Reduce Shipping Expenses, Improve Bottom Line
Precision machining companies face a constant strain on their businesses in the form of ever-increasing expenses. Day-to-day business expenses such as production costs, utilities and insurance all continue to climb, while competitive pressures deter companies from raising prices to cover any shortfall. Businesses must find ways to cut operating expenses without raising prices and negatively affecting customer loyalty.
Reducing shipping costs is an often-overlooked way to combat rising expenses. With annual carrier rate increases, skyrocketing fuel costs and accessory charges that may increase 30 percent or more a year, finding a way to reduce shipping expenses can make a serious impact on a balance sheet.
How do you know if you’re spending too much on shipping? Conduct an analysis. One easy way is to determine your shipping expenses as a percentage of your total sales. Freight expenses vary by the type of products your company is shipping and the raw materials used to manufacture them.
In a recent PMPA shipping survey, members indicated that they spend, on average, 1 to 2 percent of total sales on shipping. The survey also showed that their total shipping expenses had increased by 87 percent over the last 5 years. How much is your business spending on shipping?
If you are spending more than 1.5 percent of total sales on shipping, here are five key strategies to help get your shipping costs in line. Implement one or all five of them and watch your shipping costs go down and your profits go up.
Strategy #1: Obtain Discounts with Carriers. If you think you have to be the size of Wal-Mart or Home Depot to obtain discounts with carriers, think again. Many larger businesses have the volume and favorable shipping characteristics to negotiate directly with carriers.
If you have been able to successfully navigate this process, you are on the right track. If you have not been successful or simply don’t have enough volume to negotiate such discounts, there are still opportunities available to obtain them. One of the many benefits of PMPA membership is the ability to participate in the free PMPA Discount Shipping Program. It provides the discounts that much larger companies negotiate for themselves.
Strategy #2: Develop an Inbound Shipping Program. Reducing inbound shipping costs is one of the easiest, yet most overlooked ways to reduce overall transportation expenses. Vendors typically receive volume discounts from carriers. But are your vendors passing those discounts along to you? When you control and route your inbound shipments, you have an excellent opportunity to significantly lower your costs.
If you allow your vendors to route your freight and invoice you for shipping charges, your transportation costs are probably higher than they should be. Being the buyer allows you to determine not only what you purchase from a particular vendor, but also how it is shipped to you.
As the buyer and receiver of the goods, you can—and should—designate the carrier and arrange for shipping charges to be billed directly to you at your discounted rate. This is called “routing freight inbound collect.”
Collect is a billing option in which you are invoiced by the carrier. It does not mean paying the driver at the time of delivery.
Routing shipments inbound collect can save significant dollars. If you continue to allow vendors to prepay for shipping and add it to your invoice, in most instances you will continue to pay more than you should for incoming products.
The first step in reducing inbound shipping costs is to notify your vendors that you want your shipments routed inbound collect. A routing instruction letter specifically states to your vendors how you want your order shipped to your company. Send the routing instruction letter to your sales representative, customer service manager or to the accounts payable department. Do not send your instructions directly to the shipping department.
Strategy #3: Use the Correct Mode and Service Level. Examine where you spend your transportation dollars. Is your spending concentrated in Less-Than-Truckload (LTL) rather than small package? Or air instead of ground? These distinctions are called modes of transportation.
Ground shipping and air shipping are the two most common transportation modes that businesses use on a day-to-day basis. For 2-day guaranteed service, you can send a 35-lb package from Cleveland to Boston and pay a ground rate of $10.02. Sending the same package second-day air would cost approximately $38.16. That’s a difference of 280 percent to ship air versus ground for the same 2-day level of service.
Service level refers to the time frame in which the carrier will ship the package from origin to destination, such as same-day service, next-day, 2-day, 3-day and so on. Why pay for next-day service if you don’t need it?
To get a 35-lb package from Cleveland to Boston the next day, you would have to use the services of an air express carrier and your cost would be around $95.14. If time permitted, you could send the same package second-day air at a cost of $38.16 (a 60-percent savings). The same package via 2-day ground would cost about $10.02. Clearly, using the correct service level to meet your needs is critical in keeping your transportation costs down.
Strategy #4: Audit All Invoices. It is estimated that between 5 and 10 percent of freight invoices contain errors. Auditing your freight invoices can help you catch and receive credit for costly mistakes.
You should audit several line items on a carrier invoice. Most notably, check for the correct discount, ensure that you are billed for the service you requested, verify product classification (freight shipments only) and monitor extra service charges. Also, if you have an inbound shipping program in place, beware of double billing. If you are routing inbound shipments from vendors, shipping charges should never be on the invoice from the vendor.
Strategy #5: Shipment Consolidation. Why send three separate shipments if you can consolidate and send only one? Consolidation will save you time and money. For example, you can send a freight shipment of three pallets of tools (Class 77.5), weighing 1,500 lbs from Milwaukee to Cleveland and pay a rate of $928.50. Sending three separate 500-lb shipments would cost approximately $1,250. That’s a difference of $321.50. It costs 35 percent more to make three separate shipments.
If shipping expenses are inflicting a constant strain on your business, implement some or all of these five key strategies. Your shipping costs will go down and your bottom line will improve.
PartnerShip is an Endorsed Business Service Provider of PMPA and manages the PMPA Discount Shipping Program, a free PMPA member benefit. Enroll online by visiting partnership.com/28PMPA. For more information, call PartnerShip at 800-599-2902.