Guest Author: Ken Mullen, Vice President of Supply Chain Solutions

Transportation and Freight Cost Considerations

In Part 1 of this series, I discussed order routing and orchestration functionality is not “one size fits all” when it comes to supporting B2B customer sales order processing, as well as provided insight into when an order management solution is right for a B2B fulfillment organization. In Part 2 entitled, Transportation and Freight Cost Considerations, I will discuss the opportunity for your B2B organization to realize quantifiable value when considering transportation freight cost, as well as the number of times freight is transported is applied to customer order fulfillment.

Due to various factors like ongoing supply chain disruptions and a widening labor gap, distributors and logistics professionals face rising transportation costs. Industry experts estimate that B2B organizations spend an average of 6%-8% of annual revenue on outbound transportation distribution to both the end customer, as well as redistributing inventory across an organization’s distribution centers in an attempt to achieve “perfect inventory” (i.e., right inventory, right physical location, right quantity and at the right time). Transportation isn’t likely to become significantly cheaper anytime soon, so B2B distributors need strategies to help them cut transportation freight costs where possible.

Cost-Effective Processes for B2B Distributors

Below are a few of the most effective processes that have been successfully implemented for B2B distributors with the support of a best-of-breed order management system (OMS):

Leverage Most Cost-Effective Shipping Method When Determining How to Fulfill a Customer Order

While the concept of considering shipping cost when selecting a fulfillment location for a customer location should be commonplace and almost assumed, many B2B distributors do not incorporate this metric into their customer order fulfillment logic. These organizations opt to fulfill from a static default fulfillment location that is the closest geographical location to the customer as defined by mapping a delivery “zone” comprised of postal codes assigned to each fulfillment location. When a customer order can be fulfilled on time and in full (OTIF) (i.e., no delays in delivering later than the customer requested delivery date AND all requested quantities for all items ordered are available on-hand), this logic makes perfect sense.

Unfortunately, exceptions to “happy path” fulfillment occur more frequently than B2B fulfillment organizations would like to admit. The supply chain challenges that occurred over the past few years have shown that achieving OTIF cannot be holistically controlled by the B2B fulfillment organization; manufacturing parts shortages, inbound finished goods purchase order delivery delays, bottlenecks at entry ports and carrier capacity are all examples of these types of challenges. For the B2B distributor, these challenges can translate into the following customer order satisfaction issues as well as excessive transportation costs:

CHALLENGE #1: One or more items ordered by the customer cannot be fulfilled at the default fulfillment location due to inventory shortages, causing a potential back-order situation.

SOLUTION: Leverage a best-of-breed OMS to:

1) Check inventory availability at all alternative fulfillment locations for all items on the customer order. Compare the minimum freight cost to ship the customer order from each alternative fulfillment location to the minimum freight cost to ship from the default fulfillment location. Best practices include having the OMS incorporate a “back-order penalty factor” to the default fulfillment location minimum freight cost to account for the customer satisfaction impact of shorting the customer order/creating a backorder.

 2) Check inventory availability at all alternative fulfillment locations for all backordered items that cannot be fulfilled from the default fulfillment location. Compare the minimum freight cost to ship the customer order from both the default fulfillment location and each alternative fulfillment location (i.e., splitting the order into multiple shipments direct to the customer) to the minimum cost to ship from only the default fulfillment location. Again, best practices include having the OMS add a “back-order penalty factor” to the default fulfillment location minimum freight cost to account for the customer satisfaction impact of shorting the customer order/creating a backorder.

CHALLENGE #2: One or more items ordered by the customer cannot be fulfilled at the default fulfillment location due to inventory shortages, thus forcing the B2B distributor to transfer inventory from alternative warehouse locations into the default fulfillment location in order to ship the customer order “in-full”.

SOLUTION: Leverage a best-of-breed OMS to:

1) Check inventory availability at all alternative fulfillment locations for all items on the customer order. Compare the minimum freight cost to ship the customer order complete from each alternative fulfillment location to the minimum cost to transfer the product to the default fulfillment location plus the minimum freight cost to ship the customer order from the default fulfillment location (i.e., merge the customer order lines into the default fulfillment location).

NOTE: In 2022, B2B distributors spent on average 30% of their annual transportation freight spend on transferring inventory between fulfillment locations in support of merging all customer line items at the default fulfillment location and then shipping the order complete to the customer.

CHALLENGE #3: The customer orders more or less quantity for one or more items, as compared to forecasted amounts that the B2B organization has properly stocked in the default fulfillment location for this customer, along with some safety stock buffer; this could alter the shipping method and associated freight cost based upon the adjusted quantity, weight and cube of the customer order.

SOLUTION: Leverage a best-of-breed OMS to:

1)  Compare the updated order characteristics (e.g., quantity, weight, or cube) to a shipping method (e.g., small package, LTL, Contract Truckload, In-House Carrier Service) leveraging correlation logic (i.e., “IF ORDER WEIGHT <= 200 POUNDS, USE SMALL PARCEL SHIPPING METHOD”) and update the customer order header accordingly.

2)  Cross-reference the updated shipping method with all viable fulfillment locations and their associated minimum freight cost to the customer shipping zone to determine the most optimal fulfillment location for the updated customer order. This check also verifies that the selected fulfillment location can support the selected method of shipment.

NOTE: In these scenarios, a minimum freight cost per shipping method and origin-destination zones is leveraged by the OMS to provide near real-time analysis as part of order routing and optimization. The actual carrier within the selected shipping method will be selected further downstream once the actual order shipping characteristics (e.g., number of boxes, number of pallets) are determined during warehouse order fulfillment.

Real-Time Consideration of Freight Costs is Key

As you can see from the above-mentioned scenarios, there is significant value in considering freight movement and the associated minimum transportation costs before committing to a fulfillment decision for a customer order. While modeling these scenarios independent of executing actual customer orders to better understand all the data correlations that are required to help guide these decisions can be beneficial, being able to use actual data (e.g., minimum freight costs, customer zip code destination, customer order items and quantity) and route and orchestrate all the available permutations in real-time provides B2B distributors the best opportunity to achieve OTIF metrics for their customers. Additionally, real-time consideration of transportation freight cost and movement orchestrated by a best-of-breed OMS will help B2B organizations proactively avoid costly customer order fulfillment decisions built on dated and static business logic, including:

• Excessive transportation freight spend transferring inventory between fulfillment locations that can average 30% of a distributor’s annual transportation freight spend.
• Unnecessary customer service time and cost fielding questions on why a customer order is being shorted or backordered.
• Lost customer order revenue due to short shipments or back-orders.
• Losing customers for good!

Optimizing Operations to Drive Success

By leveraging a best-of-breed OMS, B2B distributors can optimize their operations to reduce transportation costs, improve OTIF performance and enhance customer satisfaction. Key tactics like selecting the most cost-effective shipping methods, evaluating alternative fulfillment locations and mitigating backorders can significantly impact the bottom line. With the ongoing challenges of supply chain disruptions and increasing labor shortages, adopting these strategies can help B2B organizations stay competitive, minimize unnecessary freight costs and retain valuable customers.

Interested to learn more about whether an order management solution is right for your B2B fulfillment organization? Let’s have a conversation!^®