Freight Broker Industry Training Guide

I am providing this free guide for those that have an interest in becoming a Freight Broker or Transportation Sales Professional. Please reference my websites for further information.

SalesIndustry.net – Freight Sales Industry Website
FreightBrokerJob.com – Freight Broker Job Listings

Chapter 1: The Transportation Industry and its Inner Workings

I will start this chapter by breaking down the industry. First you have freight that needs to be hauled somewhere by someone. Whether it is a load of onions or a pallet of magazines, it all needs to go somewhere. Freight is not just defined as goods that are delivered on a semi. It also entails air freight, container freight, rail, and more. Freight is manufactured either in the USA or overseas. It is then shipped in to the USA (or is already here) and needs to be delivered. At the ports or loading dock of a factory, it is loaded on to a piece of equipment. This again could be a semi, rail car, or boat. All of this freight is handled through 2 or more parties. When this load of freight is manufactured it is destined for a certain customer. This could be a line of clothes heading to a retailer or a load of refrigerated food headed for a cold storage warehouse. Either way, there is always a shipper and a receiver or consignee. Now, sometimes, the freight will go through a third party being a freight forwarder or freight broker.
A freight broker will act as a middle man that will handle the booking of the trucking company or other mode of transport for the shipper. The broker will approach a shipper asking to help handle their freight. This takes some of the workload off of a manufacturers shipping department. The shipper and broker will negotiate a rate for each load, and the broker in turn hires a trucking company at a lower rate to deliver the shipment.
A freight forwarder is a similar agent but handles more international shipments. They will handle freight such as, container ship freight, boats going overseas, and the likes. An example of this would be a yacht broker selling a boat to someone overseas. The yacht broker will contact a freight forwarder to quote a rate to ship the boat overseas.
There are also 3PL companies. They handle all aspects of transportation. They will handle everything a broker and freight forwarder will, and more. Warehousing, intermodal, rail, container, cold storage, and air freight are all aspects a 3PL will handle. They are usually very large companies with many divisions.
In some circumstances a broker and freight forwarder will work together. A broker can handle a load that needs to go overseas and will seek the service of a freight forwarder. Now, the same cannot be said for a broker working with a broker. That is called double brokering. It is frowned upon in the industry, but it still happens. Double brokering can cause serious liability issues that are not needed with the liability already on the shoulders of a broker.
Trucking companies are not likely to befriend a broker for the simple reason they feel a broker takes money out of their pocket. In a sense, they do. Though most trucking companies dislike brokers, they need them. Brokers manage such a large portion of the freight that it is necessary for a broker to be used on occasion. Trucking companies have dispatchers and load planners that are responsible for booking freight for the trucks. They will usually call on their own customers first, and use brokered freight as a last resort. From my experience, trucking companies that haul too much brokered freight are already in or going to be in financial trouble. A trucking company needs to have a strong book of business of their own. I find that smaller trucking companies tend to ignore the sales side and rely on brokers. This can quickly spell trouble. If I could recommend one thing to any trucking company it would be to employ a good sales agent!
As for brokers, you have your large corporations that own such a large portion of freight that they can bid low on rates to gain more freight. And since they own such a large portion of the market, they can accept lower rates from customers and in turn be confident that they can sell it to a trucking company. The trucking companies have to take this cheap freight on occasion because that brokerage handles so much freight. These brokerages are usually disliked in the industry. They are considered to rip off trucking companies because of their stance in the market and their market share. When I brokered, I decided to make less on a load and make a trucking company happy. This would lead to better broker-carrier relationships. You would be surprised how often you need them to help you out of a tight spot as a broker.
There are also large trucking companies that operate the same way as the large brokers. These large trucking companies can underbid the smaller brokers and smaller trucking companies. They can do this because of the amount of the market they can corner. They usually get great rates from a customer close to their home terminal and can afford to take lesser rates on their backhaul. This creates low rates out in the market that smaller companies cannot afford to accept. The other factors are that these large companies have paid for equipment and less of an operating cost.

Chapter 2: The Life Cycle of a Load

A load is defined as product that a shipper needs to move to a consignee. The shipper is also referred to as a customer (your customer). The consignee is the person receiving the freight. Once you have obtained the business of a customer, they will start to offer you certain loads. If you are to accept these loads, you will in turn sell the load to a carrier at a lower rate than you quoted the customer. Sound confusing? Just wait. Once you agree to cover the load for this customer, you start your search for a truck that wants the load. You then negotiate a rate with that truck. Once you have agreed on terms, you will set that carrier up. They will send you their set up packet. It usually contains their MC # (authority), their insurance, W9, and references. In turn you will send them your set up packet (usually containing the same information). After, and ONLY after, they have faxed back the signed broker/carrier contract (this is a contract stating that they will not back solicit your customer for freight), do you go any further. You never give out any detailed information on who your customer is until they have signed the contract. Once they have done that, you then fax them a rate confirmation (explained later). They sign it and fax it back. You now have that load covered.
A load starts as a product that is manufactured at a factory or plant. It is then designated for delivery to a buyer of those goods. The load is then either coordinated for shipment by the shipping department or is handled by a third party. The load is sold to a carrier of the product by the shipping department or third party/broker. The carrier is then responsible for delivering the load to a consignee. The consignee can be a buyer, retail store, another factory for further processing, or warehouse.
The load can also be handled on other terms such as a load of cars being transferred to another dealer or a load that was delivered prior to a warehouse. There are many origins and destination combinations that can be had in this business. Products we use every day are put through this cycle for us to obtain them. Think of all of the important items in your home. They are there because of this industry and this cycle.

