Global Supply Chain Management Consulting - Boxes and Globe

Freight Costs Rising While Sales Stay Flat?

Sound familiar?

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:
  1. 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%
  2. 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
  3. 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
  4. 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:
  1. 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
  2. The average weight per shipment for international packages overall, (import and export), increased from 36 lbs. to 41 lbs., an increase of 13.8%
  3. 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%
  4. The number of international packages shipped increased 31.1% in 2017 vs. 2016
  5. Overall international shipment weights increased from 8254 in 2016 to 12322 in 2017, an increase of 48.7%
  6. Overall international shipment costs increased 41.6% from 2016 to 2017
  • LTL Shipment Analysis:
  1. Overall LTL freight costs increased $83,992.30 in 2017 vs 2016
  2. Fuel surcharges increased an additional $25,951.09 in 2017 vs. 2016
  3. 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
  4. 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
  5. 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!

Success concept

When Auditing Isn’t Enough

–What a Comprehensive Audit Looks Like and the Profit Leaks You’re Likely Missing–

Whether a company ships small packages via parcel carriers, larger items in LTL or Truckload quantities, or imports and exports products via ocean and air carriers, creating a comprehensive invoice audit function is critical to ensure the company only pays what it should pay.  Sounds logical enough-but there is much more to auditing a company’s transportation and logistics expenses that very often is overlooked.

First and foremost, transportation and logistics invoice auditing requires specialized skills that many companies do not possess within their own organizations.  The accounts payable department usually has the responsibility to ensure the invoices are correct before processing those invoices for payment. However, they usually do not have access to the service provider’s base rates, discounts and incentives and the technical expertise to know when various accessorial fees apply and when they are not applicable.

Verifying the charges to be paid on transportation and logistics bills is only part of the audit process companies must consider before paying any invoice.  The first step in the invoice audit process is to make sure the company is actually responsible for paying an invoice in the first place.  A complete understanding of the terms of sale, or terms of purchase is most critical.  It doesn’t matter what charges the carrier or service provider assesses, if the invoice is not the company’s responsibility to pay in the first place.  And yet, we are amazed at how often companies actually pay invoices they are not responsible for paying in the first place.

Comprehensive transportation and logistics invoice auditing should actually be a multi-step process.  The first step is to ensure the invoice being audited should in fact be paid.  The second step in the audit process is to ensure the charges are 100% accurate.  The third and final step in the invoice audit process is to make sure the company is not experiencing any “profit leaks” which can increase a company’s transportation and logistics costs by as much as 30%.

What do we mean by profit leaks; here are some examples.

  • Sometimes, corporate purchasing departments will purchase goods on a delivered basis with the inbound freight costs included in the actual merchandise cost. In these cases, unless a comprehensive analysis has been performed that guarantees the portion of the product cost which represents the freight cost is actually less than the company would be able to negotiate on their own, a company could be losing significant dollars.
  • In some cases inbound freight costs are detailed as a separate line item on the merchandise invoice. Often times in these cases it is impossible for the accounts payable department to discern if the freight charges included on the supplier invoice are in fact as competitive as they should be.  In many cases the supplier will add a “little extra” to the invoice to cover their costs of prepaying the freight costs and waiting for their customer to pay the merchandise invoice.
  • Some companies have waived their right to file claims for refunds for late delivered packages with their parcel carriers. Sometimes parcel carriers will put this waiver into a recently negotiated contract without ever pointing it out to their shipper customer.  In these cases, the parcel shipper could lose tens of thousands of dollars in missed refunds annually they were previously receiving when no waiver was in place.
  • In some instances parcel carriers will offer an additional incentive to the shipper for agreeing to the late delivery refund waiver. The real question for shippers receiving this additional incentive is the need to absolutely be assured the additional incentive meets and hopefully exceeds the refunds the parcel shipper previously received.
  • Profit leaks also come about when shippers fail to properly describe their freight on a bill of lading, especially when the freight classifications are dependent on value or density ratings. Oftentimes when the proper density or value of the goods are not stated properly on the bill of lading, the shipper will be charged the highest rate for that freight classification category.
  • Shippers also suffer profit leaks when they fail to negotiate increased discounts and incentives on a fairly regular basis, especially since almost all freight carriers increase their rates annually. Profit leaks also occur when shippers fail to benchmark the rates they are paying against other shippers with like shipping characteristics.  And, if the shipper does not have the resources in house tom perform those benchmark studies, Third Party Logistics Consultants can provide those resources.
  • Shippers also endure profit leaks when they double insure their shipments by paying the carriers for added insurance while at the same time carrying a corporate transportation liability policy. You would be amazed at how often this actually occurs
  • Shippers that fail to “test the market” through the use of Competitive Bid Processes are also subject to significant profit leaks. And, very often those profit leaks represent substantial lost freight dollars.

Finally, shippers should always entertain outsourcing their transportation and logistics invoice auditing to Third Parties that specialize in providing these services.  Both Pre-Audit and Post-Payment audits are available.  Pre-Audit fees are typically based on a small transaction charge per invoice, while Post-Payment audit fees are almost always provided on a shared contingency basis, so there are no fees if no refunds are received.  It’s a great way to ensure a company never overpays for shipping again.

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