How many provider supply chain leaders have a firm understanding of what their organization spends to bring goods to their docks? How many have considered the possibility that vendors are grossly overcharging for shipping?
Freight management is a topic that often gets short shrift from materials managers. There are several reasons.
Inbound logistics costs in the grand scheme of a materials management budget are small. Charges for shipping and handling are thought to make up only about 2-3% of supply chain budget, so it’s not at the top of most priority lists. The corollary: many hospitals and healthcare organizations don’t have the mechanisms in place to track and account for these expenses.
Vendor relations is another factor. In the context of these business partnerships, supply chain personnel may take it on faith that suppliers are sending their products efficiently and at cost.
This is often not the case, says Tim Nedley, Vice President of Materials Management at University of Pittsburgh Medical Center (UPMC), where he oversees approximately $2 billion in annual spend and 550 employees.
By setting in motion a freight management program about 18 months ago, UPMC has leveraged several strategies to save $2.8 million—including putting its vendors on notice that it will not accept their turning shipping into a profit center.
Not only will some vendors charge above what its costs them to ship products, they will also be less than transparent on invoices when it comes to the precise freight figure.
“Vendors are good at disguising the charges in a variety of ways,” Nedley says.
How did UPMC come to this conclusion? It started when Nedley began researching the concept of dimensional weight, which both UPS and FedEx began using to calculate the shipping rate of all its packages in late 2014/early 2015. The formula for both companies takes into account a package’s density. If this dimensional weight exceeds the actual weight of a package, it becomes the rate determinant.
Acting on a hunch that UPMC was being overcharged, Nedley stood on UPMC’s docks, measured dimensional and actual weight of incoming parcels, used the couriers’ websites to theoretically calculate the rate, and compared his findings with what he saw on invoices.
“What I found out was, most companies—95% of companies I’ve looked into, one way or another mark up the freight above list price,” Nedley says, often between 30-40%, but some as high as 5,000%.
This prompted UPMC to formally name a freight team including four individuals, two of whom have prior experience with major shippers. Their understanding of vendor pre-payment arrangements and volume discounts gave them the evidence they required to meet with vendors and ask for an explanation. As a result of some of those meetings, the vendor reimbursed UPMC or offered free shipping going forward.
“We call it catching them speeding,” Nedley says.
These adjustments have made up a bulk of the savings. UPMC has additionally worked with three manufacturers to consolidate shipments so that multiple purchase orders are delivered in the same parcel. It also cut back on unnecessary overnight shipments, worth tens of thousands of dollars, as part of a focus on mode optimization.
So far, UPMC has examined the shipping practices of its top 30 vendors by volume, and with substantial savings, it provides an example of how much is to gain by implementing a freight management program.
“Freight management is not given the priority it needs to be given,” Nedley says. “That’s a fact.”