Eight Steps to Reduce “Hidden” Transportation Costs and Increase Profits
Nicholas Isasi, Executive Vice President, DM Transportation
As the economy continues to slowly recover, retailers, more than ever, are looking to maximize revenues while controlling costs. Increasingly, many company CFOs and logistics managers are examining an often-overlooked expense that is costing them, in many cases, tens to hundreds of thousands of dollars per year: inbound transportation costs.
As much as one third of a company’s total logistics expenses can be tied up in inbound transportation. Unfortunately, dealing with these costs is problematic, as they typically comprise “hidden costs” that are controlled by the vendor. When the vendor arranges and pays for the transportation – called prepaid or “delivered” transportation – the vendor sets the rates, chooses the carriers to be used and assigns the classification codes. When you, the purchaser, have little control over the delivery timing and transportation charges related to your goods, stock shortages and late deliveries can result. Additionally the cost for your transported goods can be marked up as much as 40% when vendors don’t pass on to you reduced transportation rates they have negotiated.
So – how can you reduce inbound transportation costs and achieve significant operational savings? The following eight steps will make a significant difference:
1. Audit your inbound transportation process.
Review your vendors and their shipping points of origin. Then, determine the lanes (the delivery route taken), the volume in each lane and the merchandise class being shipped.
Discuss the visibility your company requires regarding shipments and transit times in each lane with your purchasing and receiving departments. You can identify poor carrier service, inefficient routing and inbound shipment rates that are too high by conducting a lane-by-lane benchmark analysis.
Determine total annual costs for inbound transportation and calculate it as a percentage of gross sales. If possible identify accessorial charges such as fuel and additional services like lift gate and inside delivery.
2. Utilize appropriate transportation classifications for the items you ship
Every item that is shipped domestically has a National Motor Freight Classification number that directly correlates to the rate charged. The higher the classification number, the higher the transportation rate. – and these rates can vary by hundreds of dollars per shipment. Items shipped internationally have a Harmonized Tariff Code that serves a similar function. Many retailers can realize significant savings in transportation costs simply by utilizing the most appropriate transportation classifications.
3. Implement and enforce a vendor routing guide.
Routing guides are used to enforce vendor compliance. The guide itself should be short and simple – no longer than one page – and it should be included as a separate item with the purchase order. It should include proper routing instructions telling your vendors exactly which carriers to use in priority order. Clearly state the rewards for strict adherence and the consequences, such as chargebacks, when routing instructions aren’t followed. When consistently used, the guides help control costs and improve receiving efficiency.
4. Insist that transportation be clearly identified on each vendor’s invoice.
Don’t accept prepaid or added transportation. Transportation is often buried in the price you pay. This is called free freight. (Breaking out transportation costs from the cost of goods takes some work and requires honest conversations with suppliers.)
5. Track your shipments.
In-transit transportation tracking reduces the time buyers spend confirming shipments with vendors. It also helps to monitor individual carrier performance. Look for carriers that can supply such tracking methods. Also, utilize these reports to file for service failures with carriers that do not perform up to their guarantees.
6. Create a preferred carrier program that identifies strong carriers in your busiest lanes.
Such a program helps you ascertain carriers’ pick-up coverage, transit times, service facility locations, systems and technology prowess in addition to their financial stability. Preferred carrier programs help prevent the confusion of having several carriers backing up to your receiving dock.
7. Negotiate lower transportation rates.
In most cases, the fewer providers you utilize the more leverage you have to receive better transportation discounts. Negotiate with your carriers to eliminate or modify accessorial charges identified during step #1.
8. Utilize consortium rates
Many retailers benefit from consortium transportation rates – combining the purchasing power of several companies. Some of the most cost-effective consortia are among companies in a single industry – such as retailing. Single-industry-specific consortia can be more effective than other multi-company arrangements because the pricing is geared toward a single industry’s commodities (see #2 above); routing guides are easier to enforce because more companies are shipping from common vendors (#3); and core carriers are more productive and competitively priced when more freight pickups occur at common vendors (#6).
Additionally, carriers’ pricing tends to be more aggressive when bidding for multiple accounts.
One way to engage in consortium rates is through an independent third party that can gather the data, negotiate pricing with a limited number of carriers and supply the software to manage those shipments.
Taking these eight steps can help you reduce costs and improve your supply chain. Proactively managing your inbound transportation takes some effort, but with potential savings of tens of thousands of dollars or more on the line, it is worth it.
Nicholas Isasi is executive VP for DM Transportation based in Boyertown, Pa. (www.dmtrans.com). The company provides vendor inbound, drop shipment and supply-chain management services to companies in a number of industries including retail, resorts and direct marketing. Isasi has more than 20 years’ experience in carrier negotiations, supply chain management and corporate level logistics planning.