Outside of products, materials and people, carriage and logistics are often the highest cost areas on a client P&L account. Very often, savings are available, and indeed they can be sizeable, but the key is to ensure that they do not come at the price of poor service and damage to brand reputation.
KPI’s are important indicators that clients can assess when considering a carrier, albeit also be aware that, like any large business, there are good hubs and franchisees, and bad hubs and franchisees. With this is mind, don’t put all of your eggs in the KPI basket as, often, there is no substitute for running some pilot shipments and assessing customer feedback.
Things to consider when approaching a review of your carriage and logistics costs:
- What are your competitors paying? We will be working with businesses or competitors in your sector. We can’t disclose what they are paying for carriage and logistics, but the knowledge we have makes it a lot easier to benchmark and evaluate client costs.
- What are the equilibrium points in terms of optimum rates and volumes? I.e. where do rates bottom out? What is the absolute lowest that a carrier will ever charge, regardless of volumes?
- Have you got a contingency supplier in place for all carriage streams and how quickly could you bring them into play if necessary? For example, the collapse of Citylink was largely unexpected and saw many businesses have no means of shipping their products over the peak Christmas period.
- Does your carrier have alternative charging mechanisms or tariff structures that could suit your profile better? Do you even know what your profile is today? From experience, it can change season to season, and the key to optimising cost efficiencies is to ensure your profile is always appropriate to the pricing structure.
- Are you hedging your pricing and using long term rates cards (i.e. fixed for a year) to mitigate inflationary cost increases? Are you using a combination of rate cards and spot markets? For something like sea shipping costs this approach is often the most efficient, albeit involving a little more effort than running a set rate card.
In our experience, it is impossible to conduct a fully effective review of carriage and logistics costs unless you approach the process from a fully independent perspective, looking at every opportunity in the markets.
Too often we see the following elements muddy the water for our client’s procurement processes, and they lose money or fail to obtain the best services as a result:
- Logistics or Procurement Managers who have their favourite suppliers. These personal viewpoints should not be allowed to impact decision making. We urge clients to look at what the markets are doing, what competitors are doing, and survey every viable opportunity.
- Working specifically with incumbents. The large carriage and logistics suppliers employ slick and extensive business development teams to win or retain clients, often commission-based. Don’t allow these guys to stop you surveying the full market!
- Second tier consolidators or brokers that only work with a small selection of carriers. Again there are hidden commissions etc. in here so the organisations (whilst sometimes very competent) are far from independent.
- Savings can only be obtained by migrating carrier. This is rubbish. We regularly build business cases to evidence that the existing carrier is overcharging and obtain significant savings with zero disruption to client activities.
- Migrating carriers is high risk or an intensive process. This too, is rubbish. Migration needs to be managed carefully via strategic pilots and a phased migration plan by product line or region. New carriers can be integrated into your systems and train your employees on their processes within two weeks.
- Failure to review carriage and logistics costs on an annual basis. The carriage markets are volatile and rates can sometimes be capacity driven. We would recommend annual sense checks on procurement processes.
- Clients who don’t believe that they have a “significant enough spend” to warrant the work involved in reviewing these costs. Firstly, you don’t need to review them as Auditel will do it for you. Secondly, remember that technically every pound you save here goes straight onto the bottom line. It’s all direct net profit.
Article by: David Kendall
This is an article from: Insight & Innovation: Issue 2 – click here to read the whole newsletter.