Rising Transportation Costs –and What To Do About Them

Nov 14, 2007 2:59 AM  By

For most multichannel merchants, transportation of goods is the highest operational expense. Inbound freight costs for domestically sourced product typically range from 2%-4% of gross sales, while for imported product, inbound freight costs 6% to 12% of gross sales. Outbound transportation costs typically average 6% to 8% of net sales.

And these costs are going up. FedEx recently announced a 6.9% increase in its net average shipping rate for FedEx Express, offset by a 2% reduction in fuel surcharge and a net increase of 4.9% on paper.

Parcel carriers always rate rates at the end of the year, more increases will be announced in the next few weeks. But labor issues could be pushing costs higher this year.

For instance, the courts have recently ruled FedEx drivers can file class action suits to reclassify them as company employees rather than independent contractors and thus eligible for benefits not currently paid them. United Parcel Service just reached an early labor agreement with the Teamsters Union equating to increased costs of $9.00 per hour in wages and benefits over five years. The value exceeds the 2002 UPS and Teamsters contract of $9.0 billion for six years.

The new UPS agreement calls for average annual wage and benefits increases of $1.80 per hour; the 2002 agreement averaged $1.46 per hour wage and benefit increases. Starting pay for UPS workers increases to $16.10 and workers with 24 months seniority increase to $20.75. Right now, the highest-paid UPS driver earns about $28.00 per hour.

What’s more, under the new contract UPS agreed to pay the Teamsters $6 billion to allow UPS to withdrawal from the Teamsters Central States Pension fund. UPS will pay the costs of establishing a new pension fund for the involved participants.

Bottom line: The multichannel industry depends on parcel carriers and these providers’ prices continually increase at rates higher than most other costs. What’s your plan to deal with and reduce these expenses?

Here are a few tips from the MCM Live Webinar “Reducing Transportation Costs” I presented last week. (The recorded presentation of the Webinar can be found at multichannelmerchant.com.)

  • Look at transportation in the context of the total supply chain efficiency. A few examples: implement vendor compliance to aid in product flow-through the distribution center, push compliance up the supply chain, implement vendor added-value services to reduce costs and speed product through the DC, build transportation into facility design, and implement supply chain IT systems to provide more timely and accurate information.
  • Institute vendor compliance policies, include routing guides for inbound carriers. Do not permit vendor-controlled freight, which can cost you 20% more.
  • For high returns businesses, such as apparel, use return services to process them more efficiently and provide a customer service.
  • Join an inbound freight consortium with contracted carriers and negotiated best rates. Get audited invoices and consolidated billing to your business while saving money.
  • Do your homework. You have to understand your volume and shipping characteristics, contract pricing, the 70-plus accessorial charges, available technology, rebate incentives, ground minimums, service level guarantees; available value-added services—to name just a few things that affect rates.
  • Consider a freight consultant, which can reduce costs 15% to 25%. Keep in mind the carriers have teams of pricing professionals negotiating your contract. Do you have the internal expertise to deal with these complexities and changes that determine your shipping costs? Specialized freight consulting firms will do a study, recommend areas for negotiation and contract structure, and make a commitment to savings up front.

Curt Barry is president of F. Curtis Barry & Co., a consultancy specializing in multichannel operations and fulfillment including freight cost reduction. Contact 804-740-8743, www.fcbco.com cbarry@fcbco.com.