Improving Profits by Managing Freight
An executive of a furniture retailer recently stated that a post audit of their freight bills had given them an extra $25,000 profit. Nothing could be further from the truth! In fact, the company had overpaid trucking companies at least $50,000 because the audit firm got a fifty per cent commission for their work. In addition, other excess costs were incurred that couldn't be recovered because of blatant routing blunders.
The goal of this article is to summarize key opportunity areas you should be considering to manage inbound freight from your vendors.
Managing inbound freight positively contributes to bottom line profit improvement, reduces damages and claims, smooths receiving and boosts your ability to successfully serve the customer. It also can give your company a competitive advantage.
Concentrate your freight on a limited number of solid carriers. Whether your annual sales are $500,000 or $50 million, negotiating to concentrate your volume will result in better service and lower costs. One specialized furniture carrier may handle virtually all the purchases from North Carolina, South Carolina, Virginia and eastern Tennessee to your door. A national LTL carrier, such as Carolina or ABF, might handle your accessories and miscellaneous shipments from distant points. And you may need a regional carrier for shipments within a few hundred miles.
You will be surprised how few carriers you really need to handle your volume.
Negotiate from a factual business base. To get the best deal, the carrier representative calling on you will have to provide his pricing department a projection of the business they will handle. Plan to provide prospective carriers with a summary of your vendor locations, shipping weights and product descriptions.
In reviewing proposals, you (or your consultant) should know the options available to you. They might include FAK rates where everything ships at the same freight class or a CLASS RATE CAP where items like KD furniture ships at actual class and sofas ship at a maximum rate of class 125 instead of class 175. If your volume is high, you may get half truckload or full truckload rates.
Many companies are adopting volume LTL programs instead of traditional consolidations to reduce total order cycle time. All things considered, it may be better to get four deliveries over a two week period rather than waiting to accumulate enough for a full truckload.
Use contracts in-stead of tariffs whenever possible. The Negotiated Rates Act of 1993 sets requirements for contracts. Several key points to remember about contracts: They must be in writing, provide dedicated equipment or meet specific needs of the shipper, and they must be kept on file for a specified time. A contract is generally better for you because everything is spelled out in one document. A common carrier tariff however may be changed without your knowledge, or it may not be filed at all.
Establish a routing system to route and monitor conformance. The ideal situation is to show the routing selection on every purchase order issued to vendors. Some vendors will accept routing letters while others will not. It may take a series of letters, phone calls, warnings or chargebacks for some vendors to follow your instructions. The format for a typical routing guide is shown on page 54.
There are also a few furniture vendors that will only deliver by certain carriers. If the vendor only delivers on designated carriers or company trucks, their rates should be similar or lower than anything you can get.
Pay special attention to prepaid freight charges on vendor invoices. some vendors charge customers rates much higher than they actually pay the carrier. While this isn't illegal, it is not a good business practice. Earning a nominal amount for their processing the bill and assuming the credit risk is okay, but some charge double what they pay.
TRACK LOSS AND DAMAGE: If excessive damage is occurring, the causes must be checked out. It may be the vendor's packaging or the carrier's handling. Claims hurt everyone involved but especially hurt customer service by delays. It may be necessary to change carriers or vendors if damage cannot be eliminated.
Review all freight charges prior to payment. Is the cost reasonable for the weight and value of merchandise received? In addition to spotting opportunities for routing improvement, review will catch many rate errors. The average immediate savings by reviewing the description and charges is 4%. Challenge all bills that seem out of line before payment. In many cases, a lower cost was available and not billed.
In summary, inbound freight can be a hassle or it can genuinely add to the success of your business. Managing this area of the business may be one of many hats you wear as a small retailer, or it may be a full time job. Because of its potential to add to bottom line profits, you might, alternatively , choose to outsource this responsibility to a transportation specialist.
Daniel Bolger of The Bolger Group assists companies achieve improved transportation, warehousing and logistics. Questions about this article or others by Dan Bolger can be directed to firstname.lastname@example.org.