another common issue that arises during the procurement process is accepting or pitching expedited shipping for all orders from that supplier. Expedited shipping often does not bring the value companies believe it will while quadrupling spending on freight and shipping.
The reason why companies tend to ignore freight during a supplier negotiation is due to constraints that companies believe to exist. Historically, it can be very difficult to work with suppliers to ensure they are shipping optimally to reduce overall costs. Routing instructions on the Purchase Order often get ignored, or non-compliance is commonplace when distributing a complicated paper routing guide. Rather than seek innovative ways to increase inbound material efficiency, procurement teams pass the burden onto other functional teams within the organization. When companies begin to remove these silos of functionality, and have all of the executives and managers working together, significant reductions in direct and indirect costs can be recognized. Advanced technology can be implemented to remove the constraints managers believe to hinder operations.
Online Portals Can Help
Online portals with purchase order system integration can provide transparency to inbound material shipments. Concurrently, the shipping decision making process can be based off an advanced rating engine that automatically providers the supplier with the optimal shipping method. The result is a significant drop in manual communications (phone calls, emails) between the supplier and buyer, along with freight savings for the parties responsible for paying the freight. Transportation savings and increased visibility make customer service more efficient and knowledgeable about all sales and purchase orders. This data now available to all can greatly assist in new and existing supplier negotiations leveraging all facets that will affect the relationship’s success.
Although traditional managers and executives tend to avoid advanced technology and portals, those willing to adapt to new business processes will reap the benefits of cost savings and improved efficiency. Outbound shipping systems and inbound supplier portals provide the transportation rating and decision making technology to vastly improve areas that are currently restrained in efficiency. Procurement is an important aspect of supply chain operations, and needs to be integrated with all other functional areas for the greatest levels of success.
About the Author
Aaron Ernst is a Sales Engineer focusing on sales and marketing strategies to increase brand awareness and the customer base of RateLinx. With a technical background and degree from Vanderbilt University, Aaron worked for the world’s largest developer of Electronic Medical Record software before joining the Supply Chain and Transportation industry with RateLinx. After multiple implementation cycles with Fortune 500 clients, Aaron continues to be both an internal and external resource for RateLinx employees and strategic partners. Constantly researching industry trends and technical developments, Aaron is well versed in technology implementations and logistics optimization strategies.