How do you manage inbound freight? Inbound freight costs are often buried in the cost of merchandise, even though direct-to-customer retailers spend an average of 2% to 4% of gross sales on inbound freight.
It’s time to take a more active role. An effective inbound program can reduce expenses and improve control over receipts.
As the first step toward cost reduction, develop a profile of your inbound shipments, including carrier, origin, weight, product classification, base rates, discounts, and other charges. Ask your current carriers to provide reports if needed. Calculate totals by ship method: less-than-truckload (LTL), truckload (TL), parcel, and air freight.
Do your homework and get ready for carrier negotiations. Restrict your freight to a limited number of financially sound carriers. Talk to current carriers that are doing a good job and a select few additional competitors. Share shipment profile data and request a proposal. Ask all carriers to describe their service standards, terminal locations, information systems capabilities, financial stability, and pricing policies.
Part and parcel
Let’s start with inbound parcel shipments. Make sure your parcel carrier — UPS or FedEx, for example — discounts your inbound shipments and includes your inbound revenue for company-wide volume incentives. This is often overlooked and generally not included unless you ask. Consider establishing a special inbound collect account to capture vendor shipments to maximize your volume discounts. If you receive multi-piece shipments from the same vendor, you may be able to benefit from hundredweight pricing. Under this scheme, costs are based on the total shipment weight, not the weight of individual cartons.
LTL negotiations involve much more than maximizing discounts. The key to successful freight reductions is to understand the true costs. What base rates apply? How will your product be classified? What accessorial charges apply? What is the minimum charge? What are the total charges? Product classification has a significant impact on true LTL costs for direct merchants. Take a good look at freight all kinds (FAK) rates where everything ships at the same freight classification. A big discount may sound good, but a favorable FAK classification may be better.
Another consideration is to select carriers that can directly meet your service requirements. Interline shipments almost always cost more. Select one national LTL carrier and at least one regional carrier. Financial stability is a particular concern with LTL carriers. Recently, Consolidated Freightways, the nation’s third-largest LTL carrier, announced plans to file for Chapter 11 bankruptcy.
In addition, consider setting up inbound consolidation in major supply markets. Ask your vendors in a particular geographic area to deliver your freight to a local consolidator. This may be a public warehouse, a cartage company, or a carrier’s terminal. Have your consolidator build truckloads and ship them directly to you. This is much less expensive than having the vendors individually ship LTL. This works best in areas of high volume where consolidated loads can be released two or three times a week.
Truckload costs can vary based on geographic location. Understanding carrier backhaul lanes may help to negotiate favorable TL rates. For example, Florida has more inbound freight than outbound freight. Thus, you should expect low outbound rates but possibly higher inbound rates. Simply stated, carriers make money by keeping their trailers loaded and moving.
A good way to destroy your in-freight budget is to move a large vendor shipment via air express. Don’t assume that the shipment must go air to meet your service objective. A large percentage of air freight actually moves by truck. Depending on location, look at ground options first. For instance, a vendor in St. Louis can ship to a catalog DC in Memphis via UPS ground (about 300 miles) overnight with delivery guaranteed by end of business the next day. Sometimes an exclusive truckload only partially filled is less expensive than air express. If it absolutely, positively must go air, call your air freight forwarder and request a spot rate quote. Make sure you specify the required delivery time and calculate the dimensional weight.
To manage in-freight expenses more effectively, direct merchants should improve their control over inbound shipments. This involves reviewing FOB terms, routing guides, and vendor compliance. Try to avoid FOB terms that call for “prepay and add.” Pay special attention to prepaid freight charges on vendor invoices. Some vendors charge customers a premium for freight, although this is not illegal. If your company is responsible for the freight cost (FOB origin), the best approach is to require vendors to ship collect under your account with your carriers.
To improve control, merchants should communicate their expectations to vendors in routing guides. Items that should be addressed with vendors include carton markings, packing slips, bill-of-lading instructions, preferred carriers, and penalties for noncompliance. Criteria for carrier selection are based on weight, origin location, and service required. Be sure to distribute routing guides to the right people, including your sales representative and the vendor’s shipping department.
Many companies stop here with their in-freight program. In-freight programs are destined to fail without good vendor routing guides and vendor compliance. The best direct merchants have a formal compliance program that requires every vendor shipment to be checked, and they issue charge-backs for wrong carriers or other violations.
If this all sounds too complicated or you don’t have the internal resources at your company, don’t give up. The stakes are too high. Consider outsourcing with a professional company such as DM Transportation Management Services (www.dmtrans.com). DM negotiates volume discounts with freight carriers, enabling participating companies to benefit from their combined volume.
An effective inbound program directly affects your bottom line. Whether you manage this function in your company or outsource it to professionals, one thing is clear: It is essential to do it.
Jeff Kline, founder and president of Kline Management Consulting (www.jklineco.com), has over 20 years of experience with companies such as Nordstrom and toysrus.com. He provides operations assistance for catalog and e-commerce companies. Kline can be reached by phone at (901) 850-0645 and by e-mail at firstname.lastname@example.org.