Reducing Transportation Costs With Vendor Conversion
Shippers are spending an increasing amount of money on freight transportation. Rising rates and capacity constraints have forced shippers to re-examine carrier relationships, find new ways to optimize routes and capacity, and leverage data to mitigate cost increases. One cost-saving strategy? Vendor Conversion.
What is Vendor Conversion, and What are its Benefits?
Retailers, distributors, and manufacturers alike can save money by transitioning freight charges from pre-paid to collect. What does that mean? Traditionally, freight charges and accessorials are paid by the vendor or supplier of goods (pre-paid). With vendor conversion, freight charges and accessorials are paid by the receiver or consignee (collect).
The reality is, if a consignee is not paying for the freight they receive, the cost of shipping is often hidden in the cost of the product, and the supplier will charge the receiver more than what they paid the carrier. In fact, freight allocations may average between 4 and 7 percent of overall product cost (Manhattan Associates). Vendor conversion—or switching from pre-paid to collect—eliminates that extra charge and can ultimately save the receiver money.
Beyond cost savings, vendor conversion comes with some additional benefits:
- Direct control of freight: Shippers can to take control of their inbound freight, which increases visibility.
- More efficient backhauls: If a shipper is already managing outbound freight to their customers, they can arrange for their delivery vehicles to pick up inbound goods from suppliers on their way back to further increase efficiency.
- Less congestion on receiving docks: When receivers route their own freight, they can reduce the number of trucks arriving from different suppliers at any given time and maximize their staff’s efforts.
There has been a large push from retailers and distributors to convert 10-20 percent or more of their overall freight from pre-paid to collect. In fact, we’re increasingly seeing “vendor conversion” woven into job descriptions for freight optimization professionals at these companies.
When Does Vendor Conversion Make Sense for My Business?
It’s important to compare shipping rates and carrier service levels regularly to determine whether vendor conversion makes financial sense. Below are a few signs that indicate opportunities for vendor conversion:
- A rise in transportation-related charges
- Consistently late or damaged freight
- An increase in LTL shipments or the need for more consolidation
- Congestion on receiving docks that leads to costly inefficiencies
- Vendors exceeding a set “vendor allowance”
What Is a vendor allowance? Some retailers and distributors have calculated a precise allowance for the money a supplier can charge for transportation per load. Once that allowance is passed, the buyer no longer makes money on the load. When this occurs, deploying vendor conversion can help mitigate future losses.
When Does Vendor Conversion Not Make Sense?
In some cases, a vendor will not add any extra fees for handling, and the cost of transportation is simply passed through with no markup. In that case, the buyer may want to continue with a pre-paid arrangement.
Another scenario in which pre-paid may be a better option is if the supplier’s packaging is susceptible to damage. If the supplier pays for the freight and it arrives in poor condition, the receiver can refuse it and let the supplier deal with the claims process.
Lastly, locations and carrier sourcing capabilities will play a large role in determining whether vendor conversion makes sense. Depending on a supplier’s established carrier relationships, switching to collect may be more expensive if a receiver doesn’t have a proven network.
In any case, it’s important to perform a thorough cost/service analysis on your inbound freight to determine how well vendors are buying before making a conversion. Assess the total cost of transportation, including the risk of expensive service failures, when analyzing your network’s capabilities and strengths.
How to Approach Vendor Conversion
Finding opportunities for vendor conversion in your network can be challenging, but below are several tips for getting started.
- Work to understand your network’s capacity and core competencies
- Identify pain points or areas where your network may not be as competitive
- Execute mini bids on target lanes to gauge pricing, or bundle this into your major pricing events
- Where applicable, provide pricing transparency around the rates you need to make vendor conversion work in your favor
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