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Decoding freight and finance

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This is the final part of the three-part series on the relationship between freight and finance. You can read the first part here and the second one here.

While the first part discussed the question of freight, its relation to profitability and inventory, the second one mulled over the impact logistics has on commercial strategies. In the final part of the series, besides understanding some key freight related concepts, we come to a definitive conclusion on how two teams can work together to help organization cut costs.

Those who make decisions about buying materials and parts, and about who pays for delivery, are not always aware of the impact these decisions have on their business. For instance, products that are sold with the term “Freight Collect” require the customer to arrange and pay for shipment from your facility. While this reduces your staffing burden and shields your profit margin from fluctuating freight charges, it can also wreak havoc on your operation.

Customers that may not be experts in transportation are now forced to coordinate with your warehouse or factory, to schedule pick-ups. If badly managed, this can create unexpected and unnecessary problems. Also, Freight Collect terms can lead the customer to use your facility as a warehouse. You lose control of when inventory leaves your hands and, even more importantly, when you can raise an invoice and get paid.

On the inbound side, Freight Collect terms can backfire in a different way.

A buyer within the purchasing group may take advantage of a favorable buying opportunity, but it may come with the condition that the company must take immediate possession of the goods. The deal may look great to the purchasing and finance departments, but the gains on the pricing side may be lost in added transportation and storage costs for the products arrived that wouldn’t yet to be utilized. One has to look at the total costs under such circumstances.

Prepaid fare

There is yet another point to remember. If the outbound term is “Freight Prepaid and Add,” the good news is you don’t have to bear the brunt when freight rates go up. You simply pass on that increased cost. But, if the freight charges go down, you miss out on those savings.

If you opt for “Freight Prepaid” terms, you are responsible for managing line-item freight costs, which can increase manpower costs. But if you manage your freight network more efficiently and manage to reduce freight bills, you keep the savings.

On the inbound side, buying “Freight Prepaid” means vendors simply pass on the freight charges to you, so there’s little incentive for them to minimize these costs. Some may even use freight as a profit center. Managing inbound freight moves yourself can yield significant savings. And by improving upon the vendor’s performance, you can save up to 25% in inbound freight costs. For a company spending $100 million a year on these costs, that translates to $25 million in savings.

When it comes to freight payment terms, CFOs must carefully weigh what happens if the company relinquishes control of where and how products enter or leave the facility.

Key to reducing the cost of transportation

Closer collaboration between freight and finance is the key to reducing the total cost of transportation.

Freight strategies can have a material impact on the financial ratios that management and investors use to assess the state and value of the company. For this reason, effective CFOs need to learn to collaborate closely with the company’s logistics or supply chain team to understand these strategic opportunities.

Increased collaboration between freight and finance will most likely involve building new metrics and setting new standards for evaluating decisions. If you’re not measuring it, you can’t control it. Without transparency to the total cost, it’s difficult to uncover the best opportunities to save costs.

Employing transportation management technology

When it comes to transportation management technology, great strides have been achieved in harnessing the data-crunching power of computers and the accessibility of data facilitated by the internet.

This typically involves upfront investment in integration and implementation, as well as commitment to a technology that might not fully fit the evolving needs of your company.

CFO needs to realize is that when the transportation manager says he wants to buy a transportation management system, he is really saying he wants to pursue a logistics strategy. The CFO should understand all the implications, on cost and strategy, before deciding to purchase transportation management software.

While finance and transportation departments may not speak the same language, CFOs can and should learn to understand the different levers and balances that form the relationship between transportation and the company’s bottom line. A significant opportunity awaits the company that can better understand the complete financial implications of transportation strategies.

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