Inbound freight costs are generally hidden in your cost of goods but average between 2% and 4% of revenue. To reduce the bite to the bottom line, consider these suggestions:
- Review your “prepay and add” vendor invoices. These occur when your vendor selects the carrier, prepays the freight, and adds the cost to your product invoice. Look for verification of actual costs (carrier’s freight bill) and any additional handling fees. Based on audits performed, the industry average markup for handling is approximately 40%. Only allow prepay and add-freight terms when you can verify that your vendor ships at a lower rate than your negotiated carrier rates.
- Establish a third-party consignee billing account for vendors that ship small-package shipments (under 200-250 lbs.) to you via UPS or FedEx. By doing so you will be charged only the actual shipping costs rather than the additional “handling” charge by the vendor. You will also build a larger volume base upon which you can negotiate your overall UPS/FedEx rates.
- Review your “free freight” terms with frequently used vendors that offer them. Determine the average unit freight cost using your own carrier rates, shown as a percentage of product cost. Using this target percent, renegotiate “freight out” pricing with your vendors. If you can lower your unit cost, then freight is not “free.”
- Audit your actual paid-freight bills. There are a half-dozen reasons to do so: to verify actual freight-bill discounts from those stated in your tariff contract; to identify additional charges such as single-shipment charges or notification charges; to determine if you can negotiate FAK (freight all kinds) rates; to ensure that proper product classifications are being used rather than NOI (“not otherwise indicated”); to ensure that on truckload shipments you are being charged for actual weight rather than dimensional weight; and to ensure that you’re not fooled by discount percentages only. By verifying actual freight bills you will be able to determine if the carriers, to obtain your business, have given you “paper rates.” If you can negotiate FAK rates to group product classifications for billing under a lower rate class before your discount, this will substantially reduce your actual freight charges.
Some truckload carriers or services will give you great rates to obtain your business, then claim equipment was not available when your freight needed to be moved, so higher rates had to be applied. They may quote high discount percentages or low rates per pound because they recalculate dimensional vs. actual weight. When comparing carriers or services, look at actual dollar charges and savings, not discount percentages or rates. Be sure to understand on which “base rate year” your discount percents are applied. A lower discount percent on a four-year-old rate base can be significantly cheaper than a perceived higher discount percent on current base rates, as during the past seven years base rates have increased an average of 6% a year.
George Mollo is founder of GJM Associates, a Nanuet, NY-based consultancy.