Trimming Your Transportation Costs

Along with death and taxes, multichannel merchants can count on rising transportation costs. The chief culprit for increasing costs is fuel, which affects your transportation costs on incoming shipments from your vendors and outgoing packages to your customers.

According to Steve Holmes, spokesperson for Atlanta-based United Parcel Service, fuel costs for the parcel carrier were 48% higher in the first quarter of 2006 than they'd been in the previous first quarter. “Despite working diligently to keep these costs at bay, such as employing sophisticated routing technology, using alternative fuel vehicles, and even simple things such as avoiding left turns [“see Fuel conservation no idle matter at UPS,” right], the impact of fuel has been staggering,” he says.

But while its fuel prices that have dominated the headlines, they aren't the only reason transportation costs are high. And while you don't have much control over fuel costs, you can take control of some of the other expenses.

GETTING THE GOODS IN

A good rule of thumb is that incoming freight arriving at your distribution center should cost no more than 2%-4% of your gross sales. Yet inbound freight costs are a bit of a mystery to many multichannel merchants. You can ask operations managers what they spend on dunnage and they would know, “but ask them about inbound freight, and many couldn't tell you,” says Bill Wilson, president of Boyertown, PA-based freight management consultancy DM Transportation Management Services. The reasoning is that most marketers don't account for incoming freight as a separate line item from inventory. Rather, he says, freight expense is lumped into the value of goods. “When we ask the freight-cost question of companies the typical response is ‘it's an allocation.’” Budgeting for inbound transportation costs is an inexact science, Wilson adds. “Multichannel merchants don't understand what they pay out when it comes to incoming freight.”

A multichannel marketer typically negotiates inbound freight in one of three ways:

• collect terms, in which the buyer of goods pays for the freight under the parcel carrier's terms.

• prepay and add, in which the product vendor prepays the freight carrier and adds the inbound shipping cost to the marketer's invoice. The markup on inbound freight under a prepay-and-add scenario can be as high as 40%, Wilson says, while the average is about 25%. So if the product costs $10,000 there could be a $2,500 line item at the bottom of the bill for shipping and handling costs. Not surprisingly, most vendors favor the prepay-and-add method, because they can sometimes profit from it. Smaller multichannel merchants (say, those with annual sales of less than $40 million) frequently end up paying on prepay-and-add terms because they don't have the manpower necessary to handle it otherwise.

• delivered pricing, also known as free freight. Free freight is anything but free, however. Often vendors that ostensibly aren't charging you inbound freight expenses are incorporating the costs into the merchandise bill or burying them somewhere else.

Portland, ME-based bedding and home decor cataloger Cuddledown takes inbound freight costs into consideration when determining whether to carry a product, says president Chris Bradley. Because Cuddledown imports linens from such far-away locales such as Italy and Portugal, inbound freight can be costly. “We've had to walk away from products because the costs were too high,” Bradley says, adding that all merchandise selections must meet a predetermined gross margin target.

Telling vendors that you will not carry their goods unless it is willing to compromise on inbound freight is one way to try to control these costs. Among others:

• Try to obtain volume discounts from the carriers. That's what Winchester, VA-based Rugs Direct does. Though its costs have increased an undisclosed amount, the marketer has been able to negotiate better pricing with UPS this year by promising the carrier a certain level of volume, says vice president of operations Bill Martin.

• Supply your merchandise vendors with freight routing guides that tell your merchandise vendors which carriers they should use to transport goods to your warehouse. This is especially important if you have promised a carrier a certain amount of volume in exchange for a discount. The guides should include rewards and consequences for adherence to or neglecting of the routing instructions.

• Know the true freight cost, then compare this with how much the vendor is charging. For example, if the cost of goods is $10,000 with freight included, and you know that freight should cost you no more than 5% of this cost, or $500, use this knowledge as a point of leverage when negotiating with the vendor.

• Negotiate your own collect terms carrier contracts to manage your inbound freight using both a strong regional and one national carrier so that you've got 100% coverage throughout the U.S. “Every $1 saved on inbound freight goes directly to your company's bottom line and makes for a happy CFO,” says DM Transportation's Wilson.