Transportation: Vendor Inbound Freight

As margins continue to be squeezed, reducing expenses has become a major topic of discussion among catalogers. In fact, many have put into place specific edicts to reduce operational expenses.

That said, the purpose of this article is to offer ideas that can help you attack one major aspect of your company’s cost structure — vendor inbound freight (VIF). By properly managing your company’s VIF, you could make the difference between a marginally good and a very good year for your catalog.

Current State

VIF usually is included on the profit-and-loss statement as part of overall inventory costs. This low visibility line item normally is “buried” in the cost of goods. Most catalogers make the mistake of measuring the cost-effectiveness of their inbound program by considering just the freight discount rate, without much regard to rate base, product classification and carrier choices. At the same time, many catalog executives allow suppliers to choose freight carriers and by doing so, to ultimately control their destiny.

Why bother with VIF? Your VIF expense typically represents 2 percent to 4 percent of gross sales. At a $100 million catalog company, that’s about $3 million a year in freight expense. VIF ranks in the top eight of all operational expenses. Reduce the cost of your inbound freight by 15 percent to 20 percent, while at the same time improving operational control. Here’s how.

Manage With Information: The Audit

The first step to properly managing your VIF program is to conduct an audit, which should help to answer the following questions:

* Who are your top 20 vendors?
* Where is your freight originating?
* What are the volumes in each traffic lane (e.g., weight, pieces)?
* What freight classifications are you using (e.g., freight all kinds)?
* How many freight carriers do you use?
* What volume does each carrier haul?
* What percentage of your business is truckload versus less-than-truckload (LTL)?
* What’s the current volume of small-package deliveries (e.g., UPS, FedEx)?
* How reliable are your inbound vendor shipments (that is, on-time delivery)?
* What percentage of your suppliers currently drop-ship?
* How many of your inbound vendors supply advance shipping notices?
* How many of your suppliers/carriers are using electronic data interchange (EDI) or provide Internet visibility?
* Do you currently have “in-transit” tracking of your freight?
* What system do you use to identify and control multiple ship methods?
* What level of compliance do you get with your vendor-routing guidelines?

The audit is the backbone of any solid vendor inbound freight program. Yogi Berra said it best: “If you don’t know where you are or where you’re going, when you get there, you might be somewhere else!”

10 Steps to Savings

After you’ve completed the audit, ensure success by adopting these VIF tenets.

* Properly identify all of the costs associated with inbound freight (e.g., truckload, LTL, small package, air). Determine the total annual cost of inbound freight and calculate the percentage of gross sales. This provides you with a baseline of costs.

If you purchase with pre-pay and add-freight terms, demand that freight is clearly delineated on each vendor invoice. The industry standard markup is 40 percent.

* Adopt a core-carrier program that provides exclusive service areas to carriers that offer 100-

percent coverage. Such a program should identify pickup coverage, location of service facilities, financial stability, systems and technology prowess, and performance guarantees. Use a common rate base with common tariff provisions.

* Simplify freight classifications. Of the three cost factors including weight and distance, inaccurate classifications will have the greatest impact on your costs. Negotiate single-class contracts based on your shipment history whenever possible.

For example, a major toy company was describing items as “toys” on its carrier’s bills of lading. The carrier assigned a class of 125 at a base cost of $650. By using a more specific description of “Dart Games” at class 85, the cost for freight dropped by $226/load. At 10 loads/week, this company saved more than $100,000 per year by making this one change.

* Utilize an effective vendor-routing guide. Keep it simple by noting it all on one page. Proper routing instructions tell vendors exactly which carriers to use by mode of transportation (and in priority order). Routing guides help to control costs, improve receiving efficiency and ensure a high level of vendor compliance.

* Create visibility. In-transit tracking of freight will reduce the time buyers spend confirming shipments with vendors. It also will help to monitor individual vendor and carrier performance.

* Develop projected receipts reporting. Projected receipts or forecasting of in-transit inventory helps to plan receiving department labor and eliminates the need to call carriers for appointments. It also will identify new orders versus backorders of goods.

* Negotiate lower freight rates. Trade exclusivity for better rates. Measure on net cost, not discount points. Reduce your minimum floor limits, eliminate extra charges for single shipments and appointments, and negotiate flat C.O.D. charges. Take advantage of consortium or cooperative contracts whenever possible.

* Enforce vendor compliance with your routing guide. Establish rewards for those who strictly adhere to your routing instructions. Similarly, implement meaningful consequences for those who neglect those instructions.

* Use technology as a competitive weapon. Implement advance shipping notices, EDI and in-transit tracking, for example.

Remember, a dollar saved on freight expenses goes right to your company’s bottom line.

Bill Wilson is president and founder of DM Transportation Management Services (www.dmtrans.com). His company consults and provides vendor inbound management services for more than 200 direct marketers nationwide. Contact him at (717) 258-0611, or e-mail: billw@dmtrans.com