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Considering that freight costs account for 2 to 4 percent of a typical hospital’s total supply spend, the implementation of an effective freight management solution can have a noticeable impact on the bottom line. Comprehensive freight management programs can help hospitals realize better rates on both inbound and outbound shipments, develop more cost-effective shipping practices and drive the type of behavior change that leads to permanent cost reductions. Although some hospitals opt to implement freight management programs on their own, time, staffing and systems constraints are leading many hospitals to turn to third party freight management companies to provide day-to-day freight management support and guidance. What follows are a few quick tips to consider if you’re wondering whether you can improve your bottom line freight expense.

Hospital administrators should first ask themselves a few key questions:

• Am I tracking freight expenses right now?

• Do I know my total freight spend?

• If I do start working with a freight management service, where do I start?

While these first two questions appear to be simplistic, shipping costs are often overlooked because reducing product costs is typically the primary focus of materials and purchasing managers. Freight costs are often lumped together with the overall product cost and, as a result, do not show up as a significant line item worthy of closer individual scrutiny. However, these freight costs usually present considerable savings opportunities.

While many materials managers believe they are receiving discounts on freight from their vendors, the truth is that hospitals are being charged list price or more for most shipments. That’s because freight is in fact a profit center for many vendors. For instance, a recent analysis of several large IDNs conducted by OptiFreight Logistics (the freight management experts at Cardinal Health) showed that actual freight charges often exceed list price by as much as 30 percent. To start controlling these costs, freight management programs such as OptiFreight® offer 20-50 percent discounts on the inbound and outbound shipping methods most commonly used by hospitals and their suppliers. This includes Priority Overnight, Standard Overnight, 2-Day and Ground. Savings start with the first shipment.

But freight management involves much more than discounts. There are many factors that impact freight expenses and each of them needs to be managed. An effective freight management program will translate freight terms, purchasing behaviors, delivery time requirements, accounting practices and vendor shipping practices into customized savings strategies.

Can’t imagine adding another administrative ‘to-do’ to your already long list of priorities? Third party freight management services can provide solutions to your freight needs and handle the time-consuming tasks for you. Once you have selected a freight management service, you’ll need to share your freight spend data, so they can help you establish benchmarks on your baseline freight spend to then determine projected savings and strategies to implement the program. You’ll also need to share a complete list of your shipping locations so the service can conduct an audit to ensure that vendors are compliant and only use your shipping number for products shipped to authorized facilities. The freight management service may also ask you to review their vendor shipping profiles to give you a better understanding of all the hidden charges that are currently lumped under the title "Shipping and Handling." These include, for example, minimum order quantities, standard handling fees, and additional insurance. Awareness of these charges may help you decide if you want a vendor to participate in the program, or negotiate better freight terms. (See Sidebar 1 for some quick tips to guide your selection of a freight management service)

A comprehensive, third party freight management service can help you realize ways to permanently reduce your freight expenses by providing:

• Freight spend analysis and benchmarking

• Proprietary discounts on inbound, outbound and LTL shipments

• Freight auditing

• Supplier recruiting, management and compliance

• Strategies for cost effective shipping practices

• Regular reporting – weekly, monthly and quarterly

• Consolidated weekly billing

• Freight billing allocation

One of the keys to a successful freight management program is the ability to secure participation in the program from hospital vendors. Because many vendors bake freight costs into their profit, this can often take some convincing. Given that most hospitals work with hundreds of vendors, the sheer time it takes to coordinate vendor participation in freight management can be a significant factor in deciding to work with a third party service. Most freight management services have already negotiated rates with carriers, and should also have relationships with vendors that service the hospital industry and are willing to participate in freight management programs.

But beware – not all freight management services can offer an impressive list of participating vendors. The service you select should work with at least 500 hospital vendors to deliver true scale. And, because 20 percent of the hospital industry’s top vendors make up 80 percent of the hospital market’s freight spend, you should also make sure those top vendors are included on the list. It won’t do much good if your freight management service has relationships with hundreds of vendors that offer products you don’t need. So, you’ll also want to make sure that your freight management service offers a deep pool of preferred vendors who specifically cater to the hospital marketplace.

When evaluating freight management services, also ask to see a list of their participating vendors to get a handle on how much of your freight spend can be discounted right away. The more vendors that ship product through the program, the bigger the potential impact to your bottom line savings, so also make sure your freight management service is committed to constantly adding vendors to its list. An effective freight management service is responsible for executing all operational components of the program and should have a proven track record of vendor recruiting, management and compliance.

