How to Save Money on Your Inbound-Freight Program
By Nicholas C. Isasi
Your vendors probably bundle freight expenses with the cost of goods and then give little consideration to the price to ship those items to your distribution centers. Indeed, most vendors actually use freight as an additional profit center. The markup for vendor prepaid freight can reach as high as 40 percent.
That's why properly managing your inbound freight expenses can make the difference between a marginally good year and a successful one for your catalog company. Inbound freight typically represents 2 to 4 percent of gross sales for consumer products companies. Yet inbound freight costs seldom appear as a line item on a profit and loss statement. That's unfortunate, because inbound freight often ranks in the top eight of all operational expenses. When your supplier picks the mode of transporta tion and carrier, then includes this expense in your cost of goods, you may not be getting a chance to save costs.
To become a lean inbound-shipping machine, conduct an audit of your current processes. Start by reviewing who your vendors are and from where they ship. Then determine the volume in each lane (that is, pickup and delivery point combination) and the merchandise class being shipped. Break out the data by what's shipped internationally, by less than truckload (LTL), by full truckload (TL) and small packages.
Next, discuss with your purchasing, receiving and customer service departments the visibility your company has and what it needs regarding shipments and transit times in each lane. Conducting a lane-by-lane benchmarking analysis will enable you to identify poor carrier service, inefficient routing decisions and sky-high rates on inbound shipments. In the lanes with particularly poor service, start to implement changes by switching to the carriers with whom you've negotiated.
Next step: Save cash. Allowing suppliers to set rates and assign classification codes is like giving them your wallet. Many merchants lack the experience necessary to negotiate effective rate contracts and ensure the product classification codes are correct. The audit, then, becomes the backbone of any solid, vendor inbound-freight program.
To maximize your leverage and negotiating power among carriers, consider reducing the number of carriers you use. Why? The essence of inbound-freight management revolves around the issue of control over vendors' uses of freight carriers and rates. A vendor routing guide (discussed below) serves as a key implementing device in an inbound-freight program. Take the information you've gathered from the audit and undertake the following:
1. Identify all costs associated with your inbound freight. Determine total annual costs for inbound freight, then calculate it by the percentage of gross sales. This gives you a cost baseline, so you accurately can track your cost savings.
2. Demand that freight be clearly delineated on each vendor's invoice. Don't accept pre-pay and added freight. While in many cases freight is prepaid and added to your invoice, there are many instances in which it's buried in the price you pay for each item. Working with suppliers to break out freight costs from the cost of goods isn't easy; the process requires frank conversations.
3. Adopt a core-carrier program that isolates carriers that are strong in given lanes. Having 20 LTL carriers backing up to your receiving dock can create continual confusion in your distribution center and become overwhelming to manage with existing resources. Working in the core-carrier program, you would identify pick-up coverage, service facility locations, financial stability, systems and technology prowess, and performance guarantees.
4. Evaluate and implement appropriate freight classifications for the items you ship. Every item has a National Motor Freight Classification (NMFC) number that equates to a classification and directly correlates to the rate charged. (The National Classification Committee develops and maintains the NMFC Guide that is regulated by the U.S. Department of Transportation's Surface Board.) The higher the classification number, the higher the freight rate. For example, a major toy company was using a freight classification of 125 for toys and dart games. This classification's freight cost in the existing traffic lane was $650 per shipment. By changing to the correct classification of 85, the freight cost was reduced by $226. Because the toy company was moving about five shipments per week, it was able to save more than $100,000 per year on just that one lane.
5. Negotiate lower freight rates. Leverage your volume to get better freight discounts on LTL. Negotiate with your carrier to get reduced minimums, eliminate extra charges and get flat C.O.D. charges.
6. Create visibility. In-transit freight tracking will reduce the time buyers spend confirming shipments with vendors. It also helps to monitor individual carrier performance. So look for carriers who can supply such tracking methods.
7. Develop and enforce a vendor-routing guide. Routing guides help you control costs and improve receiving efficiency. The guide itself should be simple and on one page. It should include proper routing instructions telling your vendors exactly which carriers to use by transportation mode and in priority order. Use the guide to enforce vendor compliance. Clearly state the rewards for strict adherence and the consequences, such as chargebacks, for those who neglect your routing instructions. Your routing guide will be distributed to vendors' shipping departments. And single-carrier choices will be entered into your vendors' order-processing systems. Your routing guide should be included with the purchase order as a separate item.
After you've negotiated new rates and implemented your inbound freight-management program and routing guides, the next area of cost savings to explore is consolidated shipments. To do that, monitor and review all freight shipments to the same customer base to see if they can be efficiently combined. We've found that in many cases, merchants see more than 10 percent savings from having fewer shipments. They often can turn LTL shipments into truckloads along with and using the right carriers at the right prices. Use exception reports, management reports created to track missed pickups and consolidation opportunities, to help drive good practices and discipline across your vendor base.
Some catalogers may have sufficient leverage to implement many of the above-noted initiatives. In those cases it makes sense to band with other companies to pool your resources and buying power. Some direct marketers are benefiting from consortium shipping rates. The best way to do this is through an independent third party that can gather the data, negotiate single-rate base contracts with a limited number of carriers, and supply the software to track shipments. A third-party alliance can increase your buying power without you having to share information with competitors.
Proactively managing your inbound freight can help you reduce costs and improve your supply chain. Take control of carrier selection and classification decisions. Track all inbound freight dollars expended. Reduce the number of delivering carriers. The result? A positive impact on your profits.
Nicholas C. Isasi is the director of business development for Boyertown, Pa.-based DM Transportation Management Services, which specializes in the direct marketing industry. He wrote this article at the request of Catalog Success editors. Contact him at (407) 517-4673, or e-mail: email@example.com.