LSS Blog

It’s time to improve your margins

By Paul Publow

Improving margins can either be accomplished by increasing price of the product or reducing costs or a little of both. Unfortunately during these times, most companies are often unable to gain any ground with their customers by increasing prices. As such management is forced to look at methods of reducing costs and one of the most obvious area of any operation that is reviewed is the supply/distribution operation. It is one area that tops the lists year in and year out.

Some questions that can be asked are:

How many carriers is your firm dealing with? Is there room for consolidation of volumes to drive a better deal?
Although there are very few “national” carriers in existence today, there are still many opportunities to leverage fragmented volumes to maximize the bargaining position of the company. Logistics Solutions often visits many companies that have intentionally divided up their transportation programs between two and three times the necessary number of carriers and often ignore the value of volume in their negotiations.

Do your buying terms with your customers allow for higher priced smaller shipments?
The smaller the shipment the more expensive the freight is on a hundredweight basis. For example a $5.00 courier cost for a shipment less than 5 lbs. equals an amount of $100.00 per hundredweight if it was shipped in LTL services. It’s an expensive way to ship small amounts of product. Although there is no solid replacement for courier services real economies start at 150 lbs. or more.

Is there merit in exploring the idea of shipping collect and levering the retailer’s volumes to gain lower prices?
Some of the retailers that manufacturers deal with are huge in size and can wield tremendous leverage when negotiating their transportation costs. Consider shipping collect on their deal rather than paying the freight and building it into their cost. Know your freight costs and do not give too much away as a freight allowance if you elect to go on their deal.

Are the break points for the company’s shipments being followed closely to ensure that the proper mode is being utilized and thus the best price?
Over and over again, we find that the shipper in the back room selects whether the product should go courier or LTL (less than truckload) based on a magical “if it’s less than 150 lbs, it goes courier and if it’s over it goes LTL”. Often time’s great amounts of money are wasted on this premise. Depending on destination, courier rates can be more economical up to 180 to 200 lbs. while sometimes LTL minimums can provide an advantage at levels below 150lbs. Sound confusing? It is! There is no magic cut-off and certainly not one that can be easily memorized in the shipper’s mind. Check the weight break and check the costs; there is big money to be saved here.

What type of distribution process is being utilized? Are you operating a stand alone warehouse for a seasonal slow moving inventory and could a 3rd party logistics service provider be the answer?
If you have a reasonable slow moving product line, carry a lot of inventory, and suffer from a seasonality issue, your business is a prime candidate for a 3PL service provider. These companies make a success out of moving many companies’ product throughout the entire year. One manufacturer’s seasonal spike might come at the downturn of another manufacturer. Operating costs are spread across the entire year and result in a savings to you. But before you proceed down this road know your costs…there are many traps.

Are your transit times allowing you the best value for your distribution dollar?
We often see manufacturers using expedited premium priced transport modes and then waiting for an appointment to make the delivery. Use the right mode at the right price. In fact the value of your goods has a lot to do with the mode that should be used. The higher the value of goods the more expensive and expedient the transportation mode should be.

Are you declaring value and paying for additional insurance when your in-house insurance covers your product in the event of loss or damage?
Many companies have in house insurance that provide coverage for shipments in route to the consignee, yet many shippers declare value on their shipments. This type of insurance is costly. The first $2.00 per pound per piece is usually included in your transportation rates and the transport companies charge 1% of the excess value over and above that amount. A $200.00 power tool weighing 20 lbs has automatic coverage for $40.00 in the event of loss or damage. The excess value charged is 1% or $1.60. That’s a pretty hefty premium for the coverage. Check the fine print of your insurance policy.

If you have any concerns about any of these issues, call Logistics Solutions & Services Inc. and at (905)-896-9080 for your no-cost consultation and start improving your margins.

Do you have the tools to purchase transportation services for your company?

By Paul Publow

Undoubtedly the largest purchase an individual or family will make during their lifetime is a house. The second largest purchase and a much more regular one is the family automobile. Similarly one of a company’s largest ongoing expenditures is the purchase of transportation services.

But let’s talk about selling and buying a house for example. Anybody that I have spoken to about this subject does two very important things. In fact it would be impossible to think of a person not doing this basic homework.

They check the comparable prices that similar houses sold for when they sell and they check the same type of data for a house they wish to buy. In real estate, the actual dollars that houses are bought and sold for are readily available through the use of a broker. Bottom-line…people do not want to sell themselves short nor do they want to buy to high. These comparable listings are usually available in the form of a photocopy of the listing with the asking and purchase price clearly marked. No verbal assurances from the salesman necessary here.

Now let’s think about purchasing a car to put in the driveway. Things are a little tougher here. You the purchaser are confronted with a sticker price in the window of the vehicle. It lists the standard and optional equipment and the manufacturers suggested retail price. Somewhat different than buying the house, since you have no idea what the last customer was able to negotiate. Did they pay the sticker price, did they get ten or fifteen percent off? Were they able to negotiate better maintenance arrangement etc.? The list can go on and there are not many car sales people worth their salt which would offer up any information to you. So you blindly make an offer, without knowing what the “real” selling price is, or what the dealer is prepared to take. You probably have to meet the sales manager to “sell” him your offer.

How do these two purchases differ? In the case of the house, you do your homework, use an outside real estate agent and explore actual buy/sell numbers…you get to know the “real” cost before you make the offer.

In the case of the car purchase, by way of the nature of how the business is structured you end up making an offer based on virtually no concrete information. It’s anybody’s guess whether you got a deal and more than likely you walk away satisfied that you paid less than the sticker price. But who knows?

How does this relate to transportation and logistics?

Unfortunately the purchase of transportation related services in the business world is even worse than the process described above in purchasing a car. The individual who is charged with the responsibility of purchasing distribution services for his company has less knowledge than the car purchaser and unfortunately the purchase is far greater in real dollars.

Let’s list what most buyers of transportation know about their costs:

They know the volume, frequency, destinations, size, density and value of their product.
In most cases they know that they are not paying the “tariff” (similar to the sticker price for the car business).
They have been offered numerous “sticker prices” from other carriers.

What they don’t know turns out to be the most important factor(s) in the entire purchase process.

They don’t know what a carrier’s actual cost of performing the service they are buying really is.
They don’t know what each of the carriers is willing to take for the service (the carrier’s bottom-line).
And most importantly they don’t know what their competition is paying to move similar product, in similar quantities to similar markets and to similar customers.

If you knew the answers to these items, your effectiveness as a purchaser of transportation would be enhanced tenfold. The carriers do not want you to know the answers, since this knowledge will only weaken their position. There is something to be said about “knowledge is power” and it is very true in these circumstances.

But how do you as a purchaser better equip yourself to negotiate the next transport contract? How can you possess as much knowledge about the issues as your carrier does? I could confidently bet that your carrier can easily answer all of the questions about your business as well as the three most important factors that you need to know but don’t.

The answer is very simple. Engage a professional service that will “benchmark” your business against that of other service users similar to yourself. Only a company that deals with a wide number of transportation purchasers and an even wider circle of carriers can help lead you through the maze that lies before you.

Transportation is a complex industry often slanted in favor of the carriers and only rarely in favor of the purchaser of the service. Comparisons are not easy to make. The carriers even design their pricing in such a manner as to make comparisons extremely difficult. Different weight breaks, different minimum densities, different zone charts, different accessorial charges, different rules and the list gets longer each day.

It's definitely “buyer beware” when looking at your transportation expenditures.

Let LSS take the guessing out of the process. Call us today for a no-cost bench marking evaluation.

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