Tracking inbound freight costs “is not a very glamorous part of the industry,” admits Curt Barry of Richmond, VA-based operations consultancy F. Curtis Barry & Co. But it is an important part. Most catalogers spend 2%-4% of their gross sales on shipping goods from suppliers to their own warehouses.
“For those companies who are objective, there’s a real opportunity for management to save on costs,” Barry notes, since any savings from lowered freight costs drop right to the bottom line. The following tips will help you reduce your inbound freight costs.
- Know how much you spend.
If your inbound shipping costs are not included on your P&L statement under inventory expenses, they should be. Require each product vendor to clearly state the freight costs on the invoice. Then you can determine the total annual cost of inbound freight and calculate it as a percentage of gross sales. This provides you with a benchmark for measuring improvements.
- Avoid “prepay and add” terms.
Sometimes the product vendor prepays the freight carrier and adds the inbound shipping cost to the cataloger’s invoice. But just as catalogers typically charge customers more for shipping and handling than the shipping company bills it for, to gain additional margin, some product vendors charge mark up inbound freight costs by as much as 40%.
- Beware of “free” freight.
You may be patting yourself on the back for having negotiated that the vendor pick up the freight charges. But don’t get too smug: “Free freight” is often a misnomer, says Bill Wilson, president of Boyertown, PA-based freight management consultancy DM Transportation Management Services. Often product vendors that ostensibly aren’t charging you inbound freight expenses are incorporating the costs into the merchandise price or burying them elsewhere in the bill.
- Choose your own freight carrier.
Many catalogers allow the vendor to select the freight carrier, Wilson says. And while some suppliers may have more leverage with a shipper than an individual cataloger might, you can’t be sure you’re getting the best rates without getting involved. Unless you have determined that your supplier can move your goods at a lower rate than you can, it’s probably worth getting estimates from freight carriers yourself. When evaluating carriers, look at pickup coverage area, location of service facilities, financial stability, systems, and performance guarantees, among other criteria.
While you’re at it, look into adopting a core carrier program that provides exclusivity to high-service carriers in return for reduced rates. “Nobody pays the base price,” says Ron Long, operations manager for Pottstown, PA-based Eastwood, an automotive tools and supplies cataloger. “Even if you’re a smaller cataloger, you should get at least a 20% discount.” You may not be able to win an across-the-board discount, but flat C.O.D. charges and elimination of extra fees should be among your negotiating points.
You might also consider participating in a freight consortium. By working with several other marketers with similar product or shipping requirements, you may be able to aggregate your freight volume to qualify for volume discounts.
- Prepare a vendor routing guide.
Even if you find it’s not cost-effective to contract with a freight carrier directly, you can still provide your merchandise vendors with detailed instructions regarding which carriers they should use to transport goods to your warehouse. These instructions should include rewards and consequences for adherence to or neglecting of the routing instructions.
For example, Eastwood instructs vendors sending merchandise shipments weighing less than 700 pounds to use United Parcel Service, Long says. If the vendors don’t comply, Eastwood can charge them for the additional costs incurred by using a more costly carrier — or worse, they could lose Eastwood’s business altogether.
- Consider working with a freight consultant.
Since it began working with DM Transportation Management Services five years ago, gifts and home decor products cataloger TouchStone has saved 40%-50% on its inbound shipping costs, says Barney Pinnix, the Atlanta-based marketer’s chief financial officer. DM Transportation helps Touchtone negotiate freight costs with its vendors, taking as payment a percentage of what it saves each cataloger.
Other logistics providers such as Eden Prairie, MN-based C.H. Robinson and Redwood City, CA-based Menlo Logistics can provide similar services.
In addition to the distance shipped and the weight of the load, many carriers use product classification codes to determine costs. But classifications, which are established by your carrier based on the information your supplier provides on the bill of lading, are often incorrect. And an incorrect classification can increase your freight costs by as much as 11%.
Carriers use more than 10,000 merchandise classifications — the apparel category alone, for instance, has six classifications. In most cases you want the classification to be as specific as possible; carriers typically charge more to ship goods with more general product descriptions, says Bill Wilson, president of Boyertown, PA-based freight management consultancy DM Transportation Management Services.
For example, one Wilson client, a toy cataloger, received a shipment with a product description of “toys.” This non-specific description was assigned a base shipping cost of $650. The correct description was “dart games,” at a base cost of $424.
If there are many variances in the types of products you receive, you may want to negotiate single-class, or “freight all kinds” (FAK), contracts with carriers. FAK establishes one single price and eliminates any room for misinterpreted freight classifications that could result in higher bills.