Note to CEOs (Part 4): Committed to reducing rising freight costs? What does different look like?
CEO wants to believe that their company is the exception (a.k.a. they don’t have silos), I invite them to consider some practical examples of how these silos affect companies
By Mike Regan, Co-Founder
Initially Published in Logistics Management on August 27, 2018
Based on the feedback we’ve received, the theme of our recent “Note to CEOs” blog posts appears to be resonating with shippers who are under the gun because of escalating freight costs. In case you missed them, these pieces (part 1, part 2, part 3) highlighted the fact that in today’s transportation environment, C-Level executives have to be actively engaged if they want to reduce their company’s transportation spend.
These posts have also led to interesting discussions with C-Level executives about the important roles they play in determining the freight costs their companies incur. Most CEOs are surprised when I bring this up, but truth be told, the CEO may be one the few people in an organization that can the impact of silos and create opportunities for the types of cross-departmental dialogue required within companies who are serious about managing their transportation spend.
Having said this, one C-Level executive recently gave me a bit of a challenge: “I get the fact that we need to do things differently, but what exactly does different look like?” In essence, he was asking me to paint a picture about how addressing the silo issue could reduce their freight costs.
Here are some of my thoughts in answering this important question:
- First, your CEO needs to know that if the transportation team is going to be held accountable for managing freight costs, they need to have a seat at the table! In other words, the transportation team should have input into decisions that ultimately impact a company’s freight costs.
- Today, in many companies the only role that transportation and logistics professionals have in directly controlling freight costs involves their ability to negotiate rates with their transportation service providers. If that is the case in your company, then your CEO needs to know that with significant carrier rate increases, your transportation costs will be going up—unless you can change some sales, operations and procurement processes.
This creates what I call the “Transportation Spend Management Paradox.” Specifically, transportation professionals are expected to manage or reduce costs and are held accountable for results they have only a small role in creating. Upon see this seeing this paradox, I have told numerous CEOs: “Your transportation professionals aren’t magicians! If you expect them to reduce freight costs, then they must have a voice and some authority on issues affecting those costs.”
If you’re wondering why doesn’t happen as often as it should, the answer is simple: “Silos!” Every organization has silos, and these silos result in higher freight costs. The owners of these silos (a.k.a. the C-Level executives like the COO, CFO, CTO, CPO and EVP of Sales) like to protect their turf, and they like to be able to make decisions without “interference” from the transportation folks. While not overtly stated, they are not too enthusiastic about giving their transportation folks a voice on decisions affecting sales, procurement, operations and finance issues.
So when a CEO wants to believe that their company is the exception (a.k.a. they don’t have silos), I invite them to consider some practical examples of how these silos affect companies.
- A transportation executive shared what happened when the Sales VPs increased their discounts by 25%. They shipped more volume on more trailers. But, transportation got blamed when the Freight to Sales KPI didn’t look very good.
- Another company experienced an operational hiccup. Their order fill rate dropped significantly; their minimum charge LTL shipments went through the roof; and his staff had to spend hours explaining why the budget numbers didn’t look good.
- A third company decided to get aggressive with its minimum sales order/free freight incentive program, and guess what? It worked! But the margins on this new business were awful because “free freight” isn’t free!
These aren’t isolated incidents. We recently completed a project that highlighted over twenty factors that were driving significant increases in one company’s freight costs. What each one of these factors had in common was that the transportation professionals had virtually no input into the decisions that really whacked their freight budgets.
In the presentations we have been giving to C-Level executives, we emphasize the point that as the CEO, you may be the only one who can effectively compel silo owners to get together with transportation folks before they make decisions affecting supply chains and freight costs. So if you’re serious about controlling your freight costs, then you absolutely must have a cross-departmental dialogue where executives can share information that helps them understand the true economic impacts of the decisions they are making.
So if you’re wondering, “What does different looks like for your organization?”
- Bust the silos—at least as it pertains to working with the transportation team.
- Give your transportation and logistics professionals a seat at the table and empower them.
- Make the transportation team part of your planning process and hold them accountable for providing accurate assessments about the economic impact of decisions affecting corporate freight costs.
And while you’re at it, why not take the time to get a better understanding of what’s happening in today’s transportation markets and see if these events will impact your company’s profitability? Our C-Level presentations can do that for you, so take advantage of our offer to facilitate one for your team. Many CEOs have seen firsthand the value that can be derived when information is shared, silos come down, and you have productive cross-departmental dialogue about the changes you need to make to reduce freight costs and improve your profitability.
It’s time to find out what different looks like for you and your company.