The ability to encourage hospital vendors to participate in your freight management program is critical to managing hospital freight expenses. However, an audit of your inbound and outbound shipments will likely reveal very costly shipping behaviors. Insight into some of these behaviors can further reduce your freight expenses. For example:

• Express deliveries – On average, Express deliveries cost 420 percent more than Ground shipments. Due to routine use of the most expensive shipping methods available, such as Priority and Standard Overnight air deliveries, it’s no surprise that Express delivery expenses comprise 85-90 percent of a hospital’s overall freight spend. To add insult to injury, vendors routinely charge hospitals list price for all shipments…sometimes much more. This cost has been largely overlooked due to the focus on reducing product costs. The good news is that by reducing your hospital’s inbound and outbound Express deliveries, you can significantly reduce your overall freight spend.

• Shipping origin – Many suppliers and hospital buyers feel that due to the urgent nature and importance of hospital products, Express delivery is the only solution for time- sensitive shipments. This is not always true. While Express deliveries do mean your products will arrive at your dock the next day, Express isn’t your only alternative for next day shipping. Ground delivery might still do the trick. For instance, if a product is being shipped from a location within roughly a 200-mile radius of a hospital, Ground will offer more cost effective shipping without compromising delivery times. This is because carriers will automatically ship the package via Ground, even though Express has been requested, if the origin and destination are within 200 miles of each other. In this case, you’ll unfortunately still have to pay Express rates. Ask your freight management service to provide you with a complete list of vendors within a 200-mile radius of your hospital. Then you’ll know to request Ground delivery services for products coming from those particular vendors.

• Vendor-made shipping decisions – Another pitfall common to hospitals is relinquishing shipping decisions to vendors. When a non-hospital entity is handed this responsibility, it is impossible to maintain control over shipping costs. Oftentimes, vendors presume an expensive Priority service is required because of the clinical importance of the products, when in reality, Ground service would meet the delivery deadline at less cost. A simple fix? Never allow vendors to choose shipping options. Better yet, work with your freight management partner to plan and negotiate favorable shipping terms in your product contracts.

• Overlooking outbound shipments – Although inbound shipments comprise about 70 percent of a hospital’s freight spend, outbound shipping practices shouldn’t be overlooked. Once you select a freight management service, you will likely be assigned shipping account number(s) that you should use for all inbound, outbound and capital deliveries. Your freight management program should also be able to link your existing outbound account numbers to the program, so that you receive discounts on your existing shipping numbers, as well.

Once your freight bills are analyzed to identify expensive shipping practices like these, your freight management service should offer solutions to permanently reduce freight costs by minimizing these expensive behaviors.

A September 2005 study by Premier SupplyFocus indicated the average hospital supply spend would increase by 7.7 percent over a five year period. Translated, that means hospitals can expect to see a 9-14 percent increase in freight expenses per year. Statistics like this make it critical for hospitals to adopt cost-effective freight management behaviors.

For a materials manager who faces a skeptical administration, a good strategy to win internal support for a freight management program is to gain acceptance in steps. Your freight management partner can help you build a plan for securing multiple levels of savings, ranging from transactional discounts to mode optimization to supply chain efficiencies. The savings build as illustrated below.

Step 1: Discounts: Use discounts on inbound and outbound shipments to generate savings quickly, and ask your freight management service to provide comprehensive, easy-to-understand reports to reinforce the immediate ROI of the program. Expected result: 20 – 50 percent discounts on all program volume.

Step 2: Mode Optimization: Use freight transaction data to identify and correct expensive shipping practices. Expected result: 5 – 20 percent savings due to cost shift from Express shipments to Ground.

Step 3: Supply Chain Optimization: Combine supply spend, order and freight transaction data to help identify and prioritize potential savings opportunities from converting direct suppliers to the distribution channel, and vice versa. Result: 7 – 12 percent savings due to usage of private fleet and distribution-negotiated freight terms.

Working with a freight management service can free up your time for more strategic materials management issues. But you shouldn’t take your eye off the freight ball. In addition to the day-to-day activities your freight management service performs, such as freight auditing, freight cost allocation, invoice discrepancy and claims resolution, they should also take the lead on freight reporting, strategy, and budgeting. Expect them to provide you with options for penetrating your freight spend faster, and breaking through roadblocks put up by stubborn suppliers. It’s their job to explain your savings strategies, options and measures of success so that you can make the key decisions that impact your freight spend and budget. Regular program reviews are necessary to provide you with cost savings results, track program effectiveness and to collaborate on further process improvement strategies to maximize your savings. A dedicated freight manager should be available to answer all of your questions and impromptu requests. After all, their priority should be to help you achieve your cost reduction goals. Rely on your freight management partner to do the heavy lifting, and help you to make informed freight decisions.