Discovering, Mapping and Eliminating Hidden Inbound and Outbound Freight Costs to Enhance Profitability
Most companies don’t set out to build a great shipping department. They set out to build great products, minimize overhead, and sell for a profit. Cost controls in shipping rarely enter the equation, and when they do, controls are almost exclusively centered on the shipment of finished goods. For ABC Manufacturing, outbound freight was all arranged based on the directions of the end-user customer, billed to the end user’s account, and terms were FOB customer’s dock. Inbound materials were ordered by purchasing agents, terms were FOB shippers dock, and freight instructions were either “prepay and add” or pick a carrier and have it billed to ABC’s account. Pretty typical regarding inbound and outbound freight costs.
In other words, our client had surrendered their inbound freight, thinking they were modeling their vendors’ best practices and hence gaining some financial benefit from their large vendors’ greater buying power. Same with their outbound freight: their larger customers arranged (and dictated) the shipping guidelines and controlled the cost.
Best Practices – Best for Whom?
While ABC’s initial assumption was likely correct that larger companies have typically installed good logistics practices that are worth adopting, their next assumption was utterly incorrect. ABC Manufacturing assumed the good logistics practices of their large vendors and customers would also benefit ABC.
The truth in practice was that the efforts of the larger companies benefitted only the larger companies, not ABC. Unbeknownst to them, most savings went to their large vendors and customers, not to ABC, putting more profit in others’ pockets without ABC realizing any of the windfalls.
How Pricing Works for the Big Guys and How it Can Work for You
Often, it’s only the larger companies who have fully grasped that their transportation spend is a controllable line item on their budget. As they grew larger, they discover that shipping rates come in tiers and that with more volume comes better pricing tiers. That’s the easy part. The lesser-known key to unlocking bets pricing is in negotiating rate structures, and in finding and partnering with a carrier or carriers who can best align with the types of shipping the company needs. Large companies are far better at this than small companies simply based on available volume. Enter Customodal.
Middleman or Buyers Advocate?
When ABC Manufacturing first learned of Customodal, shipping as a negotiable budget item was largely ignored. Like most companies, their size a necessary expense that they felt was mostly out of their control.
ABC did not have negotiated volume rates in place with any carrier within the group they used, instead of accepting the 25-50% “volume discount” they were offered as a fair, thought to be generous, discount.
Rule #1: “A Discount Offered is not a Discount Negotiated.”
It is customary in America to enter a negotiation when buying a house. The seller asks a price to which the potential buyer offers a lower price. The seller then makes a counter-offer, and the potential buyer either makes another offer, accepts the sellers counter, or walks away from the deal. It’s a negotiation.
However, when a person walks into a grocery store, it is not customary to negotiate further than the posted price for a gallon of milk.
In the world of shipping, the process is in practice more like buying milk than buying a house. So when a carrier offers a 25%, 30%, or even 50% discount off published rate, buyers tend to think they are really being treated well, and everybody’s happy.
But it’s the carrier that is really happy. The skid full of your product might be right next to an identical pallet of someone else’s product, with the same origin, weight, class, and destination, yet your outbound freight costs were twice that of the other pallet. Why? A discount offered is not a discount negotiated.
Rule #2: “Half in Control is Not in Control.”
Control of the accelerator pedal is not control of the car.
Small and medium-sized companies like ABC are smart to develop a preferred carrier list. That process weeds out carriers who are consistently overpriced, habitually miss deadlines, or are shoddy in their handling of freight. Everyone should do that. Ultimately, the preferred carrier list should be the best combination of reliability and cost.
However, there are more savings to be had when that preferred list is then compared for individual shipments. Leaving the ultimate carrier decision to a vendor or customer rarely yields further savings. As a rule, ABC did not choose the carrier from within their established list for each shipment, leaving the final decision instead to their vendor assuming the carriers were all closely priced based on the previous vetting. Neither the vendor nor ABC would check for the best rate and make the most economical choice, further giving up control of the shipment.
So ABC was smart in developing a list of preferred vendors, but still was making two critical errors in their shipping process. First, they assumed the other party would check for the best price on that particular shipment, and second, both ABC and the other party thought the pricing to be stable within the preferred carrier list. Those mistakes often leave considerable money on the table. To maximize savings, companies should control the ultimate carrier choice and should base their decision on competitive, current quotes.
Rule #3: “Yesterday’s Quote is Yesterday’s News.”
Shipping is not an easy science with countless variables that can change a shipping bid from day-to-day. Fuel prices, available space, weight limits, labor, routing, and more can all shift wildly with changing demand. A change in any element creates upward or downward pressure on a bid. There simply is no such thing as stability when it comes to inbound and outbound freight costs.
For this reason, every shipment should be competitively bid. But who has the time to call multiple carriers? Nobody. And that’s why there is often so much money left on the table in shipping. Companies can rarely optimize their shipping costs without outside help.
In the last decade, online brokers have emerged, offering the promise of easy logistics at reasonable prices. In reality, they have mastered the easy logistics part, but pricing is still higher than it should be for most.
Case in Point: Customodal had a potential customer who opened the door for Customodal to competitively bid against the largest (most recognizable) online freight quote service—a service the potential customer had been using for a long time. The results were astonishing. Customodal handily beat all prices from the online source over a full week (over 50 shipments). As a result, logistics moved to Customodal, who after three years, continues competitively bidding every shipment, every day for the customer.
For ABC Manufacturing, the relationship with Customodal has created a considerable gain in profit for the company by cutting their overall transportation spend by XX%. While gaining control of shipping quotes is only part of the picture (much more to come as we tell ABCs story), ABC saw enough savings to trust Customodal to review and ultimately improve how they approached the broad category of shipping and transportation.