5 Steps to Take Total Control of Your Inbound Logistics Costs (Part 4)

Posted by George Muha on Sep 6, 2016 9:58:52 AM

Balance.jpgAre you having fund yet?  Have you asked the boss man or woman for a raise yet?  If not, hold off.  Let's put more money in their pockets so they'll throw in a big bonus too!

Part 4: Unbundling Delivered Price / "Free Freight" Programs

Now we are going to walk through the process of unbundling delivered price programs.  I know exactly what some of you are saying to yourselves right now, "Why would we touch our "free freight" programs?  I mean after all, its FREE!"  

You need to know that nothing in this world is "free" - especially when it comes to delivered price programs.  Freight is baked in the cost of the product.  Many suppliers have minimum order thresholds they want customers to buy and they entice buyers with "free freight".  Then they bury the cost of freight and product into a delivered price.  

The point of this step is to extrapolate the freight portion of the delivered price program to give you the information to have the upper hand in negotiations.

Uncovering the Costs

The most important part of unbundling these freight programs is to understand the costs to ship product to your company from your vendor.  This is not as complex as it may seem.  If you were able to convert the prepaid and add orders t collect in Step 2 of this series, then you have the skill to do this.  Plus, to have success here, all you need to do is take my lead.  

Okay, let's roll up our sleeves and follow these simple steps:

  1. Refer to your list of vendors you made in Day 1 that reference your suppliers who have delivered or "free" freight programs.
  2. Pull the last few months of order invoices for these vendors.
  3. Pull the corresponding freight carrier delivery receipts for these invoices.
  4. Use the delivery receipts to rate what it would have cost you if you shipped this collect under your account

*The freight carrier delivery receipts are vital to this because they give you all of the details need to rate a shipment (zip codes, weight and freight class).

Once you have identified what it would have cost you if you shipped this collect, then you have a pretty good idea of what it is costing your vendor to ship it to you.  Now that you have that information, you want to calculate what freight is as a percentage of invoice on multiple orders for each vendor.  The larger the sample you gather the better.  

The Strategy

The strategy in converting delivered or "free" freight programs to collect is to secure an allowance or discount from your vendor in exchange for routing via your own carrier.  Stay with me here, this is about to get good.  The key is to get your vendor to give you an allowance that is GREATER than what it costs you to ship collect.  

So if you determined it costs you 4% to ship collect via your own provider, then you need to get an allowance that is higher.  So if your vendor agrees to give you a 6% concession on the delivered price program in exchange for you routing via your own carrier, then you are essentially benefiting from a 2% delta.

Remember that it will likely be a negotiation with your vendor to arrive at a number that makes sense for you, so start high and leave some wiggle room.

The negotiation

When dealing with a vendor, you need to state your case why you must ship collect.  Give them the same reasons you used for your prepay and add vendors from the last step.  

"Congestion on our receiving dock is a big problem so we need to cut down the number of carriers."

"Our company is on a journey to operational excellence and we need to control every part of our supply chain."

"We want to collaborate better with our suppliers to streamline processes"

"If you don't follow our guidelines we'll go elsewhere with our business."

Conversion of these delivered price programs requires tact so make sure you have your game face on the whole time.  Remember, this only makes sense to do if the allowance they give you is more than what it costs you to ship via your own carrier.  

Don't Fall Into This Trap

Trap.jpgA common mistake I see people make is this:  they instruct their vendors to ship collect via their own carrier and "request" an allowance.  We are not "requesting" anything here.  We are asking for what we need, so knowing what allowance to ask for is a must.  

When a vendor gets a "request" to provide an allowance for routing collect, they will likely be lower then your costs to ship it.  I've seen people convert these programs to collect with an allowance than ends up costing the buying company more - which defeats the entire process.  So lets make sure we're smart about what we are doing.

In Summary

Refer to your list of delivered price vendors and unbundle these costs by comparing to what it would cost under your freight programs.  Identify what freight is as a percentage of invoice for each vendor.  Start asking your vendors for allowances that are greater than this number so they can accommodate your "inbound freight initiative".  

 

Topics: freight savings, logistics savings, inbound freight checklist

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