While it’s true that most companies aggressively manage outbound transportation, too often inbound transportation costs are not controlled. However, as more and more companies face a need to reduce expenses during this challenging time, total transportation cost control is heating up as a top priority for upper management. The pressure for cost reduction points squarely to managing transportation in both directions. Because it has long been ignored, savings opportunities in inbound transportation are typically higher in percentage than in outbound transportation and, very often, in total dollar amount as well.
Most purchasing agents fail to consider that suppliers use their outbound transportation departments as profit centers, not as cost centers as many believe. What does that mean? It means shippers (your suppliers) are using their negotiated carrier rates and your package volume to fatten their bottom lines. In fact, you are probably doing the same thing to your customers! I can count on one hand the number of clients that I’ve had over the years that passed their discounted rates on to their customers.
Here’s How Inbound Transportation Markup 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 passing along only 80% of its collections to the carrier. That’s a nice profit center, wouldn’t you agree?
Inbound shipping costs are often bundled with product costs, hiding the actual 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 your 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.
You Don’t Have to Pay a Premium for Inbound Transportation
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 opportunities available to your company.
- Meet with your 3PL or logistics consultant to set up an inbound collect billing program. They will be happy to accommodate your request. Additionally, by controlling inbound volume, you suddenly become more profitable to your carrier because of the high number of inbound packages per day. The overall cost of servicing your account will drop considerably for your carrier once you implement an inbound collect program. Take advantage of this cost reduction when discussing new rates.
- 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 challenge 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.