The potential for retail brands to reduce net landed cost of goods by optimizing shipping costs relates directly to the nature of the products they ship to retailers.
Net landed cost of goods, the total cost associated with getting goods into customers’ hands, consists of cost of manufacturing and cost of distribution. For decades, retail brands have worked to reduce cost of manufacturing as a way to cut net landed cost of goods to compete and succeed in increasingly competitive markets. Nearly every conceivable strategy has been explored to reduce cost of manufacturing, including reducing labor costs, increasing automation, negotiating reduced cost of materials and so on.
As this strategy reaches its limits, companies looking to remain competitive must find new ways to reduce costs, and they increasingly turn to the often more rewarding yet complex opportunity to reduce the other side of net landed cost of goods: cost of distribution.
While any shipper can benefit from cost of distribution reductions, cost savings will vary depending on the answer to one question: does my cost of distribution represent a significant portion of my net landed cost of goods? If the answer is “yes” then opportunity abounds to reduce overall costs and increase margins.
Goods with significant distribution costs include jeans and other apparel products, industrial steel coils weighing as much as 20 tons and many other products. Any time cost of distribution represents a significant portion of net landed cost of goods, the potential exists to significantly impact net landed cost of goods. In fact, most companies shipping business-to-consumer or business-to-business products, regardless of their cost of manufacturing, can significantly improve margins by cutting cost of distribution.
Distribution costs rising
Companies across every sector face increasing cost of distribution due to transportation industry labor shortages, which create higher demand and fewer available shipping lanes, as well as regulatory changes.
The net effect? A decreasing supply of drivers combined with an increasing demand for their services creates a highly competitive environment and skyrocketing shipping costs. Retailers that do nothing to reduce cost of distribution will, by default, see their cost of distribution rise rapidly in the years ahead.
Many retailers favoring long-term solutions
Instinctively, companies trying to reduce cost of distribution look to renegotiate carrier rates in their favor. While this may provide short-term dividends, this strategy has limited long-term viability. Plus, as carriers foot the bill for rising costs, their rates stand to increase, reducing their willingness to negotiate supplier-friendly discounts.
So how can manufacturers and brands find cost of distribution savings outside of carrier discounts? By finding more efficient ways to distribute, savings can be found in nearly every facet of distribution, from inventory management to transport planning.
Shippers can tap a variety of strategies to use carriers and vendors more efficiently. Route optimization and planning technologies can help mitigate the impact of driver shortages and increased road congestion by examining shipping orders for variables such as order size, type and destination and combining them with local variables such as street restrictions (one way, no trucks over a certain size, etc.) and fees (tolls, border taxes, etc.) to determine optimal carriers, fleet types and routes.
Similarly, execution monitoring and cost management technologies can be utilized for full visibility into carrier performance, rapid adjustment for unplanned delays, and quick auditing and invoice settlement, which can help preserve quality relationships and collaborative partnerships with carriers and vendors. Even with the best route optimization and planning technologies, unforeseen variables such as accidents or severe storms can cause delays. Real-time insight into these delays enables quick route adjustments and rapid communication to all vested parties (staff, carriers, customers, etc.).
More efficiencies can be found in areas including inventory and warehouse management and order consolidation. When combined with regular route optimization and planning, execution monitoring, and cost management efficiencies, companies who stay diligent can reduce their net landed cost of goods as much as 30 percent to stay competitive without squeezing any harder on manufacturing costs.