3. The Role of a Freight Broker

A freight broker is a third party individual responsible for matching a load with a carrier from the shipper to the consignee. The reason brokers are in business is the fact that manufacturers can take a huge workload off of their shipping department by allowing a broker to manage the shipments. The broker is responsible for quoting a rate to the shipper for the load, finding a carrier, negotiating a rate with the carrier, and ensuring the load is successfully delivered. While doing all of this, they are striving to make a decent profit between the rate they are getting from their customer and the rate they are paying the carrier.
As an agent you are responsible for setting up new customers, carriers, handling rate confirmations, and faxing all of this to your brokerage. You must stay in constant contact with your brokerage, customers, and a driver that is under one of your loads. You want to stay on the driver to make sure they are on time, in route, and following all necessary load information. You will also be on call at all times in case there is a problem with the load. You are responsible for that load. The customer trusts you as a business partner to handle a large amount of money in that load.
The broker, as an independent agent, answers to their brokerage. They must operate in a manner reflecting the ethics of the company they work for. Brokers are usually 1099 contractors and are responsible for their own taxes. The brokerage will usually pay you your commissions weekly and also provide detailed commission reports.
Now there are employee type broker positions. These brokers are usually handed a book of business to deal with on a daily basis and are paid salary. These positions are usually rare, and do not come easy. The real entrepreneurs decide to become independent agents. And I have seen employee brokers that realize the income potential they could make as an independent agent only to go out on their own.
If you are an agent, your brokerage also has responsibilities. They should handle all of the back office work. This would include billing, collections, payroll, and other normal office duties. They should provide software for the agents, a commission split, and often provide load board subscriptions. They are also responsible for credit approvals for the customers and carriers. They handle paying the carriers also.

4. The Role of a Dispatcher

A dispatcher is usually an employee of a trucking company. They are responsible for managing the drivers of the company. They plan and coordinate loads for the drivers, they manage the drivers’ schedule, ensure they are following DOT guidelines, and many other essential duties. The dispatcher is usually the person that will contact you when you have a load available. They will be looking for loads that match the needs of a drivers’ route, and contact the broker about the load. They will usually be very abrupt and straight to the point. They usually are not rude people, they are very busy and have a hectic job. Being a dispatcher, in my opinion, is the stress equivalent of an air traffic controller. Most dispatchers use a software program that that will coordinate their trucks, loads, and customers’ information. Most companies also now use tracking software that will check driver’s location, speed, arrivals and departures. This software has significantly decreased a dispatchers’ workload.

5. The 3PL Industry and Warehousing

A 3PL company is a jack of all trades, They usually have divisions in brokering, warehousing, and freight forwarding. They will handle air, ocean, and land freight. A 3PL will also offer services of storage, tracking, labeling, and inventory management. They are an all around logistics provider.
A company would benefit from a 3PL in a situation where they wanted someone to store their product, manage the inventory of it, and handle the orders when a buyer wanted some of that product. A 3PL can offer a great service to reduce the workload and manpower needed at a company that produces goods.
It is not out of the question for a 3PL and a broker to work together to handle shipments in and out of their warehousing facilities. This, in most cases, would not be considered double brokering.

6. Types of Freight

The different types of freight you can broker are almost endless. The most common are Flatbed freight, refrigerated freight (reefer), van freight, and auto hauling. Other types are; oversized (wide load, extended, maxi, step deck, double drop, Less than truck load or LTL, and more), boats, household goods, government, logs/timber, and the list goes on.
Your reefer freight usually consists of food products, produce, or temperature sensitive material. Dry Van loads can range from food products to most any material. Flatbeds usually haul metals, large equipment, and other goods that will not fit in an enclosed trailer.
When it comes to specialized, this can be boat hauling, car hauling, extended flatbeds, and more. The specialized market is a good one to get in to. It pays well and is not as flooded as the other freight types.
You also have your freight forwarding freight types. They are freight that is shipped on container boats, rail, or air. It can be any of the goods you would see in the above lists, just destined for another country.

Whichever field you decide to get into, I recommend you do research and ask questions on that topic. I would say that the easiest, but most competitive is van freight. Your van freight can consist of auto parts, dry foods, papers, plastics and more. It is the least likely to give you any problems during the transport process. When dealing with reefer freight, you have to worry about temperature control. Flatbed freight, you have to worry about straps, chains, tarps, and more. Once you get into specialized such as oversized, boats, maxi, etc; you have to worry about permits, escorts, and more.

7. Rating Freight

There is no real place to go to find all rates, or no book to read that can teach you rates. They are learned through trial and error. The best method on rating (pricing) a load is to post a generic load on a load board. Trucking companies will call to inquire about that load. When they do, ask them how much they would need to haul it. Tell them the load they called about is gone but you have those all the time. Do that process with a couple of companies, and you will soon see what freight is moving for in that lane. Websites do have tools to research recent rates in certain lanes. I will get into that later. There are a couple different ways that people want rates. The most common is per mile. They want to know what you (or your contracted carrier) will haul it for per mile.
Ie: A dry load going 1200 miles in a lane where the average pay is $1.15 per mile. If it is going to cost you $1.15 ($ total of $1380.00) to get that load moved with a carrier, you would quote the customer a little higher (maybe tell them it is going to cost $1650 to move it) to make a profit. So now you are making $1650 from your customer minus the $1380 you pay a carrier for a profit of $270 or 16% for one load).
In the industry, the common rule is that you want to make at least a 15% profit on each load. That is 15% of the total rate. You can set that percentage wherever you want, but you need to stay competitive. Some large brokerages I have dealt with have a minimum of 20% that their brokers must keep on a load. That, in my opinion, is a bad way of doing business. Yes, they make more on each load, but they also make a bad name for themselves with carriers and other industry professionals. Every situation is different and the rate should reflect that.
The other common way is by weight. Take a load of potatoes for instance. Your customer might pay you by the hundredweight. They have a load of potatoes going 1200 miles. The miles only come into play when you are calculating, for your own good, the rate per mile.

ie: It is 48000 lbs of potatoes going 1200 miles paying $6.50 per hundredweight; The way you figure the rate is you take the weight (48000) divided by 100 (hence the “hundredweight term), and you get 480. So you have 480 “one hundred weights”. Then you multiply however many hundred weights by what it pays per hundred weight. So: 480 hundred weights X $6.50 per = $3120 is the total pay. Then when you go to find a carrier you put it back into a per mile rate. If it is 1200 miles you divide the total rate of $3120 by 1200 miles, leaving you with it paying $2.60 per mile. You try to find a carrier for less than that to make a profit.

