Commentary & Analysis
Freight: Additional Profit Opportunities
By John G. Braceland
Published: February 23, 2010
Most companies do a reasonably good job controlling costs in the outbound freight area. This responsibility usually rests in the shipping department, where shippers take pride in getting the lowest price. However, there are ways to lower your freight costs which may be overlooked.
Consolidate Your Carriers – If you run a report from your MIS system on your freight expenditures you might be surprised how many carriers are listed, sometimes 50 to 100. By consolidating the number of carriers you may increase your profit margin. One approach is to look at your freight by zones and types of shipments and ask a number of carriers to bid on this business. Bring in a few of your carriers and talk to them about what you want to do. Now is a good time to do this as freight carriers are looking for additional business. When you greatly increase the amount of business per carrier you can generally lower your overall cost.
One of the challenges in doing this is comparing prices. Because carriers no longer work off a common tariff rate, a 50% discount from one carrier may not be equivalent to a 50% discount from another carrier. Carriers can provide you with a rate disc for you to use as a comparison.
Another method is to subscribe to a CzarLite rate base from SMC3. This is a standard rate base that you can use for an apples-to-apples comparison. Make sure to specify the year for the CzarLite rate base.
You can also contact a third party logistics (3PL) company to look at your shipping costs. 3PL’s do not own any trucks. They negotiate low rates with carriers and work to build volume. These programs work well for shipments out of your local area. 3PL’s sometimes have warehousing and fulfillment services as well.
Charging for Freight – Policies vary greatly on how to charge freight to your customers. Some companies feel it is unethical to mark up freight and instead use it as a pass through cost. Most companies charge some premium over their cost for freight. Just as many companies do not give away all of their discounts on materials, most companies do not give up their entire discount on freight. If you are receiving a 75% freight discount you could charge for a 25% to 50% discount. This can be done at the estimating stage with a freight disc from your carrier. For large shipments you can make exceptions at the estimating stage to be more competitive.
The same is true for small package shipments for proofs or samples. Do you give your entire discount back to your customer – or a portion of it?
Ancillary Charges – This area is becoming a larger and larger portion of the freight bill and is charged on a per item basis. If you have many inside deliveries, deliveries that require notification, delivery confirmation, etc. the ancillary costs can be as high as the freight charge. This is an item that can be negotiated with the freight carrier, especially if you are consolidating your carriers. Getting those charges on your customer’s bill is another challenge. Some times these changes happen just before shipment and are not part of the estimate. Make sure you have a procedure for getting these charges back to your customer’s invoice.
Rush Shipments – Companies sometimes use rush deliveries to bail out production in order to get a job delivered on time. Rush shipments can sometimes cost two to three time the price of a normal delivery. Many times these additional charges cannot be charged back to the customer. If rush deliveries are a way of life, it may be time to review why.
Freight Bill Audits – When your shipper contracts a certain price for delivery, how are you sure the bill you receive from the freight company matches your quoted price? Normally, the bill goes to accounting, which may not have the information on the quoted costs. Ancillary charges may have been added that were not quoted, which is another reason to contract ahead of time at agreed upon rates with fewer carriers. Companies specializing in freight bill auditing make sure you are being charged at the right class and rate. Establish procedures in your company to close the loop.
Incoming Freight – This is probably the single biggest area of opportunity for printers. In some industries incoming freight is managed tighter than outgoing freight. In the printing industry it is usually not even considered. When your vendors charge you freight at what rate are you being charged? How many small package shipments do you receive a day in which the vendor is charging you whatever rate they choose? Some companies do not want to be responsible for managing this area and want to leave it up to the vendor. It does take some time and effort to control. However, once you begin it becomes easier.
Start with simple areas such as small package. You probably have discounted rates from UPS or Fed Ex that you use for shipment. Make sure your vendors use your rate with your third party billing number. You then win in two ways. First, you’ll usually get a lower upfront rate. Second, the increase in overall volume of shipment on your small package account can be used to negotiate lower rates in the future.
The same can be done with incoming material shipments. Ask for freight costs to be broken out of your bill. Start doing freight comparisons with a few of your vendors. Look for the biggest opportunities. Again you win two ways; you can lower your upfront freight and increase your overall freight volume to ask for larger discounts. Incoming freight can be larger that outgoing freight. Looking for ways to better manage this cost can pay dividends.