Inbound Terms Conversion Best Practices
Inbound Terms Conversion Best Practices
When a large nutritional supplements retailer with over 300 vendors utilizing prepaid payment terms contacted Unyson, they had no visibility to their freight spend. As a result, they also had a limited ability to determine the impact transportation had on prices when their cost of goods increased. In addition to the lack of visibility to actual freight spend they had no visibility to when their PO’s shipped from the vendor or arrived at their distribution centers.
The scenario is not uncommon. We frequently encounter companies unaware of their inbound freight costs, primarily because these charges are “buried” in the prices they pay for the goods. On average, freight allocations account for 5-10% of overall product cost with prepaid freight terms. Our solution? Convert to “collect” payment terms to pay strictly for your own inbound transportation costs, not your vendors. This not only gives you greater control over your network, often resulting in greater visibility, tracking, and monitoring, but it’s frequently more cost-effective as well.
The process may seem daunting, but if you follow these best practices, it’s an achievable venture with huge payoffs.
1) Analyze historical costs by collecting, validating, and modeling data. Data collection is often the most difficult piece to assemble. Information needed is Origin, Destination, Freight Class, Weight, and Cube. This information is typically provided on the Bill of Lading that the shipper sends with the fright.
2) Implement a collect network
Once the inbound conversion opportunity has been validated we get ready for implementation by scheduling a procurement event, setting up a transportation management system / portal for shipment routing, organize day–to-day operations and establish a freight payment system that fits your inbound transportation needs. Unyson works with the vendors, schedules carriers, and manages the entire process, making it easy for you to improve visibility and generate savings.
3) Negotiate with current vendors
Develop a conversion strategy and contact vendor groups with specific pick-up allowance proposals. Vendors add, or calculate transportation cost differently, some vendors know their actual shipping cost. Others may charge a percentage of the total PO, that goes to a general transportation fund and they do not know the actual cost to negotiate.
4) Shipment Visibility and Savings Monitor
Once the program is implemented you will enjoy the improved visibility. It will help your DC’s have advanced notice to arriving goods, drive vendor compliance and improve vendor behavior. All while savings are being generated!
So what happened to the nutritional supplement retailer? After reviewing data, the Unyson Engineered Solutions team conducted a full, prepaid terms conversion analysis, which showed the majority of our client’s volume came from 125 vendors. Of the 125 vendors, approximately 15% of the vendors itemized their freight (prepaid + add) while the remaining 85% included freight as part of the cost of goods. The 15% that itemized freight charged a mark-up of approximately 100%! Given these numbers, we identified an overall lost-opportunity cost of approximately 30% above market-level rates for the remaining 85% of the vendors/spend. We also conducted a procurement event and identified over 25% in rate savings adding up to over $5 MM in savings to date.
This example perfectly illustrates why we recommend inbound terms conversion as part of your best practices. By controlling inbound freight, you can manage compliance, reduce additional charges, monitor service levels and minimize damages and claims, all while utilizing the best carriers based on price and service. And that means more time to expand into innovative solutions that will yield ongoing savings.
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Making conversions happen!
Director; Logistics Operations