8. Lanes

A lane is simply a route between two cities. Say for instance; Chicago to Atlanta, that is a lane. Whatever the Pickup location is and the destination is, that is your lane.
There are lanes that are better than others for a broker or trucking company. Lanes I have tried to avoid are the Northeast, South Florida, South Texas, and most of the Upper Midwest. The reason for this is described below.
South Florida (below I-10) – There is not a lot of freight coming out of this area. This causes freight rates to be lower because of the amount of trucking companies needing a load out of here. They will underbid each other to get the loads that are available. Now the flip side to this is that if you have freight coming out of this area, it will be easy to sell. Also, if you try to book a truck on a load going to South Florida, they will request that you pay them deadhead miles back to Atlanta or close to there.
Northeast – This area, in my opinion, is trouble because there are so many trucks there and not enough freight. The same thing happens with the underbidding of each other. Also, even if you have freight there, the customers will not pay enough to broker it out. They know the situation and cut rates accordingly.
South Texas – The same situation applies as the above areas.
Upper Midwest (Utah, Montana, Idaho, Wyoming, and similar States) – These areas have a lack of industry besides cropland goods. Unless you have established contacts in this area, I suggest staying away. It is hard to find a truck going to these areas.

9. Building a Customer Base

Where to start finding the freight is the most important part of being a broker. The best thing I can tell you to do is to start surfing! The internet will be your most powerful tool. There are websites that list manufacturers in the United States. Thomesnet.com is a great tool for contacting shippers. It allows you to email 30 companies a day per account. It is free to set up an account with thomasnet.com. You can email or call these companies. It lists any type of manufacturer from food to metals.
Another great way is to look through the products at your home or work. See who they are made by, then find them on the internet. You will always want to contact the shipping or transportation department. When you do find these companies, you need a game plan. Below is a script for an email or phone call to a shipper;
“Hi, this is Johnny with ABC Logistics. I would like to get set up with your company to help move your freight. We are a logistics company that has been in business for (x) amount of years. I would appreciate the opportunity to rate your lanes, and see if we could lower your shipping costs.”
You WILL get shot down. In my years, I have never had anyone be rude. So don’t be scared of cold calling. They do need help moving their freight. You just have to strike a chord with them at the right time. Never throw away a number. Call them back in a month. They might have just had a load dropped by a carrier, and need help.
The industry has evolved from what it used to be. Customers were gained by visiting the business in person and landing an account. This still happens but in a lower number of instances. It is wise to still do this especially to keep the customer and build a relationship. Most shipping departments are now ran by a generation that was raised using the internet. With this happening, more accounts are landed through the internet and email. I have landed most of my accounts by utilizing my computer skills and email. I will identify a company’s general email (such as @abcfoodcompany.com), then find the shipping managers email. You can do this by finding out their name. Try combinations like their first name followed by a dot then their last name and then the email address. Try different variations of the example above. Eventually you will get their email address. I find it easier to land an account with an email. They are usually pretty busy and will answer an email before answering a voicemail.
Another trick is handling the gatekeepers. The gatekeeper is a receptionist. They can spot a sales call a mile away and will automatically forward you to voicemail. Here is the trick I use:
I will call the company and immediately ask for the shipping managers’ voicemail. Once I get their name from the voicemail, I hang up. I will then call back later and ask for them by name. This makes it sound like you know them and they might want your call. You can also just ask for their first name. If they have a common first name that is even better. The receptionist will ask which “John” you are wanting. You reply with “Oh, I am sorry, John Smith”. It then sounds like you know him personally and he is expecting your call.

10. Building a Carrier Base

There are many ways for you to find a carrier to cover your load. The first would be to use load boards after you have posted a load. Some may call you off of your load or you can search and call them. Another would be to establish relationships with carriers that will haul for you on a regular basis.
I suggest establishing a good relationship with every carrier you use. They will follow you as a broker if you ever change companies. And, as you get familiar with your lanes, you can call on your list of carriers that meet the criteria. They will also help you in a desperate situation. If you take care of them, and are one day stuck with a load, you will find that most carriers will help you and take a lower rate than normal.
Keep all of your carrier contact information in a software program or an excel file. You will find it useful when you sign up with a brokerage. Instead of waiting to set them up when you use them, you can have your brokerage go ahead and set them up ahead of time.

11. Selling Freight to a Carrier

Once you hit the jackpot, and a customer is giving you freight, you have to find a carrier to haul it. This is the easy part. First, make sure you can cover the load. If you bid it too low and cannot find a carrier to haul it that cheap, you will have to give it back to your customer. If that happens, they will usually drop you unless you have been with them a while. Once you take the load, you want to post it on load boards. Once posted with the important information (weight, where it picks up, where it drops, miles, your contact info, and type of trailer needed, etc;). I suggest not posting the rate that you are paying. That might eliminate the chance for negotiation. You can also search for the trucks and call them.
Once you have a truck interested, you always want to ask them what they will do the load for. You don’t want to have to make a price. Do not be scared if you have to though. I promise you will not shock them. Quote them a lowball figure, and they will say no. Then is your chance to ask them what they need in a rate to do it. If you can’t meet them at a reasonable rate, go to the next carrier. Once you do meet at a rate, then you will start the paperwork mentioned above. The set up packets, contracts, and rate confirmations will all be exchanged.

12. Freight Forwarding

Freight Forwarding is a broker in a sense. They handle freight that is international. You will need a freight forwarder if you are handling container loads that ship overseas or air freight. This is a very lucrative position, but also requires a lot more experience with customs and such. If this is a career path you are interested in, I suggest finding an entry level position within a freight forwarding company. If you can gain experience in vessel requirements, customs procedures, or are fluent in a foreign language I would say go for it.

13. Authorities, Bonds, and Insurance

A) Authorities: An authority or MC number allows you to broker freight. Carriers and freight brokers both have MC numbers. Your MC number is used for the government and transportation industry as a number to represent your company as being legal to perform trucking or brokering duties. MC numbers are a six digit number that start with a 0-6 depending on the age of the company. You can tell a company’s age by their MC number. As I am writing this, a company starting out now would receive a number starting with a 65xxxx.

Corrugated paperboard for dummies

Corrugated packaging boxes are some of the most commonly used forms of transport packaging in the world today. The raw material used for this form of packaging is corrugated paperboard (or simply ‘board’), and it is produced in many ways and with many specifications in order to fit the corrugated packaging and corrugated transport material requirements for a particular product and its supply chain, starting from a factory to the doorstep of a consumer. In the US alone, 95% of all consumer products are shipped in corrugated boxes, with 75% of this amount of box material being recycled each year. The basic principle is to use combinations of paper and adhesives with varying levels of heat and pressure; which allows for a variety of types to be produced, with varying levels of strength, weight and durability.

