Don’t Let Freight Escape Your Cost Management Efforts

There are many costs in a health system. Some are large (orthopedic implants), others are small (housekeeping chemicals); some are relatively easy to control (office supplies), others are much more difficult (biologic mesh).

Supply chain appropriately should apply resources to the highest cost categories, making sure the easily controllable ones are actually being controlled, and finding ways to influence the ones that are harder to control. But that should not mean that you ignore the somewhat lower cost areas — particularly if one is relatively easy to control and subject to waste if ignored.

Freight represents an excellent example. Costs for freight should be actively managed to reduce the number of expedited shipments and to reduce the cost of all shipments.

Freight costs are a fact of life in business. No matter how you look at it, there is a cost associated with getting supplies from the place they are manufactured to the place they are used. Ultimately, the purchaser of the goods pays at least part of this cost. However, there are many ways to control and reduce freight costs.

A package deal?

Perhaps the best way to limit freight costs is to get them included in the price of the goods. Purchasing goods “FOB Destination” means that all freight costs will be included in the cost of the goods. There will be no separate cost for freight added to the invoice. Some may argue that it is better to pay less for the goods and see the actual freight cost separately. The problem with this argument lies in the application of freight cost. The amount on the invoice may or may not be the actual cost. Many sellers actually label it “freight and handling,” which is another way of saying “freight and additional profit.” From my experience, most purchasing professionals agree that contracting for goods FOB Destination is ultimately less costly than paying for freight separately.

Sometimes it is not possible to negotiate FOB Destination terms. Some suppliers will not budge from FOB Origin where the buyer is responsible for the freight costs. In this case, there is still a good way to contain the cost. The one advantage to an FOB Origin contract is that the buyer can determine the method of shipping. This means you can require that the seller use your preferred carrier and use your negotiated rates. Not every supplier will agree to this easily. It is a little more work for them, and they often get some benefit from the shipping company based on the amount they ship using their outbound shipping contract. Many organizations now use a third party like Optifreight or Triose to help them manage these inbound shipments and convince sellers to use their negotiated rates – rates that are even lower (according to the companies) than you are likely to get on your own.

Know the code

Reducing the costs of expedited shipments is another strategy that should be used to minimize freight costs. An expedited shipment is any order that must be delivered faster than the norm. These are usually overnight or second-day deliveries from manufacturers. They can also be special deliveries from a distributor. One key element in controlling these costs is assuring that the user who is requiring the expedited delivery is also responsible for the costs associated with it. This is not always the case. Sometimes all freight charges are expensed to a single department, often Supply Chain. Other times the freight charge will just be buried in the expense to the department where they just see the total cost. In both of these cases the department has little information or incentive to do anything different. Part of this best practice is establishing a freight cost code for every department and applying all freight charges to that code.

Another key element is good inventory control in procedural areas like Perioperative Services and Cath Lab. Keeping adequate supplies and reordering in a timely basis can significantly reduce the number of expedited shipments required. Standardization in these departments will help as well. Controlling one or two items that you use frequently is much easier to manage than many items you use infrequently. But no matter how well you manage inventory in these areas, there are likely times when an expedited shipment will be needed.

The final strategy in controlling these costs is to use the least costly method consistent with the need and from where the item is being shipped. Second day is much less costly then overnight, and regular overnight is less expensive than “by 10:30.” Lesser known but as important is the “normal” delivery period. Depending on where the item is coming from, “normal” delivery might get there as early as an “overnight.” FedEx and UPS have programs that will have this information.

While the savings may not be as great as negotiating a new spine implant contract, the savings can be substantial and relatively easy to achieve. If you are not tracking and controlling freight costs now, take the steps needed and add this best practice to your operation.

Original Link: Don’t Let Freight Escape Cost Management Efforts

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