We recently received a call from the CFO of a company who was perplexed by the fact that his company’s sales have been flat the first half of 2017, however his freight costs have been on the rise. His question to us was, “how is that possible”? Well, having been in business for over forty years, we’ve “seen this movie before.”
One would assume that there is a correlation between sales dollars and freight dollars, however the rise or fall in either one of these categories typically has no relevance to the other category. A company could sell the same dollar amount of product year over year, or even more product but where they ship and how they ship those products will have a significant impact on their freight costs. Let’s also not forget that each and every year, all freight carriers implement General Rate Increases which average 5% per year. There are so many variables associated with transportation costs you simply cannot make a valid argument that merely because your sales are flat, your freight costs should also remain flat.
So, faced with a request from the CFO for an answer, we took a deep dive into their shipping statistics comparing the first 6 months of 2017 with the freight costs for the first 6 months of 2016. Our “Big Data Analysis” looked separately at the company’s actual shipping activity for small package shipments as well as their costs for Less Truckload shipments. Here are some of the highlights from this company’s shipping analysis and the story these highlights told.
- Domestic Small Package Shipment Analysis:
- The company’s average weight per package increased year over year from 17.5 lbs. per package to 18.7 lbs. per package, an increase of 4.7%
- The company’s average cost per package increased from $8.68 in 2016 to $9.32 per package in 2017, an increase of 5.5%. As mentioned previously, part of this increase was attributed to the parcel carriers 2017 General Rate Increase, and part if the increase was attributed to the higher weights per package shipped in 2017 vs. 2016
- One major factor that affected this company’s 2017 domestic parcel freight costs was a 47.5% increase in dimensionally rated packages over the prior year. When we reviewed these statistics with the company, they confirmed a major sales push for a specific product line where the boxes were larger than many of their other standard products
- Also affecting increased Ground freight costs was an approximate 0.5% increase in domestic fuel surcharges in 2017 vs. 2016. Air Express Fuel Surcharges increased 2% on average in 2017 vs. 2016
- International Small Package Shipment Analysis:
- International Fuel surcharges for import shipments increased 3-5% on average depending on the country of origin. This represented a 178.8% increase based on the countries the company imports from
- The average weight per shipment for international packages overall, (import and export), increased from 36 lbs. to 41 lbs., an increase of 13.8%
- The average cost for all international packages, (import and export), increased from $185.18 in 2016 to $206.25 in 2017, an increase of11.3%
- The number of international packages shipped increased 31.1% in 2017 vs. 2016
- Overall international shipment weights increased from 8254 in 2016 to 12322 in 2017, an increase of 48.7%
- Overall international shipment costs increased 41.6% from 2016 to 2017
- LTL Shipment Analysis:
- Overall LTL freight costs increased $83,992.30 in 2017 vs 2016
- Fuel surcharges increased an additional $25,951.09 in 2017 vs. 2016
- Interestingly the company’s average weight per shipment decreased in 2017 vs 2016 from 2,128 to 1,461, a decrease of 11.8%, which also equates to a higher cost per CWT
- The main reason however for the large increase in LTL shipping costs was the fact that this company initially enjoyed a 2011 base rate level with their primary LTL freight carrier, before applying any discounts. However, early in 2017, the carrier changed the base rates to a 2016 base rate level, but only increased the shipper’s discount by 0.5%, hardly enough to compensate for what we projected to be an overall increase of 35% by moving the base rate levels from 2011 to 2016
- To add insult to injury, the LTL carrier also increased their Fuel Surcharge 4.2% in 2017 vs. 2016
So what can we glean form this analysis? It is clear that many factors affect freight costs and they are not necessarily reflected by total sales dollars any company achieves. All shippers must have the ability to analyze their freight costs year over year. Unfortunately, as you can see from the example above this company had no idea that they would experience such large increases in freight costs, but more importantly, they had no way internally to track these costs year over year.
Sad to say, but many companies are in the same boat. So if you do not have the resources in house to perform these analysis, have no fear, there are third party consultants that not only have the expertise to perform “Big Data Analytics” but also have the ability to assist these companies in their negotiations with their freight carriers to ensure they ALWAYS receive the best deal possible!