Corrugated paperboard starts out with basic liner (also called paperboard; from which the name comes) in massive rolls. The wavy paper shown below, sandwiched between the straight papers is called the corrugating medium (while the straight paper on both sides of the wavy one are the liners).

Common Corrugated Paperboard types and uses

Single-face Corrugated Board: A single liner is glued to a corrugated medium to form a single-face paperboard. This is commonly seen in packaging for fine china, light bulb etc.

Single-Wall Corrugated Board: Two liners are glued to either side of the corrugating material to form a single-wall paperboard. This is the simplest and most widely used form of packaging for shipments for a variety of plastic goods and food products. This is the box consumers come across most often In daily life.

Double-Wall Corrugated Board: When another layer of corrugating material and a layer of liner is added to a single-wall paperboard, the resulting product is the much stronger and shock absorbent double-wall paperboard. This form is heavier and more expensive and is generally used to ship/ transport bulk packaged foods, material like nails and rivets, appliances like TV’s and DVD players and even furniture. For larger and heavier goods, Triple-Wall Corrugated Paperboard is produced in the same way.

Production

Corrugated paperboard is specifically designed to fit product based requirements. Producers usually specifically design the kind of paperboard to be used for each specific product type in accordance with transportation requirements, weight and strength and shock absorbent properties. The production of corrugated paperboard is simply explained as follows;

1- The first sheet of straight liner is unrolled and heated.
2- This sheet is then passed through high pressure steam to make it soft and spongy.
3- The sheet is then passed between a set of long sprockets in order to create the ridges (or flutes). This process forms the wavy ‘corrugating medium’.
4- The glue is then applied to one side (in case of single-face paperboard) or either side (in single-wall paperboard) of the corrugating medium.
5- Sheets of liner are then unrolled and glued to one or either side of the corrugating medium to form a single-face or single-wall paperboard.
6- Further layers of corrugating medium and liner are added to form double-wall and higher classifications of corrugated paperboard.

Aggregate Inventory Management

This article is also available on our website: PROACTION – Generating Best Practices. It is an excerpt of a paper originally written by George Miller, Founder of PROACTION. It has been modified and updated by Paul Deis, PROACTION CEO.

Overview

In spite of the great advances in industrial management in areas such as JIT, Flow Manufacturing, Lean Manufacturing, MRP/MRPII, ERP and Supply Chain Management, and now, Electronic Commerce, inventory investment management continues to be a major issue for many organizations. Installing the latest software and mouthing the most popular buzzwords is no guarantee of good inventory management. As with almost all Best Practices, it is the effective use of available tools by properly educated and trained people that creates the desired result.

This paper covers how to set up and maintain Aggregate Inventory Management for improved investment and operations management. It is a “macro,” top-down approach that complements a company’s “micro” SKU (part number) level management techniques.

Definition, Goal and Objective

• Definition—the APICS Dictionary defines Aggregate Inventory Management as “Establishing the overall levels of inventory desired and implementing controls to ensure that individual replenishment decisions achieve this goal.”

It includes:

• How to assess overall investment levels and set targets.
• How to identify inventory investment level “drivers” and help control them
• How to link aggregate inventory management “macro” strategy to “micro” controls and develop accountability
• Performance measurements
• Specific techniques, such as ABC analysis, control parameters, inventory buildup charts, and input-output control.

• Goal—Helps manage assets and make money.

• Objective—Optimize inventory levels within the parameters of service, cost, logistics, process and investment objectives/constraints. Inventory management should be exercised to keep the lowest level of inventory consistent with achieving the objectives. Too much inventory reduces Return on Investment and Return on Assets (lower profits). It also tends to increase expenses, in the form of interest payments, handling and storage, management, damage, loss, obsolescence, tracking, taxes, insurance, etc.

Although most managers, accountants and taxing authorities regard inventory as an asset, treating it as such for operational purposes may create liabilities. You have probably heard stories about factories working to “keep people busy” or maximize “efficiency” and other similar nonsense. If they are making inventory that is not needed now, they are often wasting money. If they work just to keep people busy, they are still consuming material, energy and other resources that may not earn adequate profits. They may use resources that could better be used for more immediate and profitable needs. If inventory is deployed improperly, it may create liabilities. A customer of one of our clients had branch managers who would “hoard” products at their remote branches so that they “wouldn’t run out.” This created an excess of material in the wrong places.

How to Assess Inventory Investment Requirements

Survey

First, understand market, customer needs and service expectations; your own company needs, expectations, process, abilities; supplier abilities and mindset; industry norms and mindset; world-class best practices.

From this, you should learn how fast and reliably customers expect to get their shipments, what is involved to get raw materials and production completed, what the best in the industry are doing and plan to do, and what might be possible. For instance, if all competitors are shipping from stock, then you will either need to duplicate that feat, or determine how to manufacture very fast, or convince customers that your product is so great or so cheap that it is in their interest to wait while you make it to order. Or, you might figure out how to procure better or manufacture better in a way that allows you to carry less inventory.

The result of this step is to establish what industry inventory standards might be and what is possible. Make sure you have an “apples-to-apples” comparison: there may be significant differences among companies. For example: One company might stock finished goods, another one may sell it to another division or to a distributor.

Measure Current and Historical Inventory Levels and Performance

Measure current and historical company inventory levels and performance, not just overall statistics, but broken down into levels of responsibility, commodity, area, type (raw material, work-in-process, finished goods, consignment) and market. Do this to help isolate figures down to levels of accountability and to show inventory investment performance by market, process or even product line. You may find that your systems are unable to do that, meaning that it is past time to make changes to them, whether that be to replace them, modify them or put in separate inventory tracking and control systems (recommended as a last resort).

The result of this step is to establish how your own company is doing and has been doing with inventory management.

Establish Performance Metrics

Establish performance metrics – Inventory is usually measured in currency value, such as U.S. Dollars ($USD). Another, complementary way is to measure it in velocity. For example, you might measure it in “turns” which relates to how many times it moves or “turns over” per year. For example, if there was an average of $100 in inventory in the last year and annual cost of sales for the last year was $2000, that would be calculated as cost of sales ($2000)/average inventory ($100)= 20 turns.

