Decoding Transportation Costs: Mastering Transportation Spend Management (TSM)

The landscape of global shipping is becoming increasingly intricate. Simultaneously, a significant shift has occurred in transportation budgeting methodologies. Companies are moving away from simple base transportation cost calculations to a more complex model that incorporates base costs alongside a myriad of accessorial charges. This evolution presents considerable challenges when it comes to effectively managing transportation budgets. It’s not just about knowing How Do You Spell Transportation; it’s about understanding and controlling every aspect of its associated costs.

Fortunately, there’s a strategic approach that offers a silver lining in this complex environment: Transportation Spend Management (TSM).

Transportation Spend Management is a proactive and systematic approach. It focuses on strategically targeting specific phases of the transportation process – before, during, and after shipment execution – to achieve a significant reduction in overall transportation expenditure. TSM isn’t just about cutting corners; it’s about optimizing processes and gaining visibility to make informed decisions.

TSM operates primarily across three critical areas:

Contract Management: Optimizing agreements with carriers and service providers.
Shipment Management: Streamlining the execution and visibility of shipments.
Payment Management: Ensuring accuracy and efficiency in invoice processing and payment.

Let’s delve deeper into each of these key areas to understand how TSM can unlock substantial savings and improve your transportation budget management.

Contract Management: Laying the Foundation for Cost Savings

The journey towards effective TSM logically begins with a thorough examination and optimization of your transportation contracts. These contracts serve as the foundational guidelines that define the entire shipper-carrier relationship, encompassing service level expectations, performance benchmarks, and, crucially, pricing structures.

Often, transportation carriers provide their standard contracts, which can seem convenient. However, the challenge for many shippers lies in the disconnect between contract negotiation expertise and in-depth organizational shipping profile knowledge. The individuals skilled in negotiating favorable contract terms often lack the granular data and comprehensive understanding of the company’s specific shipping patterns, volumes, and unique requirements. Without this critical information, even the most seasoned negotiator is essentially operating in the dark, relying on industry averages and educated guesses rather than leveraging actual, data-driven insights to secure the most advantageous pricing.

This issue is amplified in the realm of global shipping, where calculating total landed costs becomes exponentially more complex due to factors like tariffs, duties, and international regulations.

Another common pitfall in contract management is overlooking accessorial charges. Shippers sometimes focus solely on base rates, neglecting the significant impact of these additional fees. Accessorial charges, while often perceived as unavoidable, are indeed negotiable and should be a key consideration in contract discussions. While proactively preventing these charges is the ideal scenario, the reality is that they are a part of the transportation landscape and must be effectively managed.

This is where TSM’s structured approach to contract management becomes invaluable. TSM advocates for the implementation of best practices and the utilization of technology to:

Establish a Central Contract Repository: Creating a single, easily accessible location for all transportation contracts ensures transparency and simplifies management.
Convert Contracts to a Rules-Based Format: Transforming complex contract language into structured, rules-based systems facilitates automated validation and ensures compliance.
Benchmark Against Industry Standards: TSM enables comparison of contract terms and pricing against industry benchmarks to identify areas for potential improvement and negotiation leverage.
Promote Contract Change Control Procedures: Implementing robust change control processes ensures that all contract modifications are properly documented, reviewed, and approved.
Provide Tools for Analyzing Contract Changes: TSM tools offer analytical capabilities to assess the impact of proposed contract changes on overall transportation costs and service levels.
Offer Platforms for Comparing Contracts Side-by-Side: These tools streamline the process of comparing multiple carrier contracts, facilitating informed decision-making and optimal carrier selection.

The potential return on investment (ROI) in this area is substantial and directly correlated to the number of contracts your organization manages and the volume of shipping transactions processed annually. By applying TSM principles to contract management alone, shippers frequently achieve an average reduction of 5% in their annual transportation expenditure. This initial step lays a strong foundation for broader cost optimization across the entire transportation lifecycle.

Optimizing transportation contracts is the first step in effective Transportation Spend Management, leading to significant cost reductions through better negotiation and visibility.

