Logistics and Transportation Expenses: Understanding Their Role in the Cost of Doing Business
Transportation Expenses Correlate Directly to Business Changes
This is especially true when companies consider revising sales and marketing programs by reducing or eliminating freight costs to their customers in exchange for larger sales order dollars. Take for instance a real life example of a company whose sales and marketing team decided they would begin to prepay and absorb all transportation expenses for any customer orders over $1500.00. The goal obviously is to entice their customers to buy more product and in return receive what would in effect be “Free Shipping.” Certainly a great marketing concept as long as all of the pieces fit nicely together.
Upon discussions with the sales and marketing team, the client’s transportation and logistics group immediately drafted a list of issues it felt needed to be addressed in order to make a good business decision, one that would ensure the company would not negatively impact its overall profit margin.
First, there would now be a significant increase in the number of freight invoices the company would have to process through its Accounts Payable Department. The transportation and logistics group determined the increase in the number of invoices to be processed for payment would be in excess of 250% when compared to what the payables group was currently processing. Secondly, how would the Accounts Payable Department handle such a huge increase in volume without increasing its staff? The answer was clear, there was no way they could handle the increase in invoice processing volume with its current staff; clearly additional trained staff resources would be required.
That led to another discussion; perhaps it was time to finally outsource the freight bill audit and payment process to a third party. When that analysis was completed the ultimate decision to outsource freight audit and payment was truly a “no-brainer.” You see no one in the company had any expertise in freight bill auditing and therefore the company could not be assured of payment accuracy on such large volumes of freight invoices. In addition, the shipment data the company would receive as a by-product of the outsourced audit and payment process would be invaluable in making good business decisions in the future. And finally, the company determined the costs to outsource the freight bill audit and payment process would be less than half of what the company had budgeted to perform the function in house with an increased and knowledgeable audit staff.
Everything seemed to be falling into place until several months into the process the company realized they were having a serious problem with spiraling transportation expenses. You see the company’s shipment data which came directly from the Outsourced Freight Audit and Payment firm revealed increasing freight expenses that the company had not anticipated, nor budgeted for. How was this possible? The company was on a mission to find out why.
Expert Transportation Expenses Analysis Tells the Whole Story to the Cost of Doing Business
After exhaustive analysis our team of experts uncovered the following facts that led to the significant increase in the client’s transportation expenses.
- When the company established their base rate levels with their freight carriers, they did not take into account impending Annual General Rate Increases by their parcel carriers. These increases averaged around 7% based on the shipping characteristics of the company.
- The company also did not take into account the Annual General Rate Increase implemented by their preferred motor carriers. While the freight carriers indicated their average rate increase was in the 5.5% to 6% range what we found was the company shipped its products out of the NY Metropolitan region and therefore the ACTUAL increase this company incurred was more like 14% overall.
- The company also began shipping larger volumes of product to their customers’ homes through their new on-line retail operation. Now their transportation expenses were not only being impacted by the General Rate Increases, but also by Residential Delivery Charges as well.
- Finally, the company added new items to its product line that drastically changed their former shipment characteristics. The new product line was lighter and bulkier and the products took up more space in the carrier’s vehicles and therefore immediately equated to higher transportation expenses. The fact is for these new and bulkier items, the company’s freight expenses increased by a whopping 50%.
All of the above items were issues the company should have delved into much earlier on in the business decision process. They simply left too many things to chance and these issues obviously came back to haunt them “Big Time” where it hurts most, in their pocket book.
So what’s the moral of the story? Before a company makes a decision to change current sales and marketing programs; before it decides to add new items to its product line; before it decides to move into home deliveries, there should be a serious discussion with those in the know of these business decisions effect transportation expenses. The focus of these discussions is to question every thought process, by every stake holder to make sure all possible contingencies have been thoroughly thought out and properly analyzed. If the company does not have the expertise in house to identify and question these issues, there are certainly many transportation and logistics services providers who make their living walking their client’s through the maze of transportation and logistics operations, expenses and strategies to ensure they make the right decision.
This is a guest blog post from Tony Nuzio, CEO of Logistics Consulting Services, Inc., who are Profitability and Efficiency Consultants in the transportation and logistics arena; providing transportation contract Bench-marking, Target Pricing and Contract Optimization Services for domestic and international shippers.