Freight Cost Benchmarking: The Final Procurement Level

Businesses today continue to look for ways to reduce their logistics costs, but in order to identify further costs savings, companies need to tap into new information. The answer? Benchmarking.


Businesses today continue to look for ways to reduce their logistics costs, but in order to identify further costs savings, companies need to tap into new information. The answer? Benchmarking. After all, don't we all want to know if we are being charged market rates? Without knowing the answer to this question, we can never know how much money remains to be saved.

This issue is becoming increasingly important, first, because in the current logistics environment more companies are outsourcing more activities, and second, more enterprises are moving their production away from their current markets. Both trends directly result in more and higher logistics invoices from service providers.

These trends also are bringing logistics into the purview of the Chief Procurement Officer in an enterprise. Previously only the Supply Chain executive was in charge of logistics operations, but nowadays the CPO and the Supply Chain leader need to work together very closely to maintain proper execution at an acceptable cost level in order to maintain their company's competitive advantages.

However, to be successful in this new approach, the CPO and Supply Chain executive need not only to work together but also to understand each other's business principles. Purchasing, for example, frequently pushes vendors to drop their rates. On the other hand Logistics leaders are often less given to hardball negotiations because their primary responsibility is to ensure that products are delivered to the customers in the correct requested or promised manner and delivery window; for Logistics, service is key.

This tension between the requirements of Procurement and Logistics is certainly visible when companies are purchasing transportation services. In my own career, I have seen substantial differences in the pricing that logistics service providers have offered to similar manufactures that ship similar products and volumes. This would seem to validate the CPO's approach: Let's find out how hard we can squeeze. In other words: Let's find out what is the market price.

In order to attain the next level of logistics procurement, both Finance and Logistics need new information in the form of benchmark reports. Purchasing needs market pricing information to back up its negotiations and/or to justify its negotiation position to Logistics. Supply Chain needs individual performance information for each vendor to convince Purchasing that the cheapest offer ? the lowest price, not the lowest total cost ? is not the best solution for the company.

Benchmarking reports also provide executives with a new opportunity for reporting achievements to financial management. Some companies have achieved successive year-on-year cost savings over time, but when they have reached the minimum price level ? where further cost reductions would have a negative impact on performance ? Purchasing needs to have ?proof? to demonstrate to financial management that excellent results are still being reached despite the fact that no new savings can be reported. Benchmarking also will allow Purchasing to compare its negotiated prices with average prices paid by similar companies for exactly the same activity.

In my own experience, leveraging benchmarking has helped some companies achieve further cost reductions and others to understand that they have achieved minimum price levels and that it is time to change their purchasing philosophy and approach. Either way, freight cost benchmarking has helped these companies achieve a new level of procurement effectiveness.

About the Author: Marc Huijgen is a logistics consultant with LHC Consulting (www.lhc.nl), which offers benchmarking for global ocean/full container load, global parcel/express, global air transportation and European full truck load transportation. Huijgen can be reached at huijgen@lhc.nl.

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