Premium Freight

“The only impossible journey is the one you never begin” – Tony Robbins

We wait for Festivals, New Year and end of season sale so that we can plan our purchasing with heavy discounts. While booking our air tickets, we look for the cheapest and safe airline. While purchasing our groceries, we often shift our loyalty from the regular shopkeeper to get a discount. But while shipping our Products to customer, we often do not consider the policy of lowest pricing and pay premium for it.

Why does it happen? When we can plan meticulously for our personal gain, we can do the same for our business too. Sometimes, we blame our customers for it but is it always the right reason?

As per IATF 16949, Clause 3.0, Premium freight is extra costs or charges incurred in addition to contracted delivery. This can be caused by method, quantity, unscheduled or late deliveries, etc.

It means premium freight is not only what we pay in-case we ship products by another means like Air, railway etc. but also if we make more shipment for the scheduled quantity (As per the agreement, to despatch product 1 time in a day, we despatch 3 times to meet delivered quantity).   

As an organization, sometimes, we do not bother if our supplier is paying the premium as it is not affecting our profitability. Can we consider it as our short-sightedness? Why the supplier is paying premium freight? Is it important to ponder over it? Premium freight is an indicator of inefficiency in the manufacturing process. If organizations do not analyze it and take suitable action, sooner or later it may result in delivery failure which may impact their shipment to the customer too.

As per IATF 16949 Standard, clause 8.4.2.4 and 9.1.2.1, the following are the key expectations.

Supplier/Customer monitoring: Number of Incidents/occurrences of premium freight:

How many times, there are occurrences of premium freight? This may be due to a supplier or organization issue. Although Standard is only asking to monitor occurrences of premium freight but for the organization, the cost of premium freight is equally important.

Industry Challenge: If premium freight is paid by the supplier, the organizations do not bother. The organizations are more bothered about the cost and not the number of incidents. If the cost of premium freight is less, it does not bother the organization. But what about numbers? If numbers are consistently increasing, it should be an alarm bell for the supply chain (Purchaser).

What incidents of premium freight indicate?

• Labour issue
• Planning issue
• Quality issue
• Finance issue
• Sub-supplier issue  
• Issue with transporter
• Change in customer schedule    
• New development
• The issue with another supplier  

If Premium freight is good or bad: The answer is Yes and No.

Yes, it is Good, if it is helping in

• Avoiding customer line stoppage
• Early sample submission
• Taking care of issues of another supplier
• Making customer delight

No, it is Bad, if it is resulting due to

• Repeated Planning issue
• Repeated Quality issue
• Repeated resource issue
• Negligence

Should the organization worry if premium freight is borne by the supplier only: The answer is NO for the following reasons

• The cost of production will become unviable to the supplier.
• Presently supplier may be able to run your production line but soon, it may get disrupted
• Presently, the supplier may be providing good quality product but the burden of extra cost (premium freight) will impact quality levels.

Can we avoid Premium Freight: The answer is Yes and No.

Yes, by

• Efficient planning
• Envisioning customer erratic scheduling
• Competent team
• Understanding customer expectations (not all customers are equally good!!)
• Effective contingency planning

No, incase

• Line stoppage at customer end due to another supplier
• Sudden change in market demand
• Quality issue
• Sudden labour issue
• Strike by transporters
• Natural disaster
• Cyberattack

What should be the weightage of Premium Freight in Supplier Rating? It depends upon

• the impact on their production process
• the impact on the customer
• the criticality of the supplier and their product
• Dependency on the supplier (Share of business)
• Future business prospects

What should the organization do?

• Call the supplier representative and understand the reason
• Visit supplier more often
• Increase the frequency of system and Process audit at the supplier end
• Think twice before offering new business
• Develop alternate supplier

Possible solutions:

• Effective contingency planning
• Periodical simulation of contingency planning
• Understanding customer requirements
• Understand the market scenario

Some question to ponder:

• How many organizations have an effective system to capture & monitor premium freight?
• Does the cost of premium freight impact the Cost of Quality (COQ)?
• Do incidents of premium freight impact the decision to offer new business to the supplier?

References:

IATF 16949: 2016

This is the 38^th article of this Quality Management series. Every weekend, you will find useful information that will make your Management System journey Productive. Please share it with your colleagues too.

Your genuine feedback and response are extremely valuable. Please suggest topics for the coming weeks.