Any port may suffice in a storm, but a successful captain will avoid bad weather whenever possible and carry the necessary tools to keep everything sailing smoothly. Such an approach to shipping can bring significant benefits to the larger enterprise. Each year, the average company spends 8% to 20% of its annual revenue on logistics. Many companies underestimate logistics costs when they need to trim expenses, and miss out on some powerful and painless cost-cutting opportunities.
If asked to reduce costs in areas such as operations, companies would never dream of looking at only half of their facilities. Yet many firms indirectly allow their vendors to manage the inbound portion of their transportation. If you pay what’s called a “delivered price” for most of your goods, your company may fall into this group.
Although “delivered price” has its benefits — such as making things easier for accounting — it may not be the best use of your organization’s funds. Your vendors probably charge you some sort of mark-up for transportation. In addition, there’s no guarantee that the vendor employees who booked the transportation are experienced at negotiating the best possible deal or savvy about comparing rates, routes, modes, and carriers.
Not so fast
Of course, laissez-faire transportation management isn’t the only culprit behind high inbound freight bills. Even companies that do an exceptional job of managing inbound shipments occasionally experience sticker shock because they expedite too many inbound shipments.
This can happen easily enough, especially in companies with sales cycles that have unexpected surges in demand. But even the most volatile of demand chains can reduce last-minute deliveries if logistics experts are a bigger part of the equation. Logistics and marketing professionals who collaborate more closely may discover key patterns that enable them to forecast peaks and valleys in the sales cycle and thereby avoid the higher expense of last-minute deliveries. Another option is to have your logistics professionals analyze which will cost more: increasing your on-hand inventory or continuing to rush-ship products as they’re needed.
The number of facilities used to receive, store, and distribute products has a direct effect on how much inventory is necessary. The stock level in turn affects inventory carrying cost, typically a big line item in any company’s budget. You must consider these factors to find out whether, in terms of warehouses, “more is better” or “less is more.” You also have to treat logistics site selection as a process rather than an event, and periodically reevaluate the configuration of your warehouse or fulfillment center to determine whether it remains cost-effective.
Even if you’re locked into mortgages or long-term leases, there are still many ways to improve the cost efficiency of warehouses or DCs. For example, although traditional logistics wisdom encourages cube utilization — using the height of the warehouse as well as its floor space — don’t take that advice so literally that your order pickers will need nosebleed insurance. Stacking product too high can slow order-filling, because it takes time for workers to get up and down, and they have to be much more careful on upper levels.
Another way to improve warehousing efficiency is to monitor SKU activity stringently. Some SKUs move as quickly as you can get them, while others end up being nothing but dust magnets. Culling out these inactive SKUs will ultimately reduce storage and inventory carrying costs.
Needless to say, there are also significant logistics savings to be had when sending product to customers. Although information technology tools such as freight management systems can be expensive — $1 million or more — one logistics analyst estimates that as many as 70% of Fortune 100 companies now use such systems.
If you can’t afford a freight management system yourself, you might consider using a third-party logistics provider (3PL), because then you can receive the benefits of high-end software without a huge capital commitment. Another way to save money is to build bigger outbound transportation loads — because the bigger the shipment is, the cheaper it will be to ship, pound for pound.
Exactly how much cheaper depends on the products you carry, the carriers used, and the volume handled. However, if you can change from the small package to the LTL mode, you probably can save 5%-15%. If you can combine LTL shipments into truckloads, that’s another 10%-30%. Taking truckloads and moving them into other modes, such as rail, is another saving.
Package handling is the segment of logistics that has changed the most in recent years, in part because the lines of activity have blurred among various carriers who once specialized in different delivery windows. UPS and the United States Postal Service now offer overnight delivery, for example. Airborne Express, which once concentrated on express documents, now is aggressively seeking packages, and FedEx has acquired a ground delivery service company. This has made head-to-head price comparisons much more difficult but far more imperative.
“Sending a 15-lb. package a short distance — Zone 3 or Zone 4 — can cost between $6 and $30, depending on which carrier and which kind of service level you choose,” says Satish Jindel, president of SJ Consulting Inc. and Shipmatrix Inc. in Pittsburgh, PA. That’s a cost comparison between ground and air, not service times. “You can ship next-day ground from Washington, DC, to New York for $5.40,” says Jindel. “Or you can ship next-day air deferred for $29.15. But if you choose to do the latter, you are throwing away your dollars.”
Jindel also offers a caveat, however. “Many carriers offer something called bundled pricing, which provides better rates if you use them for both ground and air,” he says. “As a result, switching business between two carriers is more expensive than it used to be.”
Also expensive are the kinds of activities that give carriers license to tack on extra charges. Small mistakes such as using wrong addresses and sending items in oversize boxes can add up alarmingly, increasing your package shipping bills by 10%-15%.
Let’s not forget the issue of customer service. Research shows that 20% of calls to shippers’ customer service departments are from people curious about their packages’ delivery status. “The industry average for handling such calls is $2.18, although some companies have costs as high as $6 to $7,” says Jindel.
While you’ll never be able to eliminate all of those calls, there are some easy ways you can substantially reduce their number and keep money in your company’s coffers. One way is to send out an e-mail advising your customer of the estimated time of arrival (ETA) of his or her package. As Jindel points out, “The cost of an ETA e-mail is going to be pennies.”
Another way to cut the cost of inbound phone calls is to offer a Web-based tracking system for your customers. APL Logistics has found that customers using this system save themselves and APL time and money by reducing the need to pick up the phone.
A third method is to track packages yourself after they enter the operation of your carrier of choice so that you can handle exceptions before your customer is even aware of them. Considering that package carriers deliver approximately 5% of residential packages later than promised, and that 0.05% of packages end up missing in action, that could not only head off a lot of calls, it could potentially save the customer relationship.
Integration is one of the most effective money-saving logistics tools. Inbound logistics keeps product moving into a distribution center, and outbound logistics keeps product moving out of it. But in the end, they both exist to support the overall success of your company.
Do what you can to create and capitalize on synergies between the two. For example, if you integrate your inbound and outbound transportation, you may be able to help your carriers of choice minimize empty miles — an effort they may reward with lower rates.
Or you could consider having inbound and outbound logistics share facilities, even if you have to build walls or section off different areas to do it. (The same can be done with high-volume distribution centers.)
The more you minimize fragmentation and improve team playing, the more cost-effective your shipping operation will be, and the better chance you will have of delivering a high-quality logistics product that doesn’t strain your budget.
Ron Shamlaty is managing director of sales effectiveness for APL Logistics (www.apllogistics.com), a provider of global supply chain management services with U.S. headquarters in Oakland, CA.