One of the mostly commonly asked questions we receive is “how do I reduce freight costs”. Of course, like most issues in business it’s seldom a simple answer, however there are some simple steps that can be taken. The best results will come from a thoughtful and deliberate approach of improvement over time.
Many customers come to us having had this conversation with their carrier(s) only to be frustrated with the answer they receive. That’s because the carrier often tells their client that the best way to reduce freight costs is by reducing freight prices and this can be achieved by increasing their spending with the carrier, so that they can receive a small volumed-based discount. Alternatively, carriers will suggest signing up to a terms-based contract in return for a discount that will of course reduce freight costs.
The trouble is that very few clients are in a position to take this path and therefore this is not really an option in the absence of any competitive pressure. As a result, a more fruitful path is for the client to look within their business for strategy and tactics to reduce freight costs, while at least maintaining or improving service standard – and it is possible to do both.
Freight KPIs & Benchmarking Reduce Freight Costs
When asked this question, we first tell our clients that the key is to measure their carriers’ cost and delivery performance. You can only discover, (gain insight), into what is going on in your business if you measure it. By measuring, you can also benchmark current performance as a base and also against peers.
What type of things should we measure, I hear you ask? Well, first measure how much freight you are sending and at what cost. This does not mean look at what you spent on transportation at the end of year and then divide by your sales to get a freight cost as a percentage of sales. While this is worthwhile, it’s certainly not what we would regard as sufficient to gain true insight. What we mean is:
- How many kgs did you ship?
- How many cubic metres did you ship?
- How many con notes (shipping orders) did you send?
- Where did you send them?
- With which carrier and what service did you use?
Once you know this, then you can anser the following:
- What was the average cost per kg by region?
- What was the average charge weight of the consignment?
- What was the average charge per consignment?
Once you have answered these questions and can track the changes over time, (via trending graphs in a Dashboard), you can now understand how operational changes will impact these costs. For example, we normally see a direct correlation between the charge weight of the consignment and the per kg unit cost. The higher the average charge weight of the consignment, the lower the unit cost. By this simple measure alone clients can see how they might reduce freight costs or prevent those costs from rising. Within their business and in consultation with their most important customers, clients can encourage an increase in the average size of their consignments, (which normally also reduces the number of consignments), and therefore reduce freight costs significantly.
Reduce Freight Costs via Freight Management Software
Another area where we can see operational changes influencing transportation costs is where customers introduce transport software into the business to automatically import orders into a multicarrier dispatch software and automatically pick the least cost carrier and print the label. By automating the dispatch process customers can eliminate or significantly reduce double handling, errors, and consolidate orders. This will also considerably increase their throughput, whilst reducing freight costs, and improving service. On many occasions we have seen that by introducing least cost carrier selection customers have reduced freight costs by 5%-20% by this method alone.
Now that you are accurately measuring this freight data you can have conversations with customers and internal stakeholders to increase the average size of your consignments, or at least be aware of what will occur if they must decrease.
Can you Reduce Freight Costs via Customer Service Improvements?
Customer Service is a key area of Logistics. Therefore, we believe that improvements in your Customer Service outcome via transportation operational changes should be classified as freight cost improvements.
Once again, the foundation of driving those freight cost improvements is the measuring and benchmarking your carriers’ and your Customer Service staff members performance.
What should you be measuring?
- What percentage of your carrier’s consignments are delivered over a period of time?
- Of those delivered: how many were late; how many were on time?
- Of the ones that were lat, how late, and what was the reason for their late delivery?
If you are really on top of things then you will also know how each carrier performed relative to the other and, as importantly, how did the carrier perform for specific receivers. Once again if you collect and understand this information then you will be in a position to make operational changes that will improve costs and freight customer service performance.
This is even more applicable if you can examine the service implications in conjunction with the freight cost and activity-based data. For example, if you have a carrier that is performing relatively badly against another of your carriers in terms of delivery performance, and you also understand how much this carrier’s performance is in terms of cost per kg to certain areas, then you may be able to consider switching from one carrier to the other. By being able to quantify the cost of dealing with delivery service failure you can easily determine a business case for switching from one carrier to another with complete control of what the outcome will be therefore de risking the decision and implementation.
As with delivery performance, it is also important to measure how carriers perform in relation to responding to freight enquiries and being able to categorise what the query was about i.e., late delivery or damage product. If a carrier does extremely well against another competing carrier for limiting enquiries, delivering on time, and responding promptly to those few enquiries they receive then this will further reduce freight costs significantly, as not only will your customers enjoy a more reliable service, but you will need to employ less time and / or staff to handle these freight customer service enquiries.
By accurately and consistently measuring your carrier’s performance over time for both cost, service and delivery performance, you will find yourself with a treasure-trove of data, that will reveal a number of operational clues on how to both reduce freight costs and improve the service you are providing to your customers. This data will also help you frame important conversations with your customer on how they too can alter their processes and practices that will lead to cost reductions and service improvements for both organisations, creating an easy win-win outcome for all.
If you would like further assistance on how to collect and utilise this freight data so as to gain control of your freight outcomes, then get in contact with us today.