While it’s true that most companies aggressively manage outbound transportation, too often inbound transportation costs are not controlled. But, as companies face the need to reduce expenses, total transportation cost control is a top priority for upper management. The pressure for cost reduction points squarely to managing transportation in both directions. Because it receives less attention, savings opportunities with inbound transportation are typically higher in percentage than their outbound counterpart.
Many purchasing agents fail to consider that suppliers use their outbound transportation department as a profit center, not as a cost center as is commonly believed. What does that mean? That means shippers (your suppliers) are using their negotiated carrier rates and your package volume to fatten their bottom line. In fact, you probably are doing the same thing to your customers. Seldom does one of our clients pass their discounted rates on to their customers.
Here’s how it works: Supplier A meets with its carrier and negotiates a discount off of base shipping charges, let’s say 20%. Rather than pass those savings on to you and all its other customers, Supplier A decides to invoice full base shipping charges. The result is that Supplier A pockets 20% of all invoiced shipping charges while remitting only 80% of their collections to the carrier. That’s a nice profit center, wouldn’t you agree?
Inbound shipping costs are often bundled with product costs, thereby hiding the true shipping cost paid by the supplier to the carrier. The notion that these shipping costs are absorbed by the supplier is wrong. To paraphrase a popular expression, “There is no such thing as free shipping.”
Even when shipping costs are clearly listed on the supplier’s invoice, they are usually based on calculated standard pricing and do not accurately reflect the actual cost to ship the goods. The rates you pay may not even coincide with the carrier’s base shipping charge. It can get very confusing, to say the least. But it is certainly in your company’s best financial interest to unravel this mystery.
The good news is that you no longer have to pay a premium for inbound transportation. You can enjoy significant savings by managing the inbound process yourself. By now you are asking yourself, “What do I need to do to get control of my inbound shipping?” An effective strategy must include the following items:
- Review supplier invoices to identify shipping costs and, in the cases where shipping costs are not available, ask your suppliers to unbundle costs and provide the information to you. This will give you an excellent understanding of the savings opportunity available to your company.
- Meet with your carrier to set up an inbound collect billing program. They will be happy to accommodate your request. Additionally, ask your carrier to provide a new discount program that incorporates your inbound shipments.
- Discuss your intentions with all your suppliers so they clearly understand you intend to manage your inbound shipments.
- Develop and implement the operational plans and business processes necessary to properly direct and manage your inbound shipments (for example, carrier routing letters).
Understanding the savings opportunities is the first step toward convincing yourself that managing inbound shipments is something you should be doing. Establishing the necessary changes in operational plans and business processes remains the challenges of implementation. However, once you calculate the dollars you can add to your company’s bottom line, I am sure you will be as enthusiastic as I am about managing inbound transportation.
Joe Loughran
Joe Loughran is President of Parcel Rate Solutions and an expert in the parcel industry. Parcel Rate Solutions is a transportation consulting company offering services in Carrier Rate Analysis and Carrier Agreement Analysis. Joe can be reached by phone at (724) 934-0626 or email: loughran@parcelratesolutions.com.