Trimming Your Transportation Costs

Jul 01, 2006 9:30 PM  By

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.

OUTBOUND SHIPMENTS


You’ve no doubt already felt the cost increases when it comes to shipping outbound packages to your consumers. But costs are up not only because of fuel, but also because the carriers themselves are competing in a sellers’ market. As such, they are using ancillary charges, such as fuel surcharges, as a way to generate increased revenue. As recently as five years ago, says Michael Erickson, president of Portland, OR-based consultancy AFMS Transportation Management Services, carriers had about 30 or so types of surcharges, also known as accessorial charges. Today he estimates that there are more than 100 varieties of surcharges.

But Rob Shirley, president of Austin, TX-based consultancy ExpresShip, says he has identified approximately 200 surcharges. “Anything can be added to your bill to increase the carrier’s margins,” he says, adding that carrier volumes are up not only because of the economy and just-in-time inventory practices but also because more people are shopping online. “Carriers are stretched thin when it comes to transporting shipments, and forecasts indicate that it’s only going to get worse,” Shirley says.

Suppose you are shipping a package out to a place of business via UPS. If UPS arrives at the destination and finds that the business is no longer located in that building, the carrier will log the parcel into its system as undeliverable and then charge you for an address correction. Address correction surcharges for air and ground cost $10 at DHL, $10 at UPS, $10 with FedEx Expedited/Ground, and $5 with FedEx Home Delivery. “Years ago, they didn’t have the technology and the systems to charge for correcting an address,” Erickson says. “The carriers today have gotten a lot smarter in the way they do business.”

With that in mind, here are some tips to more accurately set your budget for the coming months:

  • Coordinate with other departments. See if they can provide their sales volume forecast by market segment. “If the volume is going to increase in number, weight, distance, or recipient type, this needs to be in the logistics budget,” Shirley says.

  • Evaluate transportation costs on a monthly and a quarterly basis. Seasonality factors are a cost spike for every company, so don’t have equal quarterly averages in your budget plan. Watch your carrier-invoiced costs daily to identify increases that tend to destroy the best-planned budget. If you see increases that you can’t control, attempt to reduce costs in other areas.

  • An investment in a multicarrier shipping system can yield significant savings. It allows you to choose carriers on a cost/performance basis for each package or shipment. There are several systems to choose, but not all of them are carrier independent; in other words, some may favor a specific carrier or have internal business rules that aren’t as flexible as you’d like.

  • You can’t manage what you can’t measure. Considering hiring an audit firm to gather data from all the carriers you use. They’ll ensure that you pay only your negotiated rates, and only for packages that were delivered on time. If you have multiple carriers, an audit firm can consolidate all the data into a single electronic file to review lane and weight segments, seasonality, on-time delivery, and dozens of other measurements that you can use when negotiating future carrier contracts and to ensure that you aren’t overpaying under the terms of your current one.

  • Use history as your guide. Have your carriers provide you with historical reports of the services you’ve used. Ideally you should be able to gather at least two years’ worth of data. Among the types of data to examine are zone reports, which show how much volume you ship to each zone, and geotype reports, which break out what portion of your deliveries go to superrural, rural, suburban, urban, and superurban locales. The carriers typically charge extra for deliveries to superrural and rural addresses, so if they account for a significant portion of your business, you may want to have the waiving or discounting of those fees as a negotiating point.

  • Evaluate regional carriers. There are hundreds of them, many of whom can be more efficient and more economical within a particular geographic region than the larger players, Shirley says. If you use UPS for most of your residential deliveries in rural areas, Shirley says, your costs have increased 20.3% over the past two years. So if you have a distribution center in California, you might want to consider Golden State Overnight or another California carrier for the delivery of rural — and perhaps all — packages in that state.

  • Consider drop-shipping on a Friday to metro markets. According to Shirley, the economics work best when you factor in weekends, he says, because providers usually don’t count weekends in their delivery cycle. Say you’re shipping a 5-lb. package from Kansas City to the New York metropolitan area. You might want to use a trucking company to haul the package up to New York and then hand it off to a regional carrier. The regional carrier will bill that package as a “local” package in Zone 2. That’s 80% cheaper than shipping the package via UPS from Kansas City all with comparable delivery times, Shirley says.

Fuel conservation no idle matter at UPS


You wouldn’t think something as seemingly inconsequential as avoiding a left-hand turn would conserve fuel, but United Parcel Service swears by it. According to spokesperson Steve Holmes, avoiding left turns at intersections reduces idling. You rarely have to wait to make a right turn, and you also have the option of “right on red” in most jurisdictions. “It seems small, but when you multiply it across 91,0000 vehicles making nearly 15 million deliveries every day during the course of a year, it adds up.”

There are two other benefits: safety and congestion. It’s clearly safer to take a right turn than a left. And it helps reduce traffic congestion overall, Holmes adds.

UPS uses what it calls “package flow technology” — an internally designed system that works in conjunction with its hand-held driver computers. The technology helps the parcel carrier minimize the number of miles traveled on daily routes, Holmes says; it also preroutes the packages as soon as the data enter its system. “Because 98% of our packages are processed electronically by shippers, we know what’s entering our system each day, what’s still in our system each day, when each package is going to arrive at a center, when the package is scheduled for delivery — including time of day — and where it will be delivered.”
MDF

New postal rate case could pack a punch for parcels


As if fuel and hidden costs on your freight bills weren’t enough to contend with, the impending U.S. Postal Service rate case will likely also affect outbound shipping costs. The rate case, filed in May, calls for double-digit price increases for a number of postal services (see “Making sense of the postal rate case” in the June issue).

“Marketers are already doing their budgets for 2007, and this rate case is something of an unknown because not all the information is available,” says John Callan, vice president, product management for Weston, FL-based parcel carrier DHL GlobalMail. “This is the most comprehensive filing that anyone can remember.”

Although the details won’t be finalized until sometime in the fall, the rate hike proposal definitely puts a greater emphasis on work-sharing and on automation. As a result, mailers whose pieces do not fit neatly within the parameters of USPS’s machinery will see their costs rise by a greater percentage than those whose pieces can processed automatically.

As a result, many marketers “may have to evaluate their packaging,” according to Callan.
MDF