The Top 15 Supply Chain Terms That Every CFO Should Know
Like any industry, logistics has a multitude of terms that are commonly used but are foreign to executives unfamiliar with the day-to-day operations. To have a successful supply chain, the CFO must have a basic understanding of the terminology involved in the coordination and management of goods from all facets of the company, its suppliers, distributors, partners, and customers.
OTIF – On time and In Full
On Time, In Full (OTIF) is a policy that Walmart created in 2016 and implemented in August of 2017. In an attempt to drive their proficiency up and costs down, the mega retail chain started targeting their supply chain. Under this policy, suppliers that failed to deliver the total amount of promised goods, to designated stores at the prescribed time are penalized; fined up to three percent of the total shipment value. It’s not just trying to curb late deliveries, either. The OTIF policy also cracks down on trucks arriving too early, as it can create excess traffic and delays for loading and unloading. For suppliers and trucking companies, this means there’s no leaving early to create a buffer zone. The shipment has to arrive exactly when it’s expected. Not before, and certainly not after. On April 1, 2018, the company made the policy even harder. Prior to this date, the OTIF policy stated that full truckload shipments needed to meet a 75 percent OTIF rating and less-than-truckload shipments needed to meet 33 percent OTIF to avoid fines. Now, Full Truck Loads ( FTL) are required to meet an 85 percent standard (down from the lofty 95 percent they had originally planned) while Less Than Truck Load (LTL) requirements have increased to 36 percent. The OTIF concept has subsequently been adopted by major retailers, such as Target, Kroger, and Walgreens.
MABD – Must Arrive by Date
MABD is the predecessor to OTIF. Launched in January 2016, suppliers to Walmart were instructed to have deliveries to the store within a certain time frame, while having invoice accuracy. The MABD window included the day the merchandise was due to the distribution center or other facility, plus the three previous days. It’s not just the arrival date that counts, it is also the contents and the number of items. The MABD window was typically three days for perishable foods and 4 days for anything else. Not only did the shipment need to be on time but the shipment must contain at least 90% of merchandise being shipped or the supplier would have to pay 3% of the cost of goods.
Time Definite – Precision Delivery
Time-definite freight is precision delivery. It’s not on any given day or any roundabout day. It’s on a particular day, at a particular time – morning, afternoon, AM, PM. It can be any time of the 24-hour day. Unlike traditional LTL delivery, time definite freight has guaranteed pickup and delivery commitments. Also known as “expedited” in the freight industry, shippers who book a time definite shipment receive control over the entire delivery process, with access to dedicated customer service and tracking. While expedited shipments can use traditional tractor trailers, there are also more flexible asset options, such as non-dock high sprinter van, small/ large straight trucks with liftgates and pallet jacks for inside pick-ups and deliveries. Sprinter vans up to 24 ft and straight trucks with a gross weight under 10,000 lbs will not have the Electronic Logging Device (ELD) regulations and will be able to meet time sensitive deadlines. Carriers can provide true teams services for sprinter vans and up to 26 ft straight trucks. Another added benefit to the hands-on approach for expedited is that all shipments are tracked every 2-4 hours depending on day points.
LTL- Less than truck load
Less-than-Truckload, or LTL shipments, are palletized or loose shipments weighing between 150 lbs and 15,000 lbs. LTL makes up the majority of B2B shipments throughout the United States. Many carriers operate LTL Networks that consist of multiple points of consolidation and deconsolidation to complete each shipment. Shipping LTL can be very complex, because the is a shipment that doesn’t completely fill a truck. Having a shipment that is LTL has many of the same benefits of a full truck load but with cost savings. The business shipping only pays for the space and weight of the freight they use on the truck. LTL is perfect for smaller, sturdy, less fragile quantities of shipping as well. Once a shipment reaches either 6 pallets or 5,000 lbs, it is highly likely that shippers would benefit from using Volume LTL. Volume LTL provides many of the benefits of FTL with the costs savings associated with LTL. With Volume LTL, a business only pays the going rate for the space the freight uses and the total weight of the shipment along the shipping lane. This generally results in a lower cost to ship. Plus, shipments get out the door faster, usually same day, and there is significantly lower risk of damage for freight.
FTL – Full Truck Load
Full truckloads are typically freight shipments that can weigh up to 45,000 lbs. and up to 53 ft of space. Full truckload shipments usually travel as the only shipment on a trailer and are delivered on the same trailer that picks them up. The proper selection of the right carriers on their best lanes can maximize hard and soft cost savings. Full truckload carriers move freight that is loaded into an entire semi-trailer. Even if there are multiple businesses shipping LTL that fills the truck, it would still be considered FTL. Full truck load typically will travel faster. Less people handle you’re the cargo before it gets to the final destination, reducing the risk of damage that can occur. Type of FTL equipment include Dry Van, Refrigerated (Reefer), Oversized Loads and others.