More turns (or “turnover”) is usually good, provided that cost, service or quality aren’t unacceptably affected. If they are, the answer is not simply to increase inventory, but to try to improve the underlying “drivers” influencing it instead, if possible and cost-effective. There are variations of the turnover (this term should not be confused with the European “turnover,” which usually refers to total sales for a period) formula, mainly in addressing how to calculate average cost of goods sold or inventory.

Sometimes, turns are calculated by comparing full sales value with average inventory cost or even equivalent sales value. To maintain easily comparable figures, state all numbers in fully “burdened” costs, using industry standard overhead/burden calculations, unless this is contrary to the standards of your industry or locality. Hopefully, future standard world accounting practices may help to reduce confusion in this area.

It is becoming more common to measure inventory performance in days coverage instead of turnover. People seem to relate to it better.

Inventory and sales may also be commonly measured in more industry-friendly terms, such as tons (steel), bushels (corn), housing units (construction or real estate) or ounces (gold).

A further refinement is to stratify the inventory by “Quality,” as asserted by Gary Gossard of IQR International. The idea of classifying inventory as active, slow-moving or obsolete has been around for a long time. Constantly track it, to highlight any change in inventory quality or condition, such as a new requisition for an item which is already in excess or obsolete. The active, weighted “good” inventory not exceeding your “days coverage” target, divided by the total inventory, multiplied by 100, it equals the Inventory Quality Ratio (IQR) number. 33-40% is typical for mediocre companies. 66% is considered pretty good.

All of these numbers can be time-phased, to show changes over time, due, for example, to seasonal supply and demand changes, or planned improvements. These can then be applied in still more detail to the appropriate organizations, product lines, trade channels, warehouses, planning groups or other responsible entities and then monitored for results.

The numbers should be capable of being “drilled” down or up, from the entire enterprise level to an individual SKU (Stock-Keeping Unit) transaction or part number. Managers or employees should be able to look at total figures for their areas of responsibility and readily identify specific problem areas down to lower levels and finally to specific items, policies, orders and decisions that accounted for them.

Here are typical Inventory System Metrics, which should be broken down by organization/responsibility, area, type, commodity, market/product, and time phased, with targets and actual values:

• Inventory Turnover or Days Coverage
• Inventory value or other unit of measure, such as tons
• Inventory “Quality,” including IQR and summaries of amounts of each type
• Customer service level, expressed how the CUSTOMER perceives it

ABC Analysis

Perform an ABC analysis, a simple, common and powerful tool for inventory management. It is based on Pareto’s law of “80-20.” The most common approach is to calculate demand in units, preferably for future periods, then calculate the total usage value at cost for each item (total cost of sales multiplied by units required) for a given future period. If future demand data are not available, the next best thing is to use history, but this won’t work well for items with major swings in demand over time. Sequence these in descending value. Typically, the top 10 to 15% of items account for 75-85% of value (“A” items), the next 20-30% account for 10-20% of value (“B” items) and everything else accounts for the rest, about 60-70% of the items, usually about 5% of the total value (“C” items). Your inventory should be less than these percentages for the “A” items, because they are much more tightly controlled and a little higher for B’s and significantly higher for C’s.

Then compare the list to actual values in inventory, plus actual and planned commitments. The answers will often suggest immediate corrective actions!

An ABC list suggests what to concentrate on to control most of the inventory investment. What it doesn’t tell you is that being short of a $.10 screw might prevent the shipment of a $5,000,000 radar unit, so ensure that there are control systems for all items, just control the expensive ones much more carefully. Err on the side of caution for the cheaper items, allowing a safety stock coverage or “two bin” approach to avoid stock outs, but keep inventory from getting out of control.

Create an Inventory Buildup Chart

Another good analysis tool is the inventory buildup chart. Use a standard x-y coordinate chart. Plot the cost build-up over time, by product group, with cost on the “y” (vertical axis) and time on the “x” (horizontal) axis. Normally, raw material cost accumulates first over time, followed by labor and overhead application. Allow for safety stocks, lot size inventory, transit stock, defects/rework/scrap, and normal finished goods and distribution pipeline stocking. Show the affect of consignment arrangements. Some people also treat accounts receivable as sort of a de facto inventory, until it is paid for. Once this chart is completed, show it around for shock value. Presented correctly, it will really make people think about the effect of constraints and decisions (just another form of constraint) on inventory. Then, work on changing the rules!

One company had a 14 month buildup curve, which was reduced to 4 months. At another company, the longest lead time material item accounted for only 20% of the product cost, so stocking only that item, instead of finished goods or instead of only reacting to orders, enabled them to radically reduce the response time for orders by 70%. It also added the flexibility of being able to use that raw material to make a number of different end items.

How to Identify and Control Inventory Drivers

Inventory drivers are things that tend to make inventory go up or down. Identify them and you will have some clue of why inventory changes. Understanding them is the beginning of gaining control. I’ve stated things that would drive inventory up, e.g.: more SKU’s. I refrain from stating the obvious: doing the opposite would reduce inventory. e.g.: reduce SKU’s to reduce inventory.

Key Drivers are covered briefly, as follows:

Number of SKUs

The more items you have, the more inventory you will need, in most cases. If you sell 500 widgets a year of A, then replace it with 250/year of A and 250 of B, you will probably need to carry more inventory. Why: demand and supply variability and total economic order quantities are likelier to be higher for 2 items than for one.

The more SKU’s in a product, the harder it is to bring matched sets of parts together at the same time. Because there are multiple items, with multiple vendors, kept and routed through multiple places or paths, with more opportunity for delays, defects, etc, more inventory will be needed.

The more operations there are and the longer that they take, the more inventory you will tend to have. More operations mean a longer supply chain. It may also mean differing lot sizes per operation and more places for delays and defects to occur. Process simplification helps reduce inventory.

The more facilities that inventory passes in and out of, the further apart those are and the harder they are to reach and pass material in and out of, the more inventory you will tend to have.

The more times inventory passes from the control of one system or organization to another and the less efficient the transfer is, the more inventory you will tend to have.

