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Although transportation rates are still relatively low, companies have seen their overall logistics costs increase over the past few years. A big part of that has been due to increased last-mile costs as well as higher inventory carrying costs.
According to a McKinsey study published in November 2023, cost management continues to be the No. 1 pain point for both shippers and providers in transportation. With an increasing number of supply chain disruptions and labor shortages, logistics costs are not expected to decrease anytime soon. As the economy picks up in 2025, we can expect transportation rates to finally increase, which will have a further impact on logistics costs.
Supply chain companies have invested over the past decade in TMS solutions to optimize their transportation and are continuing to invest in freight procurement solutions. However, there is still a process and solution gap around the freight rates that are procured and how these rates are being applied during execution. That is where freight spend management (FSM) comes in. Companies applying FSM have done this more as an after-the-fact historical analysis of their spend and rates. The rise of e-commerce, volatile fuel prices and fluctuating market conditions necessitate a more dynamic, real-time approach to managing freight spend based on real-time data supported by advanced analytics using artificial intelligence. This allows companies to very quickly adjust based on the data insights, resulting in cost efficiencies.
Traditional freight spend management often relied on fixed contracts and historical data to negotiate rates with carriers. While this method offered some predictability, it failed to account for the dynamic nature of the transportation market. Dynamic FSM leverages real-time data, automation and machine learning to optimize freight costs on a shipment-by-shipment basis, in line with today’s industry needs.
Dynamic FSM involves the strategic as well as tactical control and optimization of transportation expenses. It encompasses a wide range of activities, including budgeting, cost control and expense reduction, and allows a workflow to quickly adapt to changed conditions.
There are different ways in which FSM helps companies. First, it helps you set budgets for your transportation expenses and actively manage costs to ensure they stay within budgetary constraints. Armed with accurate data from freight audits and analytics, FSM also allows you to negotiate better rates with carriers and suppliers, securing more favorable terms for your logistics operations. Through continuous analysis of your supply chain data, you can identify areas where costs can be reduced or eliminated, further improving profitability. Dynamic management allows businesses to adapt to unexpected disruptions and market changes.
Companies can leverage a wider network of carriers beyond traditional contracts, accessing capacity when needed. Effective FSM further ensures that resources are allocated efficiently, focusing on areas that provide the most value while eliminating wasteful expenditures. Finally, FSM enforces compliance with corporate policies and government regulations, reducing the risk of financial penalties and legal issues.
While the benefits of dynamic freight spend management are clear, implementing it has its challenges.
Seamless data exchange between internal systems and external platforms is crucial for accurate decision-making. New cloud-based, connected platforms allow for better connection of the multiple data points.
The biggest challenge of transitioning from static contracts to a more dynamic environment is the shift in mindset for both logistics teams and carriers. Establishing trust and transparent communication with your carriers is crucial for successful dynamic partnerships.
Despite these challenges, the benefits of dynamic freight spend management are undeniable. As technology continues to evolve, the integration of AI and machine learning will further enhance dynamic solutions, encompassing better data exchanges, more valuable insights and an easier, more automated workflow. These will create opportunities for even more accurate cost projections and predictive analytics.
Companies that embrace dynamic FSM are well positioned to navigate the complexities of the modern logistics landscape. This approach offers greater control over transportation costs, increased efficiency and the agility needed to thrive in the current highly dynamic market.
By investing in technology, fostering collaboration and adapting to a data-driven approach, businesses can transform their logistics operations and unlock a new era of cost optimization and competitive advantage.
Look for more articles from me every week on FreightWaves.com.
About the author
Bart De Muynck is an industry thought leader with over 30 years of supply chain and logistics experience. He has worked for major international companies, including EY, GE Capital, Penske Logistics and PepsiCo, as well as several tech companies. He also spent eight years as a vice president of research at Gartner and, most recently, served as chief industry officer at project44. He is a member of the Forbes Technology Council and CSCMP’s Executive Inner Circle.