A flat trailer with no enclosure or doors. The trucks can be loaded/unloaded from the sides or above, and they do not require elevated access for forklifts. You’ve probably seen this type of truck on the road shipping heavy and oddly shaped cargo. Whether you are carrying metal sheets or heavy machinery, all flatbeds need trucking insurance. Flatbed trucks are commonly used to carry construction materials, such as lumber and tile. They are a cheaper option for transit, but if not properly covered with tarps, etc. the cargo is subject to damage from rain and other elements.
2) Dry Van
A simple, enclosed non-climate controlled rectangular trailer that carries general cargo that does not require refrigeration. Usually loaded/unloaded through the rear doors. This is a type of semi-trailer that is fully enclosed to protect shipments from outside elements. Dry van trailers are in higher demand for food and products that need to be covered while being shipped.
ELD Mandate – Electronic Logging Device
A Federal Law which went into effect in April 2018, which states that under Title 49, section 521, any driver or carrier who does not keep a Record of Duty Status (RODS) is subject to being pulled off the road and face a civil penalty of $1,000 to $10,000 for each offense. The ELD Mandate replaces paper logs and any automatic On-Board Recording Device with an electronic logging device (ELD). The ELD mandate covers driving operations that are required to keep hours of service records. Prior to the mandate, paper logbooks were not always accurate, and drivers were driving more than the legal limit. The mandate helps regulate laws when it comes to truck drivers, their safety and more accurate documentation of records. The ELD Mandate had a short-term impact in 2018 of reducing carrier capacity, as drivers nearing retirement chose to leave the workforce rather than comply with the new technology. However, that shortage was quickly filled by new entries to the carrier market, and today complying with ELD is the new normal.
TMS – Transport Management Systems
A transport management system is specialized software for planning, executing and optimizing the shipment of goods. The objective of a TMS system is allow the user to reduce costs, promote efficiency and consider key performance indicators (KPI) resulting in customer satisfaction. Utilizing a TMS is essential for domestic and global shippers and its functionality can vary from company to company depending on what shippers need.
Mode – a form of transportation
In logistics, there are 5 modes of transportation; roadway, air, water, railroad and pipeline. The decision of which mode of transportation to use in tied to the distance a product has to be moved. The characteristics of the product also determines which mode should be used. For example, some food items may need a climate-controlled transport, resulting that using a truck to deliver the goods is the best option. Given their easy access, they are used in almost all logistics movements. Water transport can transport very large and heavy shipments and is the most affordable, however it is the slowest mode of transportation. Air transportation is the fastest mode of transportation but is the most expensive and meant for smaller, lighter items. Rail transportation is ideal for shipping heavy items over a long distance for a low cost. Pipeline is used to transport liquids such as gas or petroleum. Pipeline has high fixed costs but low variable costs. In addition to these 5 modes, the term Intermodal refers to a single trailer or container that encounters multiple forms of transportation along its route, such as truck/ship/rail. Intermodal is most commonly encountered by cargo arriving to ports from overseas, such as deliveries from China to Los Angeles.
Capacity – supply of carrier and drivers
Capacity may be the most heavily used term in the supply chain industry. It refers to the macroeconomic supply of drivers and equipment in the marketplace, and it has the greatest impact on the overall pricing charged by carriers to deliver goods. While demand for logistics services is typically constant or fluctuates slowly with the ebb and flow of the economy, capacity can be impacted by numerous factors that can rise quickly and change prices immediately. Natural disasters such as tornadoes and hurricanes impact capacity dramatically. Federal regulations, like the ELD mandate, have historically reduced the capacity of drivers. Seasonality, especially the produce season in California, has an annual impact on capacity. Understanding these factors is critical to managing your supply chain and forecasting the costs to deliver your goods.
The leading third-party resource to find real-time truckload compacity is https://www.dat.com/. The DAT Load Board has over 1.3 million trucks in the database including van, reefer, flatbeds, and specialty trucks. They also validate carrier’s authority, safety, and insurance to ensure your shipment will get to its destination without any problems. DAT also identifies fleets working in your preferred lanes for trucks.
DC – Distribution Center
A distribution center is a place to store goods that will be shipped to various destination points after orders are placed for goods. A distribution center offers flexibility to warehouse goods that are redistributed to wholesalers, retailers or directly to customers. The location and management of your distribution centers, such as centralized or decentralized decision making, can have a significant impact on your supply chain. Network optimization tools can and should be used to make decisions about the most efficient want to structure your distribution center strategy.
