Case Study: Ace Achieves Spend Management Success
Founded in Chicago in 1924, Ace Hardware Corporation has grown to become America’s neighbourhood hardware retailer, with over 4600 US locations supported by 14 world-class distribution centres, seven freight consolidation centres and three import re-distribution centres, supplying over 65,000 products. Ace retailers have built its annual retail sales to more than US$13bn.
Ace management emphasises quality processes and tight financial accounting. Ace wanted to ensure that its freight costs were aligned with the best market rates and to gain increased control over its freight payment process.
Freight payments are managed by a third-party payment company, primarily due to the need to allocate payments to specific general ledger accounts (GL) (each of the distribution centres has its own GL accounts). Ace’s accounting then employs the weekly and month-end freight payment accounting to reconcile the freight cost and calculates the landed cost of inventory – all inbound transport cost is charged to the inventory items. In addition, each distribution centre private fleet is a separate profit centre and this payment information is also employed to pay each private fleet.
Ace determined it needed better business process control over the audit and payment operations. Although errors were discovered on audit and corrective action would eventually be taken, Ace wanted to be proactive. Instead of concentrating on reconciliation, it wanted to pay the correct amount the first time by employing the audit-quality rate currently produced by On-Demand TMS in Ace’s transportation planning phase.
Ace had already implemented LeanLogistics’ On-Demand TMS Supplier Inbound initiative to plan and control inbound shipments from its suppliers and to address the lead-time dependability issues. Ace believed that by employing the key components of LeanLogistics’ Spend Management programme, it could achieve the desired financial controls. The first step was to conduct a network-wide rate procurement.
Together, Ace and LeanLogistics benchmarked Ace’s rates to identify procurement opportunities and out-of-tolerance conditions, analysing Ace’s spend against the On-Demand TMS Network. In addition, LeanLogistics identified complementary network carriers (those already in Ace’s market with capacity and frequency) as candidate providers to broaden Ace’s carrier base and to allow it to obtain better rates and service.
The second step was to re-engineer the freight payment process to take advantage of the On-Demand TMS components already installed. When Ace planned, then tendered a load, the audit-quality contract rate was included. This was forwarded to the third-party payment service so that it would pay the On-Demand TMS-generated rate. Also, the On-Demand TMS rate adjudication procedure was incorporated so that carriers could request, and Ace could approve, unanticipated accessorial charges.
This process allowed Ace to significantly reduce the amount of remediation that it had to perform on freight payments while retaining the benefits of the GL allocation that the service performed. This process also highlighted specific operational issues that resulted in unauthorised accessorial charges.
The billing for the private fleet has also been simplified. Previously, the fleet used to update an access database that was reconciled monthly and billing was created subsequently. Now, Ace simply runs a report and pays the fleet in aggregate for the collect moves in that month.
The procurement was conducted quickly – with a turnaround time that is impossible using normal procurement techniques – and it ensured Ace’s rates and services are aligned with market. Ace obtained full coverage, using over 200 carriers, 50% of which were new ‘network’ carriers. The savings were significant. Ace achieved a 6% annual freight bill savings on truckload alone. This increased to 10% when Intermodal Transportation Software was added.
The re-engineered payment process resulted in operational and clerical savings and improved payment and audit operations. This procedure also significantly improved carrier data compliance, since providing pick-up and delivery information is the event that releases payment to the carrier. Ace’s carriers now provide both more timely and better quality information.
Significant freight bill and operational savings have been realised as a result of implementing Spend Management. Success with the most current On-Demand TMS implementation motivated Ace to proceed with the future implementation of its outbound movements to stores, including route optimisation of the private fleet.