Shipment Management: Optimizing Execution and Visibility

Shipment management encompasses the entire spectrum of activities involved in executing a shipment, from the initial order placement to final delivery confirmation. It’s not just about moving goods from point A to point B; it’s about ensuring efficiency, visibility, and cost-effectiveness at every stage. This includes managing both the physical movement of goods and the crucial flow of information associated with each shipment.

Within shipment management, we address both non-production and production shipping environments. Non-production shipping often involves desktop shipping and mailroom operations, characterized by lower volumes and less complex processes. Conversely, production shipping from large mailrooms, warehouses, distribution centers, and other high-volume facilities demands sophisticated systems and streamlined workflows to handle significant shipment volumes efficiently.

While the intricacies of shipping execution can vary considerably depending on the scale and nature of operations, many core processes remain consistent. TSM promotes the implementation of the following key activities at the point of shipment execution to drive efficiency and cost savings:

Routing Guide Compliance: Ensuring adherence to pre-defined routing guides optimizes carrier selection and mode utilization, leading to reduced transportation costs and improved transit times.
Address Verification and Validation: Accurate address verification minimizes shipping errors, reduces delays, and avoids costly address correction fees.
Denied Parties Screening: Implementing denied parties screening protocols ensures compliance with international trade regulations and prevents shipments to sanctioned entities, mitigating potential legal and financial risks.
Cost Allocation Confirmation: Accurate cost allocation at the shipment level provides granular visibility into transportation expenses, enabling informed decision-making and budget management.
International Documentation: Streamlining the generation and management of international shipping documentation ensures compliance with customs regulations, minimizes delays, and avoids penalties.

Similar to contract management, the ROI achievable through effective shipment management is directly proportional to the volume and complexity of a company’s shipping operations. By proactively managing carrier selection, optimizing routing, and ensuring execution efficiency at the point of shipment, shippers can typically reduce their annual transportation spend by an additional 2% to 5%. These savings, combined with those from contract management, compound to deliver significant overall cost reductions.

Efficient shipment management, including routing guide compliance and address verification, leads to significant savings and smoother logistics operations.

Payment Management: Controlling Actual Costs and Ensuring Accuracy

Imagine a scenario where your transportation organization meticulously negotiates contracts, diligently implements robust routing guides for both inbound and outbound shipments, and ensures all necessary documentation is in place for international shipments. You’ve seemingly done everything right, proactively taking steps to control costs upstream. Many shippers operate under the assumption that these proactive measures will translate directly into predictable and accurate transportation bills, free from surprises. Unfortunately, this assumption is often incorrect.

Despite the most thorough upfront efforts to reduce transportation spend, actual transportation costs frequently deviate from estimated or accrued costs by a significant margin – often ranging from 5% to 15% higher. These discrepancies can erode projected savings and create budget overruns.

Payment management, a critical component of TSM, directly addresses this challenge. It focuses on meticulously managing the actual costs incurred during shipment execution and carrier activities. This involves a multi-faceted approach encompassing:

Automated Carrier Invoicing: Transitioning from manual, paper-based invoice processing to automated systems streamlines invoice receipt, data entry, and validation, reducing errors and processing time.
Validation of Carrier Contracts and Service Levels: Automated invoice auditing systems verify that carrier invoices accurately reflect agreed-upon contract rates, accessorial charges, and service level agreements, identifying and flagging discrepancies for resolution.
Protection Against Invoice Duplication: Implementing controls to prevent duplicate invoice payments safeguards against overpayment and financial losses.
Invoice Adjustment Claims Management: Streamlining the process of identifying, disputing, and resolving invoice discrepancies and overcharges ensures timely recovery of funds.
Automated Cost Allocation: Automating cost allocation processes distributes transportation expenses accurately across departments, projects, or cost centers, providing granular financial visibility.
Routing Guide Compliance (Post-Shipment Audit): Payment management includes post-shipment audits to verify carrier adherence to routing guides, identifying deviations and opportunities for process improvement.
Establishing Payment Rules and Approval Workflows: Defining clear payment rules and implementing automated approval workflows enhances control over transportation payments and reduces the risk of unauthorized disbursements.
Integration into Accounts Payable Systems: Seamless integration with accounts payable systems streamlines payment processing, improves data accuracy, and reduces manual effort.
Electronic Funds Disbursement (EFD): Transitioning to electronic funds disbursement methods reduces payment processing costs, accelerates payment cycles, and improves vendor relationships.