Lot/Batch Sizes

Lot/batch sizes greater than customer order delivery sizes tend to increase inventory. If customers order a product one at a time, but economics, handling or process considerations suggest that you make 1000 at a time, then you will have more inventory available than will be consumed per order, resulting in an accumulation of inventory. If you need to order things in cases, dozens, carloads, tons or weeks’ supply, but they are needed downstream in the supply chain in smaller increments, you will tend to accumulate more inventory.

The longer the lead time, the more inventory you tend to have. If something takes 16 weeks to get instead of 16 days, there is more inventory needed in process to cover the “pipeline” time. Whether it belongs to you or your vendor, it is increasing somebody’s cost, which ultimately will affect your cost and your customer’s cost. Longer lead time also means more chance of running out or having something go wrong out while waiting for it, which is usually dealt with by having additional inventory.

Carrying cost

This refers to the cost of owning inventory. Let’s look at what goes into inventory “cost of ownership”, frequently called the “carrying cost” and expressed in terms of percent cost of inventory valuation per year of ownership. For example, a 25% carrying cost (typical) would indicate that it costs about $.25 to own each $1.00 of inventory each year. These costs consist of:

• Cost of money – The cost of capital to the company or, in some cases the “opportunity cost” or return that might be earned on the money by applying it productively elsewhere. The cost of money has ranged anywhere from 6% to 18% in the USA in the last 25 years. Obviously, this has a very significant impact on investment strategy.
• Obsolescence – The risk of inventory never being used, or needing rework to make it usable, needs to be factored into the cost of owning INVENTORY. In theory (and practice), the larger the inventory is, and the longer it is held, the more likely engineering changes, customer preferences and technological changes will render that inventory unusable. In the clothing industry, it is not uncommon to see inventories depreciate as much as 90% when styles change. Certain portions of the electronics industry have problems with inventory becoming obsolete very quickly, due to technological changes.
• Shrinkage – A portion of inventory becomes unavailable to the owner due to loss, damage, theft or spoilage. The longer inventory is there and the more there is, the more likely this is to happen. Steps to prevent it only raise carrying costs in other areas, such as security, climate control, better control systems, recruiting policies, etc.
• Quality Factors – Allowances for yield, attrition, scrap and rework. This is really more of a function of the process than the amount of inventory invested and is more related to throughput, but is sometimes included as part of the aggregate inventory carrying cost.
• Technological or Price Obsolescence – Prices don’t always go up. In fact, in industries such as electronics, prices often plummet due to constantly improving designs, product and process technology improvements. Therefore, it is desirable to minimize inventories in high-risk areas.
• Taxes – There are two dimensions to this: 1) in some areas, a tax is levied on inventories, so the more inventory, the more tax is paid. 2) inventory is regarded as an asset by most accounting and tax rules. Therefore, increasing inventories shows “profits” and profits are usually taxed, usually by multiple government entities.
• Insurance – The cost of carrying insurance on inventory needs to be considered, as well as insuring the space, equipment, people and other resources needed to control it.
• Space – Costly storage space sometimes occupies 25-30% of the total facility, when one considers raw material warehouses, stockrooms, work-in-process storage, receiving, shipping, outside warehouses, MRB and residual storage areas. Inventory reduction campaigns can help companies avoid the need to move to large facilities, or permit them to shut down or cut back existing facilities.
• Manpower – All of this inventory needs people to order, receive inspect, record, move, count, store, retrieve, post it to the ledger, etc. People are the largest or second largest expense (behind material) for most manufacturers.
• Record Keeping Systems – Software, procedures, equipment and paper must be used to track and control inventory.
• Material Handling/Storage Equipment – Conveyors, fork lifts, bar code readers, scales, automated storage and retrieval systems, trucks, carts, bins, racks, shelves must all be purchased, leased, maintained and cared for.
• Physical Inventories, Reconciliations – Must be conducted to ensure that inventories are properly accounted for and maintained.
• Transportation – Must be provided to move inventory in and out of the facility, to vendors, within the facility, to different workstations and storage areas.
• Energy – Heat, light, humidity control, air conditioning, refrigeration and fuel must be consumed to make all this happen.
• Inappropriate Lot Sizing – In inventory formulae, the carrying cost of inventory is often expressed as a flat percentage of the inventory value, for convenience of computations, but that is an oversimplification of reality. For instance, consider material handling/storage costs. Just because a dollar of inventory is added, doesn’t mean that carrying costs go up, say, $.02. In reality the costs would not usually go up in a direct proportion at all, but only when we had to pay for an additional expense, or make the next capital investment in equipment or space to accommodate the inventory. So actually, most of these costs are step functions, rather than continuous curves.
We urge caution in the use of so-called EOQ (Economic Order Quantity) formulae in planning. While these can be useful guidelines in some cases, they can easily go awry and are hypersensitive to changes in carrying costs and order costs, which are usually no more than guesstimates, at best. We smile in amusement at PhD’s made or lost on the study of such arcane calculations, often failing to consider basic realities such as; how much space and money do we have, anyway? You can refer to Paul’s book, Production & Inventory Management in the Technological Age, pages 137 to 139 for a detailed explanation of why this lot sizing method is weak and should be used with caution.

• Supply variation—refers to the reliability of the supplier to deliver the desired units in the needed quantity, at the right time, at an acceptable quality level. If this can’t be done reliably, then companies tend to carry a buffer (safety) stock to make up for the deficiencies in the supply system.

• Demand variation – refers to the ability to reliably forecast what the customer will require (whether that is an internal or an external customer). Lower reliability tends to encourage buffer (safety) stocks.

• Defects —Extra inventory is often carried to allow for probable rejections. This is just a specialized form of safety stock for supply and demand buffering.

• Logistics constraints/transportation costs – This also sometimes falls under the heading of supply and demand variation and it certainly can affect it. For example, one of our clients transports parts by ocean freight to a plant in Portugal, or at least they do that if they don’t have to ship by air to get them there faster. Because ships traveling between economical ports only leave every few weeks, a 20 or 40 foot long container is the most practical shipping size. A certain amount of time is required for packing, transportation to the terminal, Loading, transport, unloading, customs and transport to the consignee. These are very real logistics constraints that must be built into the “pipeline” portion of the inventory model.

Another company studied ships fresh flowers from Latin America to the U.S. Air freight is the only feasible way to handle shipment, due to shelf life and care issues. It results in a shorter “pipeline” and higher transportation costs, which end up either directly costed to inventory, or get rolled into overhead, or cost of sales—same ultimate effect.

