Contract Terms You Can’t Afford to Ignore: Best Practices for Handling Freight
November 19, 2015
I recently shared some guidance on “Three ‘Free’ Freight Terms” that healthcare professionals should watch out for on contracts, so it seems only appropriate to also discuss best practices for negotiating freight requirements. I've received a number of questions from directors of materials management and supply chain executives over the years that essentially lead to one overarching inquiry:
How are other health systems managing freight in their contracts?
TRIOSE works with hundreds of healthcare systems, which gives us an insightful perspective on this and enables us to educate healthcare professionals on industry best practices. For example, I often work directly with a number of health systems on language to include in their RFPs to ensure they have a full understanding of the ins and outs of shipping expenses. Based on our experience, here are the six most common contracting requirements from best-in-class healthcare organizations.
- The cost of shipping should not be included in the cost of the product.
It must be broken out separately in order to control those costs. As management guru Peter Drucker famously said, “You can’t manage what you can’t measure.” Just because a supplier is not adding the fee on your invoices separately doesn’t mean you’re not paying for it.
- In situations when there is no way around having the cost of shipping included in the product cost, request that all shipments be ‘F.O.B. Destination.’
F.O.B. Destination means that title to a product shall pass to the hospital or healthcare facility when the goods are delivered in good condition and signed for at their final destination. Also request that the vendor pay all transportation and insurance costs.
- The manner in which shipping & handling costs will be applied should be transparent.
For instance, the fee could be a percentage of the invoice total, cost per pack, cost per purchase order, etc., but it must be disclosed in advance. (Note: Shipping cost per pack should be listed on the product price sheet.)
- The vendor must assume all responsibility for proper packaging of products for safe shipment to the healthcare facility.
The packaging must be in accordance with both the packing and shipping regulations of the transportation service provider. If applicable, it must also meet the packaging, marking, labeling and shipping paper requirements of the U.S. Department of Transportation’s Hazardous Material Regulations.
- Shipping terms must be defined so there is no ambiguity.
--Free Shipping (Pre-Pay & Allowed) – When the total landed cost of a product is free of all shipping cost, including any related handling fees, packaging costs or additional surcharges. The shipping cost may not be included in the product cost.
--Pre-Pay & Add Shipping Charges – All shipping cost, including any related handling fees, packaging costs or additional surcharges must be disclosed and, if approved, must be itemized and clearly marked on the invoice for payment.
- The participation of 3PL companies needs to be included in the contracting process.
Language could reflect the sample terms below:
Vendor shall be responsible for complying with the freight management program requested by [Customer]. Specifically, Vendor shall:
--Ship goods using the requested carrier
--Bill the shipment to the appropriate Customer account number
--Ship all product F.O.B. Destination
--Ship all product utilizing ground service unless otherwise directed by the Customer
--Place the Customer purchase order number into a field on the carrier’s manifest
--Not charge Customer additional fees for participation under the freight program
Pulling together the experiences of your contracting team, buyers and account departments can be a great first step in assessing the current state of how your organization is managing freight terms. Discuss gaps and what you would like to have in place to ensure total visibility to drive change. More often than not, freight terms are not clearly spelled out in contracts and even when they are, their application must be continually managed to ensure you’re not overpaying. That’s a topic for another day.
The information in this article does not constitute legal advice.