Reducing Freight Costs

April 06, 2015

Screen Shot 2015-04-03 at 11.44.14 AMIn a prior blog post, we looked at 10 areas your business could save money. We looked at four of them in a little more depth: legal, banking, insurance, and audit expense reductions. Now we turn our focus to freight costs. The term “freight” includes the following operating characteristics: inbound and outbound, domestic and international, and all shipment sizes from an envelope to a full container.

Let's examine reducing freight costs, both inside and outside the corporation.

Inside the corporation

One approach is to look at the company’s operating data and service requirements as an opportunity for a re-engineering analysis.

What do we mean by that?

Let me give you an example. You ship 10 truckloads every Monday to a plant in New England from LA. If all trailers do not have to reach the destination simultaneously (and realistically 5 of those 10 would be within service requirements if they arrived a few days after the initial 5) then why not consider rail transportation for the latter 5? This could save you about 20% of the line haul cost while taking three extra days in transit.

If you are a manufacturing company, you have likely invested in complex supply chain systems. You've tried to minimize your investment in inventory and manage the risk of obsolescence and slow-moving product. These are excellent systems and any changes to them need to be carefully thought through. Still, managing full truck loads for bringing in raw material can save companies a lot of money. It is worth checking whether the company is managing that process by using full truck loads for inbound product.

If it is not workable to use full truck loads, consider increasing the density of the load on the truck. Pricing decreases with increased density. Modeling what would happen to inventories if you insisted on full truck loads or increased density loads can give you an idea of the possible net savings. Even a minor change here can save a lot of money. If you are stuck with road, consider live loads versus dropped trailers.

Let’s not forget the company that sends all small packages with expedited shipping. While it makes sense to expedite replacement parts to customers, it doesn't always make sense to expedite general office communications. If everything is sent by two day air you know you are wasting money!

Outside the corporation

Most companies find that freight costs and service criteria are a key source of savings potential. Manufacturing companies and retailers see the value of periodic rate quoting (RFP) and benchmarking rates. Freight expense represents a significant percentage of revenue, and freight savings are a real mover of profits. They can be vital for corporate performance improvement.

If you are in a group company situation, see if you can piggyback on another company’s discount program. Consider combining programs with other group companies to improve your chances to get higher discounts.

Outbound shipping is something to look at from a few perspectives. If you are shipping bulk product, are you shipping the full truck loads discussed above? Have you established realistic minimum values for shipping to customers? Do they need to be updated? Does a service charge need to be initiated or increased?

The goal here is to manage customers’ behavior so they order from you in an efficient way. For those that do not, a realistic service charge can help defray the extra expense. Also, take a look at how much you uplift the shipping charge when you pay the shipping bill, and recover the uplifted shipping charge from the customer. It may be appropriate to increase that freight charge if you are giving away all your discounts.

In most companies, inbound is your expense, as the supplier sells ex-works. Do not fall into the trap of thinking that because you sell ex-works, the freight to customers should be considered totally the customers’ expense. The total cost of acquiring your product, including the delivery charge, is how a customer evaluates your product versus other competitors. Managing your profitability as well as your customer’s full acquisition cost is the way to think about it.

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Topics: Accounting & Finance

Peter Duff

PDC Consulting

Peter is a seasoned financial and operational executive who is passionate about enabling  businesses to reach the next profit and cash generation level. He brings to consulting a broad experience of over 30 years as EVP, COO, and CFO roles in diverse consumer, industrial and technology businesses. Peter has been responsible for significant improvements in revenue, margins, expense as well as cash levels in manufacturing and service oriented businesses. He has a solid background in domestic and international settings with top 500 companies, middle market, start-ups and service operations. Peter is a trusted adviser to private equity and other fund managers.
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