As unit costs rise, so will inventory, but the turns, or days coverage, will remain the same.

How to set Inventory Targets

After considering the current situation, drivers, and external situation, estimate what inventory levels should be, given certain sets of circumstances. There are impressive supply chain modeling tools to help you do this. Our experience is that developing an accurate detailed inventory behavior model is quite a chore to create and a major task to maintain, so we usually don’t. Normally working on projects with limited budgets, we study past behavior and focus on the main drivers, seeking to change a few with the greatest potential impact to achieve assigned objectives- sort of a “delta’ approach.

Don’t let us talk you out of sophisticated modeling tools, though. They have their place. When there are very large amounts of money involved and/or tricky constraints to work around, modeling tools will sometimes help. Many of the detailed control methods presented below contain elements of modeling.

Warning: Calculating or modeling inventory behavior solely by using the rules and parameters will nearly always be wrong. Why: If, for example, you assume that inventory will be an average of ½ times the order quantity plus safety stock, you’ll most often be wrong. Actual supply and demand variability will differ. Defective items/customer returns may result in buildup. Unmatched sets of parts due to shortages will result in buildup. Generally, it is higher than the model would indicate.

Even the best laid plans can go off track if something changes unexpectedly- a major customer cuts orders, unexpected defects occur, requiring ad-hoc reaction, rather than careful, deliberate, advanced planning.

There are two major directions to approach inventory management from—Top-Down and Bottom-Up. Most successful companies use a combination of both.

• Top-Down — this is the “macro” approach. Start with a goal, objectives, ABC (Pareto) analysis of estimated or historical usage, knowledge of overall processes and lead times. Set overall targets, by business unit at a minimum, preferably at a lower level, so that middle managers or even individual supervisors, work teams or administrative control personnel might be held more accountable. It takes more effort as the control is moved to a lower level.

Establish a tracking system, such as actual inventory versus target level. Compare numbers to actual sales, forecast. Monitor commitments and production plans against targets… Hold managers accountable for results and make them come back with reasons why targets cannot be met and solutions to the problems. Motivate them to solve underlying problems. Help them with problems outside of their scope of authority.

Another good tracking tool is Input-Output Control. Simply build a time-phased table of planned starting and ending inventories, showing starting, input, output and results. Then task employees to make the “delta’s” happen and track the actual values per period.

• Bottom-Up—Look at each item- determine cost, lead times, supply and demand reliability/variability, defect rate, transportation, storage, set-up/batch size considerations, buffers, process, handling considerations. Then set the proper planning methods and control parameters, to either default down from the enterprise, product line, commodity or department level to default down, or just establish them at the item/part level.

This takes a lot more effort than merely exercising Top-Down control, but it can deliver better results.

Educate and train people in inventory management and control approaches.

How to Control Inventory

After you do all your research and analysis, set targets and establish your control system, then you get to the hard part – actually making it happen.

Quick hits – Simply establishing the aggregate targets, understanding drivers, educating and training, setting up responsibility, establishing accountability and tracking results usually has significant effects. I have seen greater than 50% reductions from this alone. This can be the cheapest, fastest way of making some change happen, but it has a limited effect, because the approach lacks detail and won’t make major permanent changes in the ways that the business works without additional actions.

What is “Control?” – Control means to make something happen or to know why if it doesn’t, so that something might be done about it. Using that definition, there is no such thing as an uncontrollable situation. Someone once told me that he couldn’t control service inventory, because of unreliable vendor lead times. Nonsense! Unreliable lead times might be controlled by several strategies, such as: multiple sourcing, re-sourcing, safety stock, exhorting supplier to improve performance, ordering sooner, improving your own planning and reaction times, changing designs, alternate routing, training customers to order differently, having vendors stock raw materials. At least some of these would work in almost any situation.

Detailed Control Methods

Most of the detailed control methods that follow have some inventory management rationale built in, but it must be properly set-up and tuned for best use. Provide and implement control tools such as:
• Order on demand- Order only to fill customer orders. This is the most direct, intuitive method and tends to avoid excess inventory. It will only work if it can meet customers’ lead time and cost expectations. It works best for custom ordering and when it will result in delivery service meeting customers’ expectations.
In most cases, organizations must anticipate customer wishes to be successful. This often involves committing inventory in advance, to be able to deliver in time and to produce in economical quantities. So other techniques are often used, such as:
• Reorder point- Keep a certain amount available and on order to help ensure that it is available when needed, but not in excessive quantities.
• Min-max- This is a modified form of order point, with upper and lower limits established.
• Kanban- This is a more sophisticated type of reorder point. Instead of having a single order point, with a relatively large and lumpy order quantity, one replenishes a smaller quantity every time it is consumed. This method was popularized by its success at the Toyota Motor Company in Japan.
• MRP (Material Requirements Planning) – formalized in the 1950’s by Dr. Joseph Orlicky, MRP uses a master schedule developed from a demand analysis of orders, forecast and production plans. It then considers available inventory, parts requirements calculated from the bill of materials, then factors in open purchase orders, lead times, logistical considerations, safety stock and other ordering rules, to develop a materials purchasing and factory schedule to meet planned and actual demand.
In current times, a company’s MRP system is often a subset of its ERP (Enterprise Resource Planning) or Supply Chain Management System, which incorporates MRP as only one portion of an overall “Enterprise” level system. MRP is not always the most appropriate approach for all environments. In recent years, it has been modified successfully, by incorporating techniques of Kanban, JIT, Lean Manufacturing, Repetitive Scheduling, Theory of Constraints and others.
• DRP (Distribution Requirements Planning) — this is a specialized form of MRP, for distribution networks. It uses the same principles, but may also consider the dynamics of multi-level distribution networks, service level planning, cross-docking, shipment staging, truck loading, inventory deployment optimization and other considerations.
• Supply Chain Planning/Optimization- This is the next level of sophistication for MRP and DRP. It creates a model of the supply chain, which may include suppliers, manufacturing, various levels of distribution and even monitoring of inventory through one or more levels of customer ownership.
• Repetitive scheduling- Designed for continuous flow production.
• Process monitoring/control – Control of an ongoing, often continuous, process, usually by monitoring and controlling process parameters, such as raw material properties, desired attributes, temperature, pressure, speeds, viscosity, finish, byproducts, etc.
• Safety stock/safety lead time – Most of the above techniques might be enhanced by building in supply and demand buffers to allow for fluctuations/uncertainty of what will be needed and when and what supply will arrive and when. It can be done by adding on a fixed quantity or time coverage. The trouble with this approach is that people tend to make the wrong allowances, usually on the high side. This inflates inventory, may actually confuse priorities and use up needed capacity, by working on things not actually needed. The best approach is to try to reduce process variation for supply and demand, so that less safety stock is needed.
• Vendor-Managed Inventory – a form of delegation that is proving to be quite popular and sometimes very successful. One provides the supplier with demand and logistics data and makes him responsible for ensuring that the right quantities are available at the right time and place for you to meet demand. It needs cooperation, monitoring and common interests and objectives to be successful.
• Input/Output – Don’t forget to implement the input-output method, described earlier as a tool to help make reductions.