The ROI from optimizing payment management is highly variable, depending on several factors specific to each shipper’s operations. These factors include the number of carriers utilized, the complexity of the shipping profile (modes of transport used), the proportion of spend attributed to inbound shipments, the volume of paper invoices processed, the complexity of cost allocation requirements, and the extent of international transportation activities.

Companies can typically realize immediate hard-dollar savings simply through improved contract compliance validation during invoice auditing. However, achieving substantial cost reductions, particularly in areas like cost allocation and exception management, necessitates a commitment to automating a significant portion (ideally 95% or more) of cost allocation rules.

Through a combination of automation and best-practice methodologies in payment management, companies can typically reduce their transportation spend by an impressive 5% to 10%. This area often yields the most immediate and tangible ROI within a TSM initiative.

Effective payment management, including automated invoicing and contract validation, is crucial for controlling actual transportation costs and eliminating overspending.

Information Management: Data-Driven Decisions for Continuous Improvement

As the adage goes, “information is power,” and this holds especially true in transportation management. A robust and comprehensive data warehouse serves as the foundation for informed decision-making and continuous improvement within a TSM framework. By consolidating and analyzing transportation data from various sources, a data warehouse unlocks tremendous value for an organization by:

Creating a Dynamic Routing Guide: Real-time data analysis enables the creation of dynamic routing guides that adapt to changing conditions, optimize carrier selection based on performance and cost, and continuously improve routing efficiency.
Enabling Business Intelligence (BI): A data warehouse empowers business intelligence initiatives by providing comprehensive data for reporting, analysis, and visualization. This enables stakeholders to gain deep insights into transportation performance, identify trends, and make data-driven strategic decisions.
Providing Carrier Performance Analysis: Granular data on carrier performance metrics, such as on-time delivery rates, transit times, and cost per mile, facilitates objective carrier evaluation, performance management, and contract negotiations.
Enabling More Effective Contract Management (Iterative Improvement): Data insights derived from the data warehouse inform contract negotiations, allowing for more targeted and effective strategies based on actual performance and cost data. This creates a cycle of continuous improvement in contract terms and carrier relationships.

By implementing a robust information management process, shippers can reap significant ROI, with the magnitude of returns scaling with the number of contracts, shipping transaction volume, number of locations, and overall complexity of the transportation network. Shippers can typically achieve an average reduction of 3% to 5% in their annual transportation spend through effective information management alone.

Beyond these direct cost savings, information management also generates significant “soft-dollar” savings associated with increased operating efficiencies, improved visibility, and enhanced decision-making across the transportation organization.

Leveraging information management and data analytics provides the insights needed to optimize routing, carrier selection, and overall TSM strategy for ongoing cost reduction.

Getting Started with TSM: Focus on Your Pain Points

Embarking on a Transportation Spend Management program may seem daunting, but the good news is that there are multiple entry points and flexible implementation strategies. The optimal starting point depends on your organization’s specific needs and priorities.

A practical approach is to begin with the area of TSM that directly addresses your most pressing pain point or the area that promises the most immediate and substantial return on investment. Conducting a formal ROI analysis for each of the core TSM areas (contract, shipment, payment, and information management) will provide valuable guidance in determining the most logical starting point for your organization.

Access to comprehensive and accurate shipping data is paramount for effective decision-making in TSM. If your organization currently lacks readily available and detailed shipping data, it is often advisable to initiate your TSM journey with payment management. Payment management processes, and particularly the data generated through meticulous payment management, along with the establishment of a robust data warehouse, will provide the foundational information required to expand your TSM program upstream through the shipment lifecycle.

At each stage of TSM implementation, actively seek opportunities to reduce transportation spend, benchmark current processes against industry best practices to build a compelling ROI case for further investment, and leverage tangible results to demonstrate the value of TSM and facilitate broader organizational change. By taking a phased and data-driven approach, your organization can systematically unlock the significant cost savings and operational efficiencies offered by Transportation Spend Management.