If space is the final frontier for managing inventory, freight and shipping costs must represent the toll booths along the way.
On the journey of getting something from there to here or vice versa, these tolls can add up — both in frequency and amount.
Over the years, Healthcare Purchasing News has explored the breadth and depth of healthcare providers managing the costs and practices of freight and shipping. Historically, the bulk of HPN’s coverage focused on the tips for and traps of controlling costs and improving how Supply Chain oversees inbound and outbound freight and shipping.
This year remains no exception as healthcare organizations continue to struggle with freight and shipping practices — from making it a budgetary, and therefore a management, priority to relying on outside resources for varying degrees of control. Those outside resources typically include third-party logistics (3PL) companies as well as main- line distributors with 3PL “boutique” operations.
One noteworthy trend emerges: Software. Designed to help Supply Chain departments manage costs by tracking usage and expenses, these applications automate portions of the process, functioning sort of like a “Freight-Shipline.com,” but without the clever commercials and corny pitchmen.
Regardless of outsourcing all or part of the freight and shipping function to a third party or using a software package internally, Supply Chain executives and professionals continue to wrestle with some of the subtle nuances of freight and shipping contracts and requirements.
Red flag rising
To wit, HPN asked a variety of freight/shipping executives to reveal and explain some of the contractual red flags that Supply Chain pros should spot and understand, including such examples as early termination addendums, actual versus billed weight discrepancies and minimum billable weight determinations.
Contractual red flags are difficult to identify because typically they may be disguised as savings opportunities, according to Andre T. Davis Sr., MBA-HCM, Marketing Manager, TRIOSE Inc.
“One of the most common red flags are stipulations placed on how your organization can obtain free freight,” Davis told HPN. “We see vendors offering free freight only if certain dollar thresholds are reached, only if certain item amounts on specific item lines are reached, and only on specific days — some even have these stipulations combined with one another! Perhaps most troubling, we’ve seen contracts stipulate that punitive fees be charged if many of these same terms aren’t reached.”
Davis indicated that one term gaining in popularity is “flat free freight.”
“A flat charge for shipping, no matter the amount ordered, is only beneficial if it fits your procurement practices,” Davis said. “Spending a flat rate of $35 for a shipment that would normally cost $7 can add up quickly. The good news for supply chain professionals is that with greater visibility, they can impact, avoid and even affect change on many of these stipulations. Finding a partner to help you along the way is paramount to a healthy supply chain for your healthcare organization.”
During the contract negotiation phase with suppliers, Supply Chain pros often forget to delineate and differentiate between product and freight fees, allowing medical product suppliers to count freight fees as a tidy profit center, noted Marc Mullen, Vice President and General Manager, OptiFreight, Cardinal Health.
“These direct shipments, especially overnight deliveries, typically come at a hefty freight expense that’s higher than the market average,” he said.
But Mullen acknowledged that it can be easy for Supply Chain pros to overlook these costs.
“These freight fees may be hidden in the customer invoice due to the practice of combining shipping and handling costs into one line — making it difficult for supply chain professionals to identify true freight spend,” he said. “This is a critical step in negotiations to not only realize true shipping costs, but also to identify potential savings opportunities.”
Jake Crampton, Founder and CEO, MedSpeed LLC, pointed to cost-per-stop or cost-per-mile pricing structure and transactional add-on fees as red flags.
“While unit costs such as these are simple to grasp, they incentivize providers to increase the number of miles driven, stops made and fuel consumed — adding unnecessary costs and time,” he said. “A global approach that puts healthcare organizations and intra-company logistics providers in lock step to create more efficiency and eliminate redundancy is more aligned with the future of healthcare and the need for healthcare organizations to be agile.”
Don Carroll, Vice President, Business Development, Vantage Point Logistics Inc., however, warned about “non-approved handling fees,” advising Supply Chain pros to include a contract clause that prevents the suppliers from assessing them.
“A growing number of suppliers use random non-freight handling fees to make up for shortfalls in other areas,” Carroll cautioned. “VPL has identified over 1,000 unique fees that suppliers are adding to their customer invoices. A competent freight program can identify these fees for their customers, and it makes it that much easier to address them if the contracts state they can’t add them in the first place.”
Spot the liability liability
As Supply Chain pros examine freight and shipping agreements, they should play close attention to the contractual language addressing cargo liability and insurance requirements, emphasized James Hancock, Director, Sales, Veritiv Logistics Solutions, a division of Veritiv Operating Co.
“Most agreements have limits for cargo liability that are set around industry standards, Hancock said. “However, be aware that some agreements may try to impose liability for the full amount of the loss as well as consequential damages such as loss of business profits, or liquidated damages for delays. It is important to understand what actual liability you have agreed to take on. Based on the liability language you agree to in a contract, additional product loss insurance may be necessary to cover any gaps in coverage.”
Supply Chain also should review indemnity. “Most agreements will cover in detail when carriers, brokers and shippers can each be held liable for potential incidents. This liability language in a contract is usually in addition to the liability a party already has under the law,” he noted. “Indemnity provisions should be reviewed carefully to ensure that the risk a party is assuming is in line with its risk profile.”
Kevin Clonch, Director of Global Transportation Service Provider Development, Ryder, agreed that Supply Chain pros should watch for indemnification and ultimate liability language, as well as insurance level changes, accessorial charges, early out clauses for termination of the contract or rates and price change clauses, which typically involve increases.
Maintaining a “solid baseline understanding of an organization’s freight needs, costs and ordering trends” represents the “cornerstone” of freight and shipping agreements, insisted Sophie Rutherford, Vice President, Business Development, Jump Technologies Inc.
“If you’ve not been working with a third party logistics organization, it can be difficult to assemble this data, but it’s essential to any freight agreements you will negotiate,” she said. “First, look at all incoming packages over the last 12- or 24-month period. How did freight arrive? Who ordered it and what were the actual incoming supplies? What vendors and levels of service were used most often? And most importantly, what was the cost associated with your inbound freight? Why was the order shipped in the service that was chosen? In other words, did it really need to be priority overnight?”
Rutherford recognized how hard it can be to obtain data on incoming packages because “most ERP systems do not capture freight cost information.” With this data, however, you then can determine the organization’s current cost per package. “Take your inbound freight charges for one month and divide it by the number of packages you received that month to get a starting point for cost per package. The lower the number the better, so use this as a benchmark as you build metrics for improving your freight costs,” she said. Armed with this data you can negotiate for the best rates on most commonly used service levels, either directly with the carriers or with the vendors if you’re not leveraging a 3PL, she added.
“You [then] can work upstream within your organization to identify the people, departments and products driving the highest freight costs — ordering trends,” Rutherford continued. “This can help you flag potential inventory issues inside your organization. Finally, if you’re negotiating an agreement directly with a carrier, ensure you examine the contract carefully for add-on costs, such as fuel surcharges, sorting fees, shipping of materials needing special handling, and put responsibility onto the carrier to deliver goods to you — on-time and undamaged. Add rebates or charges to the contract for lost or misdelivered items to ensure the responsibility resides with the carrier. Watch out for words like ‘unless otherwise noted,’ as they can require you to continually sift through invoices of inbound shipments for exceptions.”
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