Most businesses know that freight is an un-welcomed cost and burden, but few know how much it impacts their bottom line and inventory costs, and even fewer decide to do something about it. Deciding to improve your freight costs must be tackled at both ends of the spectrum. You must work to reduce the freight costs on incoming parts and raw materials into your inventory, and find ways to mitigate freight costs out to customers on finished goods, and or those shipments to your other warehouse locations.
I’ve reduced my customers' freight costs on incoming & outgoing shipments on a number of occasions. As such, I have outlined six steps within this article on ways to improve freight costs for both your incoming and outgoing shipments. I’ve also included an excel sheet which provides an example of how to reduce the per-unit freight costs of parts coming into your warehouse.
1. Be Aware of the Hidden Costs of Overseas Shipments
You have to do your homework on this. For some overseasshipments, making sure you only pay for one price, and that the cost of delivery and insurance on parts is covered by your supplier, is often the best way to go. The myriad of freight and INCO terms can drive someone insane. Some of them include: CIF,CIP,DAF, Ex-Works, FOB, DDU, DDP, DEQ, etc,. To learn more about these terms, please refer to the INCOTERMS website here. Now, if you deal with overseas, container, port-to-port shipments, then get to know these terms like the back of your hand. You must know where your company’s liabilities are with respect to insurance coverage on each of these terms. I’ve seen firsthand the huge amounts of wasted money from my clients who had no idea what these terms meant. In some cases, they lost the complete value of the shipment. Now, I won’t go through each one of these terms and explain them – I wouldn’t be able to.
2. Wherever Possible, Separate Freight From Delivered Pricing
When it comes to overseas shipments, there is merit to having a supplier cover all the costs to your door, and in return, providing you one price for the product. In this case, it’s a DDP (Duty Delivery Paid) shipment, and you pay one price – the duties, taxes, clearance, is all covered in the price and is the responsibility of your supplier. However, where possible, especially with shipments within the same country, try and have the freight separated from the price of the product your company purchases. While accounting loves to have one clean bill, there is a cost to that delivered price and it can be more expensive for your company. If your vendor is in the same country and providing you a delivered price, you can be 100% sure you are paying a surcharge on the freight. It’s a service your vendor is offering your company and it costs them money to support it, so they are charging extra and making a profit off the service.
You might not be able to get lower freight costs on your own. You might just find that even with your vendor's delivered pricing, it’s still better with them regardless of their mark-up. However, you must know. You might have better freight costs, and if you do you’ve successfully lowered a key cost of your inventory!
3. Measure the Burden of Additional Inventory Against Lower Freight Costs
The one conundrum company’s always face is how to measure the per-unit freight costs of taking more per shipment against the burden of carrying that extra inventory. Essential to this process is to understand your monthly carrying charges. Most companies agree that it’s usually around 3% per month. So, every month you hold inventory, add 3% to that cost. Here is something I took from a previous post I made earlier this year.
Use the following example to drive down your purchase costs:
If the savings accrued in Freight & Purchase Price from your vendor are greater than your monthly carrying charges of 3%, then you’ll come out on top.
Your company should be able to reduce your Per/Unit Freight cost of parts coming into your warehouse by 5% if you double your volume.
We’ve provided two scenarios here. One is for your customer providing a 9% price discount, and another is for a 10% price discount for doubling your purchase volume. Your price discount could easily be higher.
In both cases, both the 9% & 10% discount means you’ll now hold inventory for more than one month. We’ve assumed it will now be 3 months of holding all the inventory before depleting it and having to purchase more.
We’ve moved the analysis from month to month, to a quarter. You won’t be able to do this with all your products, but those that you can, you need to capitalize.
The net gain or savings, is the yellow shaded area, is simply the original cost of ownership of $58.71 minus the new cost of ownership after the end of the 3 months.
Here’s the excel sheet for the above if you want to download it:Download Freight1
4. Make Your Efforts Measurable
It’s one thing to go ahead and set forth plans to reduce your freight costs, it’s another thing entirely to commit yourself to tracking your success and improving on your efforts. Now, I strongly suggest you take the time to write down the following:
- Start with your most recent year to date freight costs and work out your monthly average before starting your initiatives.
- Track your savings quarterly. In the above calculation (9%,10%example) it’s based on higher volume held for 3 months at 3% per month.
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Track Your Progress By Quarter By Product Line: |
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Quarter |
Volume |
Savings |
Total |
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First |
30 |
$ 2.38 |
$ 71.40 |
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Second |
30 |
$ 2.38 |
$ 71.40 |
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Third |
30 |
$ 2.38 |
$ 71.40 |
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Fourth |
30 |
$ 2.38 |
$ 71.40 |
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$ 285.60 |
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The goal is to reduce the per-unit freight cost of incoming parts, and to make sure that your inventory carrying charges aren’t too high in the process.
- Do the analysis by each product line and set forth plans to save money on the customer demand of that product line. Doing the analysis by product line will increase the gross profit margin of that line. Manage it like you would a portfolio.
- Price reduction from supplier/vendor for purchasing more
- Per-unit freight reduction from shipping more
- Monthly carrying charges or “ownership cost” as seen above in the example from point 3 in this list.
5. Avoid the Dreaded Stock-Outs & Double Freight Bill
Remember, when you don’t have the inventory, and need to rush it in from your supplier, you could pay a rush fee to get the product from your supplier, and will definitely have a higher freight bill for the expedited freight option. Also, if you’ve let your customer down because you didn’t have the inventory, you’ll probably have to cover the freight to their location.Avoid the double whammy from inventory stock outs. They are killers.
6. Create a Bidding War for Your Container Freight
If your company is involved in container or truck shipments, and you’ve become concerned with the costs, then it’s time to ratchet up the competition for your business. Now, be careful, don’t go with the cheapest option – it’ll come back to haunt you. Just make sure to save money if possible from one shipment to the next. This isn’t always easy, especially with fuel costs fluctuating the way it does, and surcharges always a threat. However, I’ve seen it done first- hand and it’s all about mitigating your costs as much as possible. In doing this, I set up one customer of mine with their junior logistics operator actively going out to 5, or more, companies for bids on each and every delivery. He was successful and it became his full time job. Getting a surcharge, and negotiating it down somewhat, is still a savings. Yes, you got a higher price, but it could have been higher. Again, it’s all about mitigating costs – as much as possible.
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