Pitfalls of using control parameters

With the use of MRP, MRPII, ERP and now “Supply Chain Management ” systems, there are more opportunities to improve inventory management, but also more chances to lose control! Unless there is a clearly stated Aggregate Inventory Management approach imbedded in the system, through education, training and parameters, yes- I said parameters!, you will likely fail.

War story from George Miller: “Years ago, I worked for a specialty niche MRPII/ERP company. After I left for the consulting world, a customer of that company called to inform me that the “software wasn’t working” and summoned me to come and help them. After only a day on site, I told them that the problem was that the system was carrying out their instructions at the speed of light, spewing forth recommendations to acquire inventory, based on their unrealistic parameters. You see, most of these systems have various ‘gauges’ and “levers,” to set control parameters to tailor the operation of the system to the company, products and process. These might be set, for example, system-wide, but can usually be overridden at the business unit, plant, department, product line and/or part number level. Each level normally defaults down to the lower level, unless you override it.

“For example, they used unrealistically long process times in the item master planning records and had safety stock and scrap factors planned at multiple levels in the bill of material, “pyramiding” (increasing) demand calculations considerably. No surprise then, except to them, that they were well upon their way to doubling their inventory investment in record time, without significant benefits. The prescription was:
1.The management team to get personally involved in setting the system parameters.
2.Educate employees in inventory management concepts and train them in proper use of system tools.
3.Establish and monitor a special report to assess the effect of “order modifier” parameters, such as safety stock, scrap and attrition factors, order planning method, order quantity rules, order multiples, lead time, review time, inspection time.”
Conclusion: Inventory can be systematically managed. It doesn’t happen on its own. Needed is a rationale, a plan, education, training, organization, tools, policies, procedures and management willpower.

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Keeping A Daily Spending Diary And Small Business Record Keeping

Have you ever taken $20 out of an ATM and wondered later where it went? Start keeping a daily spending diary to keep track of where your money goes. Try it out for one week and you’ll be amazed at how much you can spend on the little things like coffee, eating out and entertainment. Here’s how to do it:

Take a blank piece of paper and create a column for each day of the week, Monday through Friday.

Put the piece of paper in your wallet or purse – somewhere where you can have it with you at all times.

Make a note of every single penny that you spend – This is very important, if you forget to write down a coffee here and a soda there, you won’t have a complete picture of how you’re spending your money by the end of the week.

At the end of the week quickly order the items that you spent money on throughout the week into the following categories: Food, transportation, entertainment, clothing, housing and other. Next add up your expenses in each category. Here’s an example of one day:

Monday

Coffee – $2.75 Food: $10.60

Bus fare – $3.00 Transportation: $3.00

Lunch – $7.85 Entertainment: $2.50

Magazine – $2.50 TOTAL: $16.10

Next, find out what percentage of your money you spend on each category by dividing the total for each category by the overall total. Following the example above, I spent 66% on food ($10.60/$16.10).

Once you have completed your calculations look carefully through your analysis. Does anything surprise you? Are you spending more money than you thought on small items? Small things, like coffee, drinks, cigarettes etc… can really add up in a week! Just think, if you spend $3 on coffee every day, that’s $21 a week or $1,092 a year! Identify these areas that surprise you and look for opportunities to cut back on your spending.

Keeping a daily spending diary is an easy way to take control over your spending and to identify some less than desirable spending habits. Also as an added bonus, by keeping a daily spending diary, you’re already halfway there in creating your own personal budget. Next week we’ll explain how to set up your budget. In the meantime, congratulations on taking an important first step! You’re on your way to learning more about Your Money and You.

TIP: Use your daily spending diary as a savings tool. After one week you should be able to easily identify some areas to cut back on your spending. The money you save will bring you one step closer to your goals of opening a business, saving for your children’s education, purchasing a home or taking a dream vacation.

Boat Transport is As Easy as ABC!

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Although this process of yacht shipping may look pretty complicated, but it is very easy once you take the time to prepare yourself very well. Taking the time to be well prepared always pays off in the end. Getting ready at the last minute will certainly lead to a lot of tension; so it is important that you give yourself a lot of time. Plan a month head when you want to transport a boat and you will discover that the process will be less daunting.

Planning well ahead will help you to search for and find a top quality boat transport company and the right boat towing service. Employ the services of a boat transporter two weeks before and ensure that you have some good information regarding the transportation of your type of boat; this will help you to get the right permits and quotes that are required. You should also ensure that you get some feedbacks from past clients or friends who have used the boat transportation service in the past. Be sure that you find out whether the boat transport company is insured and has legal authority. As soon as you find a top quality service, you can count on having your boat delivered safely to you€¦right on time!

You will need to adhere to a couple of precautionary measures prior to transporting your boat. You may need to remove some loose items in order to avoid damages prior to calling the boat towing service. For yacht or sailboat transport, you should check with the boatyard in order to get special instructions and information on what precautionary measures to take. You may also need to ask questions concerning yacht or sailboat transport.

It makes a lot of sense to take the time to look at your boat manual and check out details such as liquid in storage and boat weight. If you are moving a boat that is taller or wider, then it makes a lot of sense to contact a reputable boat transport company for assistance. This is because, reliable boat transportation companies have a team of highly trained experts who can successfully transport your yacht, sailboat and other ocean vessel to your destination all in one piece.

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