Freight Management: The Easiest Purchased Services Category to Find Savings
Shipping and receiving are among the fundamental processes of most businesses, and healthcare is no exception. In the healthcare industry, we call shipping and receiving inbound and outbound freight. You might be surprised at how much your health system purchases directly from a vendor (instead of a distributor) and then has it shipped for next day delivery. This is usually due to unexpected surgeries that come up that need special products or it’s from overly cautious buyers who don’t trust that their supply chain department will get them the products they need on time through their normal process.
What many healthcare entities don’t realize, though, is that they’re missing out on easy savings. There is no way that you have an in-house expert that can analyze the spend, negotiate new rates with the carriers, force your vendors to use your preferred carrier, and then manage the compliance of the program all for less than the cost of an FTE. As you know, we are at a time when hospitals are looking everywhere for savings and this is the easiest category that I know of to implement.
That’s why many healthcare organizations are turning to third-party hospital freight management companies for help.
How Freight Management Works
As mentioned above, there are two types of freight we will discuss: inbound and outbound. Inbound freight is when you order something and it is delivered via FedEx or UPS and represents around 80%-90% of your total freight costs. Outbound is when you ship something out of your facility somewhere.
The first step a hospital freight management vendor will need to complete is getting a list of vendors that are charging you freight with the total amount paid over the past 12 months. This is typically called a “summary of freight by vendor” report. They will then go through this list and identify which vendors are compliant to their program and which ones are not. This will provide them with how much of your freight can immediately start running through their program, and therefore you would immediately start realizing savings.
You might be thinking, what do you mean “which vendors are compliant to their program?” This is one of the ways to compare the different freight management vendors to each other. Basically, the freight management vendors reach out to the manufacturers and explain that they will need to start using the freight management vendors’ FedEx or UPS numbers on their invoices. The manufacturers either comply or don't with the program. There’s a little bit more to it than this but that’s basically how it works.
They will then spend their time working on optimizing the modes of freight you are currently using. They will review every shipment and see how many packages and at what price you were charged for sending: Priority, Standard, 2nd Day, Express, and Ground.
One of the biggest values hospital freight management vendors provide (besides discounts discussed below) is that they are continuously monitoring your freight spend and trying to get new vendors compliant to the program while also directing you to use cheaper methods of shipping.
They all have great internal tools to help you quickly identify where your vendors are shipping the packages from so you can easily see if ordering ground shipping would get the package to you at the same time as 2nd day, for example. This is very common and the savings are huge.
Here's the best part: there’s no cost to the hospital. This is a free service provided by the freight management vendors. They make their money on keeping a tiny percentage between the discounts they negotiate with the carriers and what they pass along to you. Trust me, you cannot run the same program for less than what these vendors charge.
Who Are the Main Players?
The major freight management vendors for the healthcare industry are:
- Cardinal OptiFreight®
- FDSI (recently acquired by Cardinal)
- There are other smaller players like Unishippers but I have not worked with them directly.
Cardinal acquiring FDSI makes Cardinal the largest player in the industry by far. They also have great tools to help you track and manage your freight online. Their primary carrier is FedEx.
Triose is 100% focused on healthcare and is known for their great customer service. They have a strategic alliance with UPS, which makes them unique in the industry. However, they do manage and audit both UPS and FedEx for their hospital clients.
5 Ways Freight Management Saves Money
There are five ways using a freight management vendor can put savings back in your pocket:
- Carrier Discounts. This might shock you but FedEx and UPS make a lot of money and have a lot of margins. You can tell when you see the chart below. These are the potential discounts you might be able to receive from using one of the three companies listed above:
- Optimized shipping modes. As I mentioned earlier, their goal is to reduce your freight costs. One of the best ways to do this is to move as much of it to ground delivery as possible and eliminate all of your priority shipments. One way they track and benchmark your performance is by your average cost per package price. They take all of your freight charges for a month and divide it by the total number of packages received (for inbound) to get this number. They do this for all of their clients so it’s a good benchmark to see how well you are performing. The lower the number the better. I’ve seen it as low as $11/package and as high as $28/package.
- One bill. Freight management vendors give you the power of multiple shipping vendors, all consolidated into a single bill, reducing your accounts payable overhead.
- Managed routing and re-routing. Even the best shippers make mistakes sometimes. Freight management vendors monitor the delivery status of your shipments and make sure that carriers correct mis-delivered packages and missed delivery times, ensuring you don’t pay for their mistakes.
- Monitoring of rates and vendors. They are continuously monitoring the shipping rates of their carriers to make sure you are getting the best discounts. They are also constantly reaching out to your non-compliant vendors to try and get them on the program.
The Future of Freight Management
Freight management for the healthcare industry is a decidedly niche market. Cardinal Health recently merged with FDSI, reducing the number of players in the field. The long-term impact on healthcare entities is anyone’s guess—the reduced competition may drive up prices, or the large volume of the combined Cardinal-FDSI business may enable them to drive even greater discounts with FedEx. Either way, freight management providers know that they can’t stay in business if they don’t save you money, so they’re committed to doing whatever it takes to keep their customers happy.
Shipping for healthcare organizations can be a nightmare, with myriad rules, paperwork and choices; many hospitals find it easier to pay more for fewer choices because figuring out the nitty-gritty of industrial shipping to save a few bucks is just one more hassle they don’t need. Freight management gives you another option, combining expertise with vendor relationships to take the guesswork and headache out of shipping while reducing spend. If you aren’t taking advantage of these services, you’re missing out on a major cost-saving opportunity.
Topics: Purchased Services