Five Reasons For High Transportation Cost

Five Reasons For High Transportation Cost Case Study

Here’s another case where freight cost as a percent of sales benchmarked high. This shipper of computer accessories had a demonstrated history of continuous improvement in freight cost as a percent of sales. In spite of this performance, the benchmark indicated the strong possibility that costs could be lowered. The following are the findings on each of the top five reasons for high transportation cost. 

1. High Freight Rates

The base LTL tariff used in this company was based on origin and the destination state. Rates were based on shipment size and on FAK classification. The questions to be answered were: Are overall rate levels competitive? Is there any advantage to a state (rather than ZIP) based rate structure? The general rate benchmarking process described in Case Two (above) followed that. The results were overall levels higher than the lowest benchmark by 1 to 10 percent, depending on the destination region. States closer to the shipping point had good rates; those farther away had the most potential for reduction. For large states like California and Texas, there was some justification to “sharpen the pencil” and use ZIP-based rates; for most states the single rate base yielded good results.

2. Outdated warehouse network

The most common problem in configuring a logistics system to serve customers while minimizing cost is keeping up with the changes necessary to meet the current demands for quality in product delivery. The concepts are clear and the tools are available; it’s just that the pressure of day-to-day operations can easily put off the network reevaluation until it is overdue. In this case, the most important change occurred on the supply side of logistics. Manufacturing had gone global. The current network was designed when over 90 percent of the products sold in domestic markets were manufactured in one of two centrally located plants. Now, over 50 percent of the product is made in the Far East and over 15 percent (and growing) is made in Mexico. Even with calculations on the back of an envelope, the client quickly realized that bringing product from China into the U.S. and halfway across the country before reshipping it to a Southern California customer would result in high freight cost as a percent of sale. Add to this a rapidly decreasing price structure and the result is an opportunity to do better.

3. out-of-area shipping

Out-of-area shipping occurs when the primary shipping point cannot fulfill an order and the order is routed to an alternate facility. This happens when the primary shipping point is out of stock on one or more items or is overloaded with orders beyond the current capacity. When out-of-area shipping occurs, two things happen and neither is good! First, the transportation cost is usually higher because the secondary location is farther from the customer. Second, the transit time is longer for the same reason, so the shipment may arrive later than expected. A good database of freight bills, properly coded, can help to identify the extent of out-of-area shipping and provide the tools for estimating the additional cost involved.

4. poor compliance with prescribed routings

Prescribed routings include the correct use of mode and carrier for a specific size of shipment. In most cases, local shipping personnel should follow the routing guide as prepared by a professional traffic manager. A routing guide should be customized for each location and include the best route and at least one alternative routing along with the cost and service difference between the two. Complete routing instructions may include specifications for parcels, emergency parcels, less-than -truckload shipments, priority LTL, and truckload shipments. The best mode and carrier should be specified by destination region, state, city, or ZIP Code as needed. As mentioned above, a good freight payment database can support analysis of compliance with these instructions. It is not unusual to identify 15 percent freight savings in cases where professional routing guides are not maintained and where compliance is not monitored.

5. Split Shipments

Compare orders to shipments. Are you able to ship perfect orders (on time, without errors and complete)? When orders are split into multiple shipments, the resulting individual shipments move at higher freight costs per pound than if they were all shipped together so that one shipment is created from one order. Inefficient things happen when split shipments occur. Beyond the premium in transportation cost, there are additional clerical and material handling costs that relate to the processing and receiving of each individual component of the order. The extent of this split shipment problem can be quantified if the freight payment database contains the unique order number corresponding to the freight bill. When more than one freight bill contains the same order number, a split shipment has been identified. The solution to the split ship condition may be in production. However, the planning and deployment techniques to make the best of the situation are urgently needed. Shipping costs can be as high as 30 percent above “normal” levels due to unnecessary split shipping.

In this case, opportunities amounted to 15 to 20 percent of transportation costs. The savings came from taking a first step in improving each of the five areas listed above. Not all of the issues have been solved, so the opportunity to improve next year still exists.