FREIGHT FOCUS: Using Cost-per-Pound to Reduce Freight Costs
August 1, 2010
The metric of all metrics when it comes to drilling down freight costs is (drum roll, please) cost-per-pound. End of article. Thank you!
All kidding aside, cost-per-pound data is the key to a well-run supply chain. In the transportation world, we spend a lot of time on freight class, distance and weight. However, it’s the cost-per-pound that should mean the most to shippers. When it comes to negotiating freight deals, pricing products, selecting vendors and evaluating rate increases to customers, nothing is more important than the cost-per-pound.
Finding Cost-Per-PoundCost-per-pound is quite easy to extract. Almost every freight carrier in the industry publishes the weight of each shipment on their freight bills. If the weight is on the bill of lading, it will likely get transferred to the invoice.
Many companies are already key-punching freight invoices when they come in or pulling the data from reports sent from freight carriers. The key part of analyzing cost-per-pound is getting the data into an Excel spreadsheet. The needed data includes: shipper and consignee information (company name, city, and state), freight class, weight, and the freight charge. If using a third-party logistics provider (3PL), all of the data is usually lump-summed and can be easily downloaded from the 3PL’s website. In addition to the cost-per-pound data, adding another field for product invoice price enables shippers to drill down even further.
Analyzing the DataThis is the fun part. When a shipper knows the cost-per-pound of their freight and their product, they can become extremely efficient. Knowing what to look for becomes the keystone of this process.
Existing “Free Freight” Programs
It is important to evaluate the profitability of all customers. I cannot tell you how often I see the same “free freight” program applied to customers regardless of geography. Why should the profit margin be so high for a neighboring customer (who is also likely much easier to service) but so low for a customer located on the other side of the country?
When you know your cost-per-pound, you can price your products more effectively. Perhaps increasing the “free freight” threshold makes more sense for customers who are farther away. Alternatively, maybe lowering the “free freight” deal for nearby customers provides more perceived value to that customer. Shippers are often surprised when they see how much their profit for different customers varies based on geography.
Higher Weight Means Lower Cost-Per-Pound
For less-than-truckload freight rates, lighter shipments result in higher rates per hundred-weight (and a higher cost-per-pound). Looking at the weights of shipments requires an understanding of how freight carriers charge for freight. Less-than-truckload carriers use a matrix of weight breaks to charge a “per-hundred rate,” which is based on a specific zip code pair and freight class.
For example, shipments under 499 lbs are billed at the highest rate per-hundred, 500-999 lbs are billed at a slightly lower rate per-hundred, 1,000-1,999 lbs at a little bit lower rate per-hundred, 2,000-4,999 lbs a little bit lower, 5,000-9,999 lbs even lower and 10,000-19,999 lbs even lower. After that, full truckload rates based strictly on miles and capacity go into effect.
When reviewing a six-month or year-long list of shipments to a customer or from a vendor, it’s easy to see where those shipments fall into the rate per-hundred scale. The low-hanging fruit are the shipments that are teetering at a specific weight break. Boosting those customers to get to the next weight break could mean a big decrease in cost-per-pound. If a customer is close to the next weight break, increasing their “free freight” threshold so they are forced to hit that cheaper rate per-hundred will be effective. When dealing with inbound shipments from a vendor, perhaps buying a few extra widgets would do the trick.
Freight Class Can Change Everything
Shippers whose product mix requires them to ship at different classes must remember this concept when reviewing the cost-per-pound data: A 75% difference in yield exists between a class 50 and a class 100. The higher the freight class, the higher the freight charge. This results in a big difference in cost-per-pound, so it is important for shippers to consider freight class when putting together pricing programs, free freight deals, vendors and rate increases.
Integrating the Entire Supply ChainNothing works better than cost-per-pound data to help identify areas to lower costs, provide a benchmark for years to come and hold freight carriers accountable. Having this data is also imperative when putting serious muscle into any supply chain.
Logistics managers can use the data to have a positive impact on all aspects of the company; for example, they can help purchasing managers make smarter buying choices and work with the sales team to creatively incentivize customers. In addition, pricing analysts can use cost-per-pound data to price products more effectively.
George Muha is vice president of Sales for CHTL Logistics. He hosts a blog at www.freightsavingstips.com and can be reached via e-mail at firstname.lastname@example.org.