How to effectively reduce your procurement function’s transportation costs

In the world of purchasing and procurement, transportation is a strategic issue for businesses. Although it is a significant cost, it is synonymous with securing the supply chain. That is why it is crucial to optimise transportation costs, without compromising on the level of performance, in terms of respecting deadlines and service quality. As we are experiencing an unprecedented inflationary crisis, every company can activate the appropriate levers to reduce their cost of transportation.

 Transportation cost, at the heart of the Total Cost of Ownership

To optimise expenses, it is essential to adopt a Total Cost of Ownership (TCO) approach. This involves calculating the overall cost of a product or service throughout its life cycle.

The TCO is calculated by summing a set of costs. In addition to the purchase price, a few elements are taken into account, such as the acquisition costs, the cost of ownership, the cost of maintenance, the cost of use, the cost of non-quality, the cost of withdrawal, etc.

In this calculation method, there are also what is known as induced costs. This includes transport costs, customs, insurance, and payment terms. According to the Canadian purchasing consultancy J2, transport costs typically account for 14 to 20% of a company’s input procurement cost1.

In recent years, there has been a record increase in freight prices, exacerbated by rising fuel prices and labour shortages. A recent study co-led by Upply, Iru and TI highlighted that in Q3 2022, transport prices in Europe had risen by 19.6% compared to N-22. As the sector is far from returning to pre-pandemic levels, companies have every interest in looking more closely at transportation costs, regardless of the product.

The specific case of long-tail spend

This approach is especially important for long tail spend. This type of procurement represents 5% of budgets for 50% of segments and often contains significant hidden costs for businesses. As these purchases are often considered non-strategic, companies have not structured their management.

Consequently, the Total Cost of Ownership is largely dominated by indirect costs. Sometimes it even exceeds the purchase price of the product itself! For this particular type of procurement, it is even more essential to optimise the transportation price.

 Procurement function: How to optimise transportation costs?

Procurement departments have several levers at their disposal to reduce their transportation costs, both from the supplier and internal customer sides.

 Rationalise suppliers

By definition, rationalising the supplier portfolio also allows for streamlining indirect costs. By consolidating orders with reference suppliers, any company can reduce its supply expenses. To go even further, it is possible to take advantage of such a project to promote suppliers who offer the most competitive solutions in terms of transport (price, means of transport, etc.).

This approach is particularly suitable for long tail spend. These purchases concentrate on average 75% of the number of suppliers within companies. The potential for rationalisation with distributors offers both rapid and significant gains.

Rely on a local network

The geographical location of suppliers is a point not to be overlooked. Choosing a partner located in the same geographical areas and/or the same countries as your own company helps logistics, transportation management and route planning as it reduces travel distances, delivery times, and transportation costs.

Moreover, this makes it easier to set up framework agreements, with the presence of local teams who can ensure that these are correctly deployed. Having partners nearby is even more important when it comes to critical procurement, which can suffer from the complexity of the supplier market and therefore from shortages.

Raise awareness among internal customers

Order givers and users also play a significant role in upstream transport. It is essential to remind them of good practices to reduce the indirect costs of their procurement. To do this, care must be taken to ensure that they have exhaustive product descriptions (size, weight, features, etc.) in order to limit returns.

It is also possible to implement an automatic suggestion system for complementary products or even a minimum order requirement to encourage them to massify their orders. This is especially true for companies that have not set up framework agreements and do not benefit from specific commercial conditions.

 Optimising transport: Towards decarbonisation?

It is also interesting to note that optimising the transportation cost is inherently part of an environmental approach. These various levers, based on the Lean philosophy, aim for operational excellence by eradicating waste. Rationalising deliveries, travelling shorter distances, and limiting returns – these actions have an impact on both the economic, financial, and environmental aspects. Beyond the transport cost, this also helps to reduce greenhouse gas emissions related to the shipping of goods.

As a reminder, the transport of goods (air transport, maritime transport, rail transport, or road transportation of goods) accounts for 8% of global greenhouse gas emissions and up to 11% when warehouses and ports are included3. With the economic growth of Asia, Africa and Latin America, the global demand for freight is expected to triple by 2050, which would then

double the greenhouse gas emissions4 and make it the highest-emitting industrial sector on a global scale5. This approach is therefore as virtuous for the company’s finances as it is for the planet.

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