Your purchasing team is in charge of finding the best raw materials and components at a price advantage to your competition. Lots of hard work and plenty of hard-nosed negotiating go into each vendor negotiation and subsequent relationship.
In the end, your company ideally has a better product at a more favorable price while maintaining the highest attainable profit margin. But if too much is paid for raw materials or components, it stands to reason that your company is either being priced out of the market or your margins are too thin to sustain growth.
How to Find Better Pricing Without Endangering Good Vendor Relationships
Like any good negotiation, the key is in finding cost savings that satisfy your needs without touching the vendor’s own key profit center or squeezing them so hard on the price that they walk away from the relationship.
Sound impossible? Think “Inbound Freight.”
Cost Savings Hidden in Plain Sight
Many companies rely on their vendors to arrange the shipping. But the truth is, your vendor’s priority is to get the load off their dock so the order can be invoiced, not to spend the time to find you the absolute best price for the load. For them, shipping cost is rarely a consideration—even when you mandate a routing guide (more on why routing guides inflate costs and waste money in a later article).
And to make things worse, not only are more expensive carriers or routes frequently chosen, but the vendor will often (justifiably) add a markup to the shipping. We call this the “Add.” We don’t fault anyone here—it’s just important to remember that the vendor works for the vendor, not for you. That extra profit goes to their bottom line when it should be going to yours.
Yet, merely overpaying for freight creates an even bigger problem.
Overpaying for Freight Unnecessarily Balloons Finished Goods Pricing
Everyone adds a profit margin to the total cost of labor and materials before publishing a price for their product. So it goes without saying that every well-run company knows its raw materials and labor costs. But there are hidden extras like higher inbound freight costs that should never have been entered.
“It’s better to save a dollar from a vendor than to try to recover the dollar from a customer.”
But paying too much for inbound freight (remember the “Add”) is money that puts unnecessary pressure on pricing in a competitive sales environment. That dollar wasted on inbound freight shows up as $1.25, $1.50, $2.00, or more on your sales proposal beyond what your final cost should have been. Depending on price sensitivity in your market, that unnecessary extra could be a deal-breaker to a potential customer.
So isn’t it better to save the dollar than to mark up your finished goods to recover that dollar, potentially pricing yourself out of the market? It is far better to save a dollar from a vendor than to try to recover the dollar from a customer.
Everything’s Great Now. Why Should I Care?
Besides the fact that a question like that should never cross our minds, here are three good reasons for digging deeper to discover your real costs:
- Your Reputation. No company can risk the perception of being priced too high for the corresponding value. Not even in good times. Why? Because the “too expensive” narrative will carry over into a downturn where customers will be hesitant to talk to the overpriced provider.
- Knowledge Now > Knowledge Later. Understanding your real costs now will serve well both now and when sales are harder to find. Like any other company, sports team, municipality, or nation, it’s much easier to know where the oars are before the waves get too tall.
- Get Disciplined or Get Schooled. Deep knowledge of real costs is one attribute of great companies, enabling them to thrive in good times and survive in bad times. But it’s surprising how much discipline it takes when times are good.
How to Recapture Unproductive Shipping Dollars
Ask the vendor to price their product FOB their dock and talk to Customodal for freight rates to compare with your total current cost. Once you add the vendor’s best raw material or component price to Customodal’s freight price, nine times out of ten, your net cost will be lower than before. Our experience with this practice has been annual savings from tens of thousands to hundreds of thousands of dollars for our clients. Attention to small details can pay big dividends in surprising places.
Why Your Vendors Will Thank You
Your vendors aren’t in the shipping business, they’re in the raw material or component business, and very likely want to continue doing business with you. Their profit—their entire livelihood—relies on selling their core product to customers like you, but their continued existence does not depend on which shipper is chosen for your order.
The notion of getting rid of the shipping responsibility while keeping their core business intact is a relief to many vendors. And with Customodal’s ability to provide shipment tracking (and in some cases, shipment intercept), you achieve greater precision for production timelines while saving on overall freight costs.
This is why we call our inbound freight program, EXACT Inbound. Because understanding your lowest real costs with precision is critical to optimizing profits. In a word, EXACT Inbound provides greater control.
…Speaking of Control, Cut Out Wasted Time Tracking Shipments
If you currently let your vendor schedule freight, any tracking is likely a several step process to locate your shipment. Call your vendor (1 minute). Ask for the carrier name and pro# (1 minute). Wait for them to find the job info (2 minutes), only to have to finally contact the carrier directly (5 minutes) or use their website to track your shipment (2 minutes). With EXACT Inbound, simply log into our TMS, and your shipment details are on screen in seconds. What will you do with that extra 7-10 minutes saved from tracking a single shipment?
…And Use More Precise Inbound Scheduling to Save Even More
With “need dates” or deadlines, EXACT Inbound’s dynamic routing sequences freight into your plant based on a date-specific schedule. Pay for 5-day transit to slow down an order and spend up for 2-day transit only when needed. The net effect is to hold less inventory in your warehouse while saving more money.
Do What Makes You Thrive
Bottom line: Vendors should continue to do what they do best, you do what you do best, and let a premier logistics provider like Customodal handle what we do best.
Customodal is a new breed of innovative 3PL, primarily serving the Manufacturing sector for over 15 years with a full menu of Professional Logistics services. For more information about Customodal and our inbound freight program EXACT Inbound, contact us here or dial 800-445-6577.