Welcome to our continuing series highlighting the speakers of the National Conference on Operations & Fulfillment (NCOF) which Multichannel Merchant presents with the Direct Marketing Association. This year’s NCOF conference was held in Schaumburg, IL, in May. This month, George Mollo, president of Nanuet, NY-based consultancy GJM Associates talks about what you must know about your inbound freight costs.
Inbound freight costs are generally hidden in your cost of goods but average 2% to 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. The industry average markup for handling is about 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 250 lbs.) to you via United Parcel Service 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 several reasons to do so: to verify actual freight-bill discounts from those stated in your tariff contract; to identify additional fees 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”). By verifying actual freight bills you can determine if the carriers 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 reduce your actual freight charges.