Logistics Management

Dave Schneider

… The more they continue to change…
February 8, 2008

So the “big idea” that the “best in class” are doing are converting freight terms from FOB – Destination – Prepaid to FOB Origin – Collect. And the research firms like Aberdeen and AMR are predicting that there will be a growing focus to convert terms.

I agree that trend is growing. That is what trends do, they up, or they go down. As markets mature and bigger players form through consolidation of a market, the bigger players will provide growing momentum behind trends that change the behavior of a market. While I agree, I am not overly “excited” about the growing trend and how the “best in class” are driving the trend. It is nothing new, it is something to expect.

It is like this: The bigger players grow bigger in the market, and make it more difficult for the smaller, weaker players to survive. The really poorly run smalls die the death they deserve. The not so poorly run smalls merge into bigger players. Not so hard to call that trend, is it?

For most of my career people have been ringing the bell of freight terms conversion. I remember a consultant tell a small group of folks that in a presentation at an old CLM meeting in Boston back in the 80’s. The old hand that I was sitting next to that had 30 years of experience saw the excited look on my face and said “Don’t get so excited. That old gal has been around the block a few times.”

Please don’t get me wrong. Freight term conversion to where the buyer “owns” the freight is an important logistics strategy. It gives control over who the carrier is, how the freight moves, and when it moves over to the buyer of the merchandise. In an increasing complex supply chain of international logistics it is a basic requirement for success. But it is only one component of a strategy. Don’t make too much of it.

Let’s look at “that old gal” and see why she is attractive, and why we should stop and have a chat with her.

The first benefit is that under a FOB Origin – Collect set of terms we control the freight. We have the right to choose the carrier, the pickup, the method of shipment, the speed of transit, the cost of the shipment, the payment for the freight services. We can redirect that freight in transit with a phone call to a new location. If the carrier we choose screws up, we can have that “heartfelt” phone call with the carrier, if we choose to do so. For a control freak, FOBO-Collect is very happy place to be.

The next benefit is if my company is big enough (or it could be small enough) to own its own fleet, or have control of a fleet. That fleet costs money, and it costs about the same money if the trucks are sitting or the wheels are rolling. The more freight that I control the more that I can get it on the fleet and the more freight the fleet moves the higher the fleet utilization moves. Even better is that for every shipment that I get on the fleet for the marginal cost of some extra miles and hours, that is one shipment that my company does not have to pay another carrier to move. My friend, that is what I call a too-fer.

The third benefit is that the more freight that I control, the better “leverage” that I have with the carriers when it comes time to negotiate rates. That argument is valid, but only to a point. That additional volume is leverage if it is freight that a carrier wants to haul, and is moving from and to places that the carrier needs freight. If you have “ugly” freight, the carrier is not going to give you a “better” deal for more of it. Likewise, if you are asking carriers to place themselves into a bad balance, again, they will not give up revenue and profit just because you have more volume in a lane.

Now that we have been talking to the “old gal” for a few minutes we can start to see that she is not as attractive as she was from across the street. Let’s consider what we need to do if we want to spend more time with her.

Conversion is a negotiation process between the buyer and the seller in the transaction. We logistics types just move and handle the goods, we don’t get to make the buy decision or work out the price. In a retail organization that job of selecting the products to buy from what suppliers belongs to a guy known as a “Buyer”.   Oh, there are other titles, like “Merchandise manager”, “Category Manager” or, one of my favorites, “Market Procurement Manager”. In many organizations there is a “line in the sand” between the logistics and supply chain team and the “Merchandising” team. In more “advanced” organizations there is relationship between the buyers and the “transportation” folks.

Let’s assume for a moment that the buyers as a group are on board and with the program. Now they have to approach the suppliers and start the “dance” to change the terms. Their counterpart may be a manufacturer’s rep, could be “Sal the Sales Guy”, or Jack the customer service rep. In all three cases, none of those people will be allowed by the supplier company management to make a FOB – Origin deal without blessing from operations, transportation, production, or a combination of the three.

And do you think they will understand the needs or reasons to convert terms?

Posted by Dave Schneider on February 8, 2008 | Comments (0)