State of UtahState of Utah

Freight Program Freight Program

Nothing Moves For FreeNothing Moves For Free

No Such Thing as Free FreightNo Such Thing as Free Freight

““Many vendors use freight pricing Many vendors use freight pricing programs as profit centers.”programs as profit centers.”

Dr. Lee Buddress

Supply & Logistics Management Program Portland State University

Comments from 2006 WSCA Conference.

State Freight Program OverviewState Freight Program Overview

• A benchmark program: (Selective Implementation)

Statewide freight contracts and quotes are benchmark rates for vendors to beat. The assumption is the vendor’s will offer optimal rates in bid responses.

Statewide freight contracts must be re-bid per state procurement law. No evergreen clauses.

• Statewide contract rate application:

Express small package delivery and LTL rates apply both ways, into and out of Utah points (Interstate) and within Utah (Intrastate) points. Uniform pricing for planning purposes. Rates are good for one year.

• Truckload one shot deals.

Sporadic truckload shipments via van, flatbeds, bulk , over dimension, temperature controlled, etc. Carriers are selected for bids based on the type of shipments to be transported.

Example: Virco school furniture shipments. State truckload pricing based on current market pricing. Rates in effect for 30 to 90 days. Savings to Granite School District several thousand dollars per truckload on shipments from Los Angeles, CA to SLC.

State Contract State Contract SummarySummary

Small Package Delivery Less-Than-Truckload Truckload Contracts (LTL)

I----------------I-----------------I--------------------I1 ounce 200 lbs. 10,000 lbs. 44,000 lbs. +

MA454 Fed Ex PD-136 UPS Freight Carrier examples: MA2017 DHL (formerly Overnite) C.R. England, Inc. Pride Transport, Inc. (WSCA Contracts) Up to approx. 6 pallets. Air and ground Base rates: OVNT 560, Eff: 4/30/2006 Current transportation market shipments Discount: 75% pricing. FAK: 55, for classes 50 through 125.

Rates good for one year. Actual class rates above 125. Consider 2nd Day Service. Rates good for one year.

Zip code driven pricing.

Ref: www.purchasing.utah.gov

Competitive Bid ProcessCompetitive Bid Process

• Buyers have the right to route freight.• Vendors provide freight data as part of state bid process.• F.O.B. Terms – domestic shipments. Example: F.O.B. Origin, Freight Collect vs. F.O.B. Destination, Freight Prepaid.

• Freight Collect vs. COD. Not the same.

• Freight allowances are not always vendor’s carrier contract prices.• Ask for actual freight costs not “shipping & handling.”• Watch bids where % of total cost charged as freight. • Sole source shipments – watch freight ! !• Shipping instructions on purchase orders must be specific when

stating carrier routing instructions. • Communicate with your vendors when first shipment is routed via

state contract carriers so they follow purchase order routing instructions.

Fuel SurchargesFuel SurchargesChallenges and OpportunitiesChallenges and Opportunities

NEGOTIATIONS

• An art as much as it is a science.

• Know your vendor contract options, i.e. can you re-bid the contract, let it lapse, negotiate or just say “NO.”

• We work with a supplier to help defray fuel expenses not absorb them.

• What is the effective date of the contract? Important to know when comparing fuel prices at the time of contract award in relation to current requested fuel surcharge.

Factors in Considering Suppliers Request for Factors in Considering Suppliers Request for a Temporary Fuel Surchargea Temporary Fuel Surcharge

• Fuel surcharges must be established on base line criteria. For example: EIA Retail On-Highway Diesel Prices. Keep it simple.

• LTL fuel surcharges are lower than full truckload surcharges. Which are you being asked to accept into the contract?

• What is the total cost to manufacturer and transport the unit to Utah? What percentage of the total unit cost is fuel related? For example: 90% unit cost plus 10% freight/fuel cost = total purchase price per unit. Require the vender to supply this detailed information in writing for your analysis.

• Focus on the fuel related freight cost of the transaction and not the total unit cost. Any fuel surcharge request should be based on the fuel related expenses (recent increases) not the total unit price.

• Is the proposed fuel surcharge a flat fee per purchase, a percentage of the purchase cost or in dollars and cents per mile?

Fuel Surcharge ExpectationsFuel Surcharge Expectations

• What has the supplier done to hold the line or to reduce their fuel expenses?

For example:

A. Bulk fuel contract purchases versus paying retail prices per gallon at the pump?

B. Does the supplier have an ongoing program to reduce engine idle time?

• Highway Diesel Prices. Review cost per gallon history to ascertain a trigger

price. Example: If the posted weekly cost per gallon of hits $3.00 per gallon

a surcharge will be allowed. The “agreed to” fuel index will be reviewed on

the each Monday to ascertain the fuel surcharge from a printed surcharge table. If published cost per gallon falls below $3.00 per gallon the surcharge is waived.

• This trigger pricing must be stated in the contract or amendment along with the appropriate fuel index agreed to be used, i.e. gasoline, diesel, or jet fuel.

Surcharge Audit TrailSurcharge Audit Trail

• If surcharge is agreed to be sure to tie it to a published fuel pricing index, write it into the contract along with a trigger price and the fuel surcharge table. Keep it simple.

• Always require the fuel surcharge to be listed as a separate line item on each invoice.

• If a vendor surcharge table is incorporated into the contract be sure your accounting people paying the freight bills or vendor invoices can easily verify the surcharge, i.e. Using the EIA web site index to ensure proper surcharge is applied.

Fuel Surcharge SummaryFuel Surcharge Summary

• View surcharge requests as temporary in nature and optional.

• Require suppliers to document their temporary fuel surcharge requests. Keep negotiations centered on the fuel related cost of the transaction not the total unit cost to deliver the unit to Utah.

• Tie any fuel surcharge to a published cost per gallon table with a trigger price whenever possible.

• Keep the audit trail simple so accounting staff can easily verify the application of the surcharge.

Pre-Audit of Freight BillsPre-Audit of Freight Bills

• No carrier is 100% accurate in billing of freight charges. There are humans involved in the process.

• If possible, always pre-audit freight bills or invoices prior to payment.

Example: Match warehouse receivers with purchase orders and freight bills.

Verify accuracy against contract pricing.

• Incorrect invoices should be sent back to carriers for corrected billings.

Shakes up carriers A/R system and hopefully generates internal exception reports.

• Avoid short payment of freight bills based on “verbal” authorization from carrier’s sales representatives or anyone else.