Transportation and Logistics Strategy in Procurement

Transportation and Logistics Strategy

Procurement logistics requires adequate involvement from purchasing professionals to ensure the lowest possible freight costs and effective delivery of materials to internal customers.

Though transportation and logistics might be taken care of by a separate dedicated department in large organizations, the involvement of procurement management will still be of paramount importance.

For organizations where a significant share of procurement costs comprises inbound freight, efficient optimization of inbound routing and freight costs can provide big savings as explained in the introductory case.

This involves establishing an effective logistics and transportation strategy supported by efficient information systems.

Process of Transportation and Logistics Strategy

The steps involved in establishing a transportation and logistics strategy are as follows:

• Acquire Proactive Control and Authority Over Transportation Decisions
  
• Establish Clear Objectives for the Transportation and Logistics Strategy
  
• Identify Key Transportation Performance Variables
  
• Describe the Procurement Logistics Policy and the Nature of the Control
  
• Form a Team
  
• Establish the Process for the Selection of Transportation Choices and Implement the Same
  
• Select Approved Carriers and Negotiate Contracts
  
• Evaluate Carrier Performance

Acquire Proactive Control and Authority Over Transportation Decisions

The procurement department should take cognizance of the emerging strategic nature of logistics and transportation. For all inbound logistics, it is a procurement function that is involved in decision-making with respect to the transportation mode and carriers during discussions with the suppliers.

Effective management and control of procurement logistics require that the procurement manager has a clear understanding of the following aspects:

• Impact of transportation decisions on materials management
  
  
• Available transportation options and carriers
  
  
• Pros and cons of all available various transportation modes and carriers
  
  
• Criteria for the selection of a carrier
  
  
• Shipping terms and commercial practices
  
  
• Transportation documentation
  
  
• Freight rates for different modes and factors that determine the rates
  
  
• Usage of third-party logistics service providers such as freight forwarders, private logistics service providers, etc.
  
  
• Intention to develop long-term logistics contract
  
  
• Prevailing commercial laws and rules related to tariffs and duties

In the case of procurement logistics, it is quite possible that the suppliers take all transportation decisions that can adversely impact delivery costs. Having an established logistics strategy will help the procurement function to negotiate well with suppliers for effective transportation decisions.

Establish Clear Objectives for the Transportation and Logistics Strategy

It is important to establish clear objectives for the transportation and logistics strategy because an effective procurement logistics strategy helps in the following aspects:

• Managing and controlling an inbound routing of freight
• Delivering goods at the lowest possible total transportation costs
• Bringing down lead times involved
• Reducing avoidable inventory
• Procuring effective carrier services
• Taking control of business terms of purchase
• Determining routing and risk management strategies
• Identifying key areas of opportunity for continuous improvement

Identify Key Transportation Performance Variables

After setting up objectives for the transportation and logistics strategy, key transportation performance variables must be identified. These performance variables can influence transportation choices.

Some important performance variables are the total cost involved in transportation, lead time involved, the reliability of the transportation mode and carrier, the capability of the carrier, and control over the shipments, etc.

For each of these variables, appropriate metrics and an acceptable range of performance should be decided based on the different types of shipments and transportation choices.

Describe the Procurement Logistics Policy and the Nature of the Control

The responsibility for the transportation of shipment is also part of the trade terms of the contract of sale. As discussed in Incoterms, the trade terms can vary between the two extremes of the supplier taking full responsibility for carriage and risks to the buyer assuming all the responsibilities till it reaches the destination. Clear policy terms should be framed for the usage of different types of trade terms based on the nature of shipment and suppliers involved. Another possibility is the use of third-party logistics providers.

Thus, the transportation of shipment could be under the control of the buyer, supplier, or a third-party service provider. The choice of control has a direct impact on transportation costs and delivery performance. Hence, the policy should clearly specify the nature of control to be exercised.

Form a Team

Procurement logistics impacts other functions of the organization as the purchase function does. A cross-functional team consisting of professionals from other departments such as transportation, materials, production, warehousing, quality, and finance should be formed to decide and establish the logistics strategy.

Establish the Process for the Selection of Transportation Choices and Implement the Same

Based on the objectives of procurement logistics, performance targets, and transportation control policy, establish a process for the selection of transportation modes and carriers.

The process should involve the analysis of transportation choices that consider the types of goods procured, mode of transportation available, shipping points and volume traffic lanes, tariffs involved, delivery performance targets, and carrier capabilities. This includes criteria for the selection of third-party service providers.

There are five principal modes of transportation, viz., motor carrier, rail, air, water, and pipeline. Each has its own advantages and disadvantages and is suitable for specific types of commodities and materials, and geographical areas involved.

All these aspects should be thoroughly analyzed as part of the transportation mode selection. Other than the tariff involved, the nature of shipments, and geographical areas, the applicable regulations and commercial trading practices pertaining to each mode of travel should also be taken into account. It is also possible that some shipments might require intermodal transportation.

Similarly, there are different types of carriers available namely common carriers, contract carriers, private carriers, and exempt carriers. A company may also decide to use its own fleet of vehicles. Alternatively, it may also decide to use the services of a third-party logistics service provider.

Select Approved Carriers and Negotiate Contracts

The selection of carriers should be similar to the process of selection and evaluation of suppliers with due consideration to several factors (other than tariffs) such as financial strength, pricing and contract terms, fleet involved, delivery record, insurance-related factors, past experience, and reputation, service capabilities, geographical areas covered and routing management.

Negotiation should focus on specific services required that provide the best possible performance parameters. The nature of services and service levels offered by the carrier may also depend on freight volumes involved over the period. The carrier might require a commitment from the buyer with regard to the minimum volume of the shipment.

The contract should focus on parameters such as service performance targets, service guarantees, penalties and rewards, handling of freight loss and damage claims, type and quantity of equipment utilized by the carrier, freight rates, discounts, and information-sharing systems available.

Contracts should be established with selected carriers who provide best-in-class service at the lowest rates. The rates are generally based on origin and destination points, shipment characteristics, packaging, handling, etc. The establishment of a contract should focus on a long-term partnership that is based on mutual trust between the organization and the carrier. Transportation consultants can also be engaged in negotiating and concluding a professional contract.

Evaluate Carrier Performance

Carriers should be evaluated periodically for standard performance measures such as delivery performance, claims occurrences, transit time between facilities, equipment utilized, billing accuracy, rate negotiation service, the technology deployed, and customer service. The measurement of carrier performance should also have the objective of continuous improvement of operations.