Freight Procurement: A Crucial Component of Supply Chain

A no.of links make up the supply “chain””

Supply Chain Management is an important component for organizations and their success. It basically provides a map that defines all the stages of business operations. In a supply chain, there are a number of stages in between the initial stage where the suppliers provide the raw materials and the final stage where the end product reaches the customers. So, we can safely say that a lot of factors contribute to the smooth functioning of the supply chain, which in turn is required for the smooth functioning of an organization’s operations.

Now, one such critical factor that affects the supply chain is Freight Procurement.

What is Freight Procurement?

Before we talk about how freight procurement contributes to the smooth working of an organization, it is essential that we truly understand what it means. So here we make an attempt to look at it from the root words, freight and procurement.

The term freight (as a noun) is defined as:

1. compensation paid for transportation of goods
2. goods to be transported (via air/surface/ocean transport)

Similarly, procurement is defined as the process of purchasing or sourcing of goods or services. Thus, Freight Procurement basically involves finding suitable avenues for an organization’s transport buying.

Why is Freight Procurement Critical?

Freight Procurement is critical as it enables effective logistics operations. Now, since logistics is the mechanism through which supply chain provides value, it becomes all the more important that it is carried out efficiently.

At this point, it is imperative that we understand what exactly is logistics.

Logistics is the process of acquiring, storing and transporting resources. It is important for maintaining the flow of goods from the initial stage to the final utilization stage. Its two major components, Transportation and Storage, can be seen at every node of the supply chain.

Out of these two components, transportation is the more dynamic one, and this is because:

• the probability of facing issues is more when moving the goods than compared to when storing them,
• the supply and demand fluctuations in the market makes static pricing and strategies harder,
• the transportation market is a highly opportunistic market.

What is the relation between Logistics and Freight Procurement?

Effective logistics requires identifying the right transport partners, having evolved relationships with them, ensuring that there is a backup of transport partners and the procurement does not rely only on the lowest cost transporter, ensuring that right truck types are used, identifying the difference between the planned and the actual dispatches etc.

A proper freight strategy takes care of the above requirements and helps the organization use their resources effectively. Based on the steps undertaken in terms of freight procurement, the supply chain will either be more efficient or more complex and we can call freight procurement as a strong pillar of the supply chain.

Now, What are some of the practical Challenges organizations face in terms of Freight Procurement?

It is surprising to note that even though freight procurement is an important component, many organizations are still trying to excel at it by using excel. It is a common sight that most of the processes are carried out manually by calls/emails and tracking and collecting data using excel sheets. Since the volume of activity is huge, this leads to confusion and more tedious work. Also, this kind of a system limits learning from past experiences, as there are no effective ways to analyze and draw out patterns or trends.

Given below are some of the practical challenges that threaten the smooth flow of the freight procurement process of organizations:

1. The absence of a real time view of freight spend analytics and its correlation with previous years/periods to identify the anomalies proactively.
2. Limited pool of transport partners and relatively lower scope of value discovery.
3. Insufficient strategic data on transport partners- their SWOT and key vulnerable areas. This data can help in assimilating information on repetitive behavior.
4. Static strategies with high dependency on one-time-contracts, which on an average, fail in less than 3 months duration.
5. Spot procurement of freight capacity is not an integral part of freight procurement and is only given importance during critical times.
6. The unavailability of real-time data regarding the active fleet mix and operator mix. This unavailability clubbed with the absence of data on operational performance and financial performance affects the updating of the Business-Cost Escalation risk which is important on account of failure of a particular transport partner.
7. The absence of a regular and engaging relationship-dialogue with transport partners. An unsuccessful supplier relationship management is also an issue.
8. The lack of adoption of right digitization and data driven decision support systems, to eliminate phase lags from planning.
9. The absence of a pro-active load and truck forecasting and a lack of information to the transport partners. This leaves very little room for accommodating turbulence/disruption.
10. The absence of a Freight Emergency Drill as a practice to address the sporadic disruption events like Covid-19, Suez Canal blockage etc.

So, how to mitigate these challenges?

Data-driven insights gives a competitive edge to the freight strategies devised.

To tackle the above challenges, organizations should reduce their dependence on manual mechanisms and start tracking their activities using digital systems. This helps organizations deal with disruptions and uncertainties efficiently with technologically elevated freight strategies . A responsive and flexible freight procurement strategy of the new age is backed by data driven insights and robust tech support.