Freight costs too high? It might not be your rates!
Timothy Woods has 24 years’ experience in the Logistics and Supply Chain arenas in roles such as CEO, Managing Director and Executive Management. Tim is now a Principal Consultant at the Expense Reduction Analysts based in Melbourne, Victoria. People often look at transport rates as a commodity spend and compare one rate card against another rate card, with the cheapest being chosen. But at Expense Reduction Analysts we know that there is far more associated with making sure your transport costs are controlled, and the correct level of service is provided. In fact, the article below outlines how to save money and improve service standards for your end customers.
In my 24 years in this industry, many companies I come across make a number of these typical freight mistakes which dramatically increase their costs. Most are blissfully unaware they make them and even believe they are doing things right until advised. The impact of eliminating them (and understanding how to) can reduce costs considerably and save your business large amounts over a year. The truth is I have never walked into a business that isn't making at least two of these errors, even when they have put in software to try and eliminate them.
People mainly manage freight even when software is integrated into the company’s ERP’s, and there is only so much software will do. It’s the expertise, analysis of data, customer expectation and understanding their behaviour, and the time to investigate it all that (which we do) that is the key to lowering freights costs for the long term.
The below are all real examples - Imagine if you could eliminate costs of double-digit percentages without changing much at all.
1. Incorrect service types used. - Many businesses make up to 20% wrong choices when despatching freight. Typical examples include sending freight that could travel with a carton provider, via their standard "Bulk" providers incur large minimum charges or sending large freight like skids via their small carton carriers incurring high cents per kilo charges. This can typically lead to extra costs of up to 7% - 10% of spend.
2. Pallet rates vs Cents per kilo rates Vs $/Cubic Meter. - Often, when companies want a simple method of charging so they can on-charge customers easily, they use a pallet rate. While this makes things easy to manage internally, it often isn't the best choice when it comes to rates. Many use a pallet rate when cents per kilo rate would be best. For example, light and small pallets are better charged as cents per kilo. While heavy or large is better as a pallet rate. Some carriers offer half pallet rates too which is often best-case scenario for you. Sending to specific areas also have a $/Cubic Metre rate which means it is different again. It’s all about understanding your freight profile and utilising correct rate cards. Mistakes here can cost up to 20% extra of spend.
3. Incorrect packaging sizes. - A client of mine sends many small items to retail sites and homes via airfreight standard size charges - 5kg, 3kg, 1kg. Their warehouse used many standard carton sizes. In assisting I was able to reduce one carton dimension by 1cm x 1cm x 1cm (that's right - just a centimetre) which saw the cube of that main product line reduce to a lower weight break for their airfreight usage. This saw freight costs lower 33% for that product.
4. Cubic Vs Deadweight and understanding your true cubic profile. Your true cubic profile, while basic to calculate, is often the most misunderstood part of the rates and how it affects your overall costs for delivery.
Few clients I deal with on initial meetings, really understand what their true cubic profile is. This is one of the most significant factors which ultimately affects how much they are charged for freight. Or even which style of rate card they should be using.
Initially, transport providers put in a cubic space policy to ensure they were paid equitably for when light, yet large freight was sent. For example, a large light isn’t fair on the transport provider, charging on a cent per kilogram rate card. But this is where the game begins.
So, let's say your business sends out 90,000kgs of actual weight in a month, with a cubic amount of space of 500m3. If you divide the actual weight by the cubic meters (90,000/500) you end up with a figure of 180. This is the true cubic factor of your freight and “should” determine what rate you pay for cubic freight.
However, many businesses get offered what appear to be cheap rates on a 333m3 rate card when their cubic profile is only 180m3 in the above instance. So, this means paying an extra 46% in cubic space compared to your actual profile. If the rate is only 10% cheaper, you are still paying far too much extra. Same again for a 250m3 rate card. This would be 28% above the true profile. To break even, you need a 28% reduction in the rate card.
Don’t get me wrong, carrying freight is not easy like all clients sometimes think it is (For example there are sorting centres around the country sorting over one hundred thousand items per day) and the carriers need to charge accordingly to make a profit, like all businesses. But there are tricks of the trade applied to all services, and this is one that if identified and negotiated correctly on your behalf, can provide huge cost savings. Many businesses get this wrong and apply for incorrect rate cards against their freight, which means overpaying large amounts without knowing it, even if they have cheap rate cards! Savings can be up 60% if this is done right.
5. Reciprocal rates - Often having reciprocal rates (rates being the same to & from a certain destination) seems like it is the best way to manage things. Often there are freight lanes that can be far cheaper coming back from a destination, that people are unaware of. Dependent on how much you use these lanes, you can reduce them by up to 40%.
6. Understanding of movements and what it really costs you. - A client of mine operates a large branch network being serviced by a central DC. They were continually fulfilling some urgent orders direct from their manufacturer direct to their stores as they were running out of stock. After quality reporting via automated software platforms, they were able to understand the true extra costs of freight to do this, against the cost to order more stock and ship via their standard process. This eliminated 6% overall transport costs and gave higher branch satisfaction too.
7. Consolidation of orders to reduce basic charges. – When busy and clients are ordering through the warehouse more than once a day for a particular destination, this often does not get consolidated into one delivery. This means you are charged an extra “basic charge” for each consignment generated if this happens at the end of the warehouse pick process which is typical. Utilising the right carriers or software platforms will enable these to be identified and charged correctly (without changing the warehouse process) and removes this, saving large percentages.
For example, if you have a $10 basic change and a cent per kilo rate is 30 cents, if you send 7 kilograms the cost is $12.10
If you send three separate consignments to the same place of 6kg ($11.80), 7kgs ($12.10) and 8kgs ($12.40) on the same day you would have a total of $36.30. If consolidated correctly you would have a total of $16.30. A whopping 55% difference for such a small modification. This can be a substantial overall annual saving dependent upon numbers of consignments sent.
8. Process elimination / ERP Integration – Many of the process relating to the despatch process like paperwork, invoices printing and packaging, updating consignment information before connote generation, chasing ETAs, following up on consignments that haven’t been delivered, etc. can be eliminated/automated if integrated with ERP systems. These systems are readily available and will often be integrated by providers free if giving them the work.
Dependent upon how much of these instances occur within your business these indirect savings can save you up to 11% of your overall annual spend on transport. I worked on one scenario where we saved the equivalent in labour time of 5 x full-time employees, which they could then deploy to fulfil more orders.
While there are many more potential errors that may be made, these are some of the most common in what seems to be the primary function of distribution. It is far more scientific than that. You will note that none of them applies to rates you have, how you use them. Imagine the outcomes that combing ERA’s expert knowledge, analysis and professionalism can generate.
We help clients to support the health and growth of their business, whatever its nature, focusing on proactive expense and supplier management. As an Australian company that is part of a global network, Expense Reduction Analysts can benchmark costs and spending, follow the latest supplier innovations, and have real-time data on changes and advancements. This strength gives us the recognition and power needed on supplier markets to best serve your interests.