Accessorial – fee added to shippers’ freight
Accessorials are extra charges associated with freight delivery that fall outside simple pick-up and delivery. An LTL shipment can be anything from a household item to larger industrial equipment. If an accessorial is required, the customer must specify that in the special instructions and remember that special delivery can add a couple of days to the delivery date. The accessorial fee is added to shipper’s freight for services the carrier performed beyond the standard pickup and delivery. This fee could be applied for drivers having to load or unload trailers, wrap pallets or make additional stops, etc. Here are some other types of common accessorial charges: Fuel Surcharge, Reweigh, Limited Access, Liftgate, Residential delivery, Appointment / Notify, Sort & Segregate, and Hazardous Materials.
NMFC – national motor freight classification
NMFC is the standard that is used to compare prices in transporting products. Almost all LTL freight carriers use the National Motor Freight Classification (NMFC) system to design their pricing structures for transporting LTL freight shipments. There are a total of 18 NMFC freight classes ranging from class 50, up to class 500. Shipments classed at class 50 would be the least expensive to ship, while shipments at class 500 would be the most expensive. The NMFC classification is difficult to determine and subject to re-classification by the carrier at time of delivery. The classes are a function of both the density of the cargo (weight/volume) plus the type of cargo itself (electronics, apparel, tile, etc.)
3PL – Third Party Logistics
A 3PL is a firm which provides multiple logistics services for use by customers. Preferably, these services are integrated or bundled together, by the provider. These firms facilitate the movement of parts and materials from suppliers to manufacturers, and finished products from manufacturers, and finished products from manufacturers to distributors and retailers. Among the services they provide are transportation, warehousing, cross docking, inventory management, packaging, and freight forwarding.
Conditions that can determine if you should utilize a 3PL and outsource your supply chain needs include:
1) Your costs are increasing exponentially
When your company is experiencing high growth and freight costs are increasing rapidly, your logistics strategy may become obsolete. The financial KPI’s in your supply chain can quickly draw unwanted attention. A 3PL will offer logistics solutions to help your company scale and create leverage, so you can focus on financing and cash flow.
2) Customer service is beginning to falter
A great product is meaningless if you cannot deliver it to customers. If you are unable to keep items in stock or meet demand from distributors, a 3PL with expertise in network optimization can help. A 3PL can provide technology that adds visibility to order status and track so your team can monitor shipments through the entire supply chain.
3) Increasing Complexity
With various freight classes, modes, trailer types, and capacity issues to understand, order fulfillment can become complex. A 3PL can provide a Transportation Management System (TMS) directly to your employees or offer outsourced managed transportation services to simplify the shipment process and put you in control of pricing, tracking, and invoicing.
Choosing a 3PL with the right carrier network makes all the difference when your business is expanding. B2B and B2C networks are increasingly determined by where the customer is, rather than a companies’ geographical location. With more business moving to online, you need to be prepared to meet your customers where they are. The right 3PL will also have a network density that connects you with the right carrier, at the right location and with the right capacity and expertise.
It’s important that your 3PL has the capabilities to make it happen. Two considerations are technology and partnerships. Shippers should look for a partner that allows them to quote, track and control invoicing for their LTL and FTL shipments, across a nationwide carrier network. Because your shipping partner is responsible for integrating different shipments, they are responsible for implementing technology that provides visibility to your shipment across their network of trucks and more.
Some 3PLs specialize in specific modes of transportation, commodities, dealing with regulations and origin/destinations. Others are generalists. Make sure that you ask potential 3PLs if they have experience handling the cargo that your business will be shipping. The right partner for your business will be able to walk you through the different steps required, allowing all parties to agree on the correct protocols and procedures.
For United States and Canadian finance leaders and their teams BlueGrace has created an easy to share PDF of the terms above that are applicable to domestic shipments, Click Here
Here is some Bonus Material on Incoterms for senior finance officers whose companies export or import goods:
Incoterms® rules define important responsibilities of buyers and sellers for the delivery of goods exported and imported under sales and purchase contracts. The rules provide specific guidance to individuals participating in the import and export of global trade. These terms have very specific meaning that cover who is responsible to pay freight, insurance, when risk of loss occurs, when title transfers and other terms involved in shipping goods internationally.
List of Incoterms:
· EXW Ex Works
· FCA Free Carrier
· CPT Carriage Paid To
· CIP Carriage and Insurance Paid To
· DAP Delivered at Place
· DPU Delivered at Place Unloaded
· DDP Delivered Duty Paid
· FAS Free Alongside Ship
· FOB Free on Board
· CFR Cost and Freight
· CIF Cost, Insurance and Freight
For more on Incoterms visit the International Chamber of Commerce’s website on Incoterms
Not a member-scholar yet? Join our financial community here!
Identify your path to CFO success by taking our CFO Readiness Assessmentᵀᴹ.
For the most up to date and relevant accounting, finance, treasury and leadership headlines all in one place subscribe to The Balanced Digest.