The operations department wants to maximize the value of its logistics spend by purchasing third-party services that make the distribution network more efficient. Buying these services is difficult, however, because procurement is pursuing lower costs by commoditizing transportation. How can the two views be reconciled?
This is not a new source of conflict in companies, but it is one that has gained in significance as senior executives - and notably CFOs - have widened and deepened their search for ways to trim budgets. Logistics is a legitimate target for such efforts, and the procurement department has become more involved as more responsibility for the purchase of goods and service has shifted to this department.
Giving procurement practitioners a seat at the negotiating table can be beneficial if they work with transportation managers to develop the most cost-effective solutions for moving the company's freight. Problems arise when the two approaches to purchasing are incompatible.
This happens when procurement lacks the depth of expertise to understand why transportation managers employ third-party expertise to do much more than hire carriers. If they fail to appreciate the bigger distribution picture, it is easy for procurement specialists to deduce that the operations department is paying for extraneous services.
To appreciate the range and value of these services look no further than this blog series. Take just a handful of blogs from any period and you will find a rich collection of analyses, practices and strategies for making distribution networks more efficient at the lowest cost. While logistics professionals understand the value of, say, an advanced transportation management system that combines software as a service (SaaS) technology and dedicated support teams (see the blog Transportation's Next Iteration of Saas, September, 2010), procurement practitioners might not.
These differences of opinion can surface in a number of ways. Misunderstandings occur when operations managers are unable to articulate to procurement how they add to the bottom line by increasing the value and strategic worth of logistics.
The relationship can hit rocky ground when procurement attempts to translate every part of a transportation management package into a commoditized item that is negotiated purely on price. Such an approach stymies contract negotiations by limiting the discussions to service costs. Moreover, agreements based on this approach are often more likely to fail. Service providers might not be able to meet the contract's cost thresholds, and thwarting operation's strategic goals creates internal resistance that can undo the agreement.
Excessive involvement of procurement can also significantly lengthen the contract cycle. It is good practice for transportation to keep procurement and sales in the loop when embarking on contract negotiations with a service provider. However, too much control from other disciplines complicates the process and makes it unwieldy.
There are ways to eliminate these speed bumps. Here are some suggestions.
Learn the lingo. Transportation can play its part by learning the language of procurement and finance. Many of the disagreements described above can be avoided if transportation is able to clearly articulate its purchasing approach. Similarly, procurement should make efforts to gain a deeper understanding of the value of transportation to the organization both in terms of profitability and customer service.
Build Trust. Establish a foundation of trust built on the notion that transportation and procurement are working towards the same goal: the optimum transportation solution at the lowest cost. Try to avoid the idea that either party is trying to take over.
Supply the Right Information. Service providers can help by gearing the sales cycle to both transportation and procurement. For example, TMC routinely includes ROI information in presentations that relates to both disciplines. The provider can also be sensitive to procurement's cost concerns by paying particular attention to prices early in the negotiations, thereby reassuring both parties that the talks are on track.
Truckload rates are on an upward path (see the Cutting Through the Fog of Freight Rate Predictions blog, August 2010, for more on rate trends) so the pressure to keep transportation costs under control is unlikely to abate. Some elements of freight spend can be commoditized – although this tends to be a relatively small percentage – and logistics professionals are just as intent on securing the best price for third-party services as are procurement managers. The trick is to recognize and leverage these common goals, and to overcome differences through a clear understanding of the strategic value of transportation management services.