If your suppliers are in different states or even in different countries, you may find potential savings by factoring in and analyzing your transportation costs.
Do you know the answers to these questions?
- How much does transportation cost as a percentage of your total spend?
- What is the optimum order volume needed to obtain the lowest transportation costs possible?
- Which of your distribution centers would be best to receive the products?
- How do you optimize delivery frequency?
If you haven’t answered one or more of the above questions, then you may need to begin making transportation costs visible in your total spend. To do so, there are a few different strategies you can use.
How to make transportation costs visible within your total spend
- Ask your suppliers to open their books and share their transportation costs.
- Factor in a standard transportation cost for each supplier for the quotes you request, or estimate a different coefficient for each one.
- Ask suppliers to quote in different Incoterms, volumes or destinations to see a variety of transportation cost estimates for each scenario. However, this matrix can be complicated to read in one step.
Now you may proceed to these two steps:
1- Ask your suppliers to bid EX Works, based on out-of-factory prices for three different annual quantities.
It will give you a clear idea of their real production costs. That is the first step and a good benchmark of each player’s positioning. It can also raise interesting considerations in terms of quality or services, especially if you find out that one is much higher than the other.
2- Set up another request for quote (RFQ) event and invite mostly transportation companies.
You can eventually invite some of the short-listed suppliers from the previous step but only if they have their own internal transportation services. Ask them to bid on transport only, on three volume options, different frequencies and/or different distribution centers, depending on how relevant this is for your organization.
Now you will have all the necessary elements to identify the best scenario for this product, and you will then be able to set your final negotiation round after having identified the best scenario. At this point, you can set your event with or without transportation costs. It doesn’t matter because you will now have more cards in your hand to drive the negotiation, rather than following two steps behind.
This strategy even allows you to split your savings into two categories:
- Savings on product price.
- Savings in supply chain optimization.
It's always good to show your boss you’re negotiating in two or three dimensions!
You may be worried your current supplier will not welcome this new approach. And depending on the supplier, you may be correct. If this supplier is a strategic supplier, you should inform them you are evaluating transportation options at the company level and their product is not in question. If your supplier is not strategic, then you are simply putting the deal back on the market for a competitive evaluation of their service since you may decide to handle the transportation yourself.
Remember, complex negotiations do not always bring out the biggest savings.