Question: My outbound freight to ship packages now exceeds my direct labor costs. I can’t seem to control the expense. What can I do to reduce it?
Answer: Outbound freight exceeding the direct labor for fulfillment is a fact in many businesses. Here are some ways to reduce those expenses. Outbound freight costs continue to rise, but it is possible for direct marketers to optimize their situations. The good news is that all carrier contracts can be improved—most contracts have a short-term termination clause.
However, there are two important steps you must take to achieve all or part of the potential improvement: 1) You have to know more about your distribution than the carrier does, and 2) you must honestly assess whether your company has the knowledge and skills to negotiate a better contract, or whether you will do better with the help of a qualified consultant. First, you must understand a few things about your distribution:
- Know your annual spend and historical volume.
- Understand your carrier’s contract pricing and incentives.
- Leverage your volume—single-sourcing yields a discount.
- Understand accessorial charges—these could be up to 40% of spend and more than 40 different charges.
- Use technology. Get on electronic invoicing so you can see the information necessary to negotiate effectively and have access to the same information the carrier has.
How do you make sure you have access to this critical information? To begin with, it is important to partner with the right carrier for your business. One important factor in choosing a carrier is to identify the right individual to be your account representative: a good representative will help achieve better service and optimum performance for you. Your rep should ensure that you receive effective management reports and schedule quarterly business reviews.
These quarterly reviews should be detailed accounts of your volume and charges, not simply social visits. These reviews can help you better understand the cost of performance. Your contract entitles you to professional service. Your carrier and account representative should be willing to work with you to perform the value-added services they provide, for example, a packaging analysis to optimize your performance and to reduce costs.
Some of the many contract details to review are:
- discount rates.
- rebate incentives
- ground minimums
- revenue qualifiers
- quick payment discount
- service-level guarantees and subsequent performance
- value-added services available to you
- benefits of automation (electronic invoicing)
- accessorial charges
Assuring that you have a quick payment discount is one easy and automatic method of cost reduction. Routine auditing of your invoices is critical to ensuring that you are invoiced correctly and that the carrier is performing to contractual service levels. It is conceivable that an audit of your invoices might identify invoice errors of 4% or higher in the carrier’s favor. Skilled and knowledgeable auditing of your invoices guarantees that you receive all the benefits of your agreement with the carrier. The question is whether you have the skill and knowledge within your company to perform these invoice audits effectively.
That brings up the second key to improving your carrier agreement. Your outbound freight costs are one of your greatest operating costs. There is no room for pride or a false sense of knowledge when you are negotiating the terms for cost of operation. Be honest with yourself. If you or your company does not possess the skills and knowledge to effectively negotiate all the terms of the agreement discussed above and more, or if you do not possess the skills and knowledge to perform a monthly audit of your invoices—get help.
F. Curtis Barry & Company is a fulfillment consulting firm for catalog, e-commerce, and retail businesses. We offer clients expertise in business process and order management systems, inventory management systems, warehouse management systems; warehousing and distribution; call center services; inventory management and forecasting solutions; and strategic, financial, and operational planning for all business channels.
