Dude, Where`s my margin? (part 3)

In the second part I`ve argued that most of the retailers call COGS is a sum of actual Cost of Goods Sold and costs of fulfillment inefficiencies (for some of which vendors should issue credit memos). In this part I`ll share some of the benchmarks and cost reduction practices for shipping costs.

Shipping costs are likely to be your second biggest cost on P&L statement. They range from 10 % to 25 % of sales depending on your product portfolio and state of operations. While every company is different - it`s possible to benchmark costs by a "delivery" channel. For small packages shipping cost of 6 % of Net would be an excellent result, for LTL (Less Than Truckload) - 12 % and for White Glove - 15 % should be considered as benchmarks.

Let`s say you are 50 - 50 small packages and LTL (in terms of number of packages). Then your goal is 10 % (since LTL is on average 2X more expensive then UPS/FedEx). So, if your costs are above that - stay with me for a bit longer...

There is no magic in lowering your shipping costs. You can lower your costs by 7-10 % of Net Revenue by following a 4 step approach:
1. Consolidate shipments with fewer carriers and renegotiate pricing,
2. Convert vendors to ship on your account,
3. Inspect shipping invoices for errors,
4. Reconcile shipping costs on the product level for the best pricing decisions.

Consolidate.
Shippers love big accounts. Even if you are small you can still present yourself as a desirable client by consolidating your shipments and demonstrating significant growth of your business. For specific advices on negotiation strategies check out my article Retailers and Shippers: Friends or Foes.

Convert vendors to ship on your account.
Having vendors ship on your account is the cornerstone to lower shipping expenses. Most of the vendors are happy to switch. They need a simple process; you need PO numbers on the shipments. Help them create your company profile in the UPS/ FedEx systems and send a PDF of a Bill of Lading with your details pre-printed for LTL and White Glove carriers.

Once you made vendor`s life easier you can expect them to put your PO numbers on each of the shipments as a return favor. Follow up on every order missing the reference and pretty soon you will have a perfect process.

Inspect your shipping invoices for errors.
Stuff happens… Vendors ship somebody`s else orders on your account, shippers apply wrong discounts… Catch them and call the party immediately to find the cause and prevent errors in the future. I`ve reduced shipping by 10 % by identifying and correcting the errors.

Reconcile costs on the product level.
You will be amazed how different your actual costs are from expected. In the article How Free is your Free Shipping? I made an argument that incorrect shipping costs lead to the situation when several highly profitable products subsidize the rest of the catalog suppressing your sales on one side and diluting margins on the other.

Shipping cost reconciliation can be a part of COGS reconciliation and should be run monthly for top-selling SKU`s.

Conclusion
You can reduce your shipping costs by 7-10 % of Net Revenue through negotiating better shipping discounts, converting vendors to ship on your account and monitoring your invoices.

My strong recommendation is to outsource logistics management and offer a performance fee arrangement. There are teams of experts that will work hard to get you the last cent possible. You get the expertise and pay only when it saves you money.
Perfect arrangement, isn`t it?

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1 Comments:

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September 17, 2015 at 4:24 AM  

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