Knowing How Freight Relates as a Precentage of Invoiceby George Muha on 2012-05-18 01:24:58
Some popular business sayings that are relevant today are “companies don’t know what they don’t know”, “knowledge is power” and “you cannot manage what you cannot measure”. Despite the fact that many executives agree with these quotes and can even be heard saying them, most do not utilize this methodology where it counts the most…within their supply chain.
One supply chain advantage that is significantly underdeveloped is the use of metrics and analytics. When employed correctly these measurements can be a powerful tool in exceeding revenue goals and greatly improving shareholder value. However, on the flipside, the lack of measurements can erode company profits without anyone having any way of knowing or ability to do anything about it.
A measurement that is especially underutilized is freight as a percentage of invoice. As vital as this information is, too often companies just do not understand how freight relates as a percentage of the cost of their goods. Whether a company has a delivered price program or freight is a pass through, it’s vital for this measurement to be in place and regularly monitored.
The Percentage of Freight as it Relates to Invoice Costs MUST be Monitored Regularly
By creating visuals like this map can be very impactful in identifying how freight impacts invoice prices. Tracking such data is very useful moving toward more profitable percentages.
Companies that do subscribe to a delivered price methodology need to especially understand how freight costs impact the cost of goods. But companies that pass freight through on their invoice need to pay attention just as much. It’s a competitive market out there and competitive freight can easily be the difference between winning and losing the business.
Obviously it costs more to ship one thousand miles away than it does five miles away. It also costs more per pound to ship something that is one hundred pounds than it does to ship an item that costs two thousand pounds. These two ideals are the backbone to making the most of these metrics.
Engineering a chart that shows freight as a percentage of invoice by customer or even by state can be wildly eye opening for a company who has never looked at the impact of freight on profits like this. Looking at a healthy sample of time (like a year or more) can arm a company with some excellent data to react upon.
For delivered price customers, having this data will significantly improve their business intelligence. It’s this intel that will help them to make meaningful changes.
Adjusting Delivered Pricing Programs
One common improvement this data provides is on a shippers free freight program. Companies generally have a “free freight” threshold. That is, they offer freight included if a customer buys over a certain amount of volume. Generally this is a universal threshold to anyone who buys from them, despite where they are located.
However, there are big problems with this kind of logic. First, the costs vary to ship all over the country. The company loses much more profit on customers who are far away. So having a universal freight allowed program over a certain buying amount doesn’t even make sense.
Having the proper metrics in place allows a shipper to properly evaluate such programs and create thresholds that make better sense.
By looking at the data, the exact profitability of each customer comes to light. So it becomes evident which companies in certain geographical areas can have higher thresholds. In the same regard, it might make good sense to reward closer customers by giving them a lower threshold.
Companies that pass along freight also should look at this data. Identifying the weight breaks in the freight rates where the cost per pound drops can be significant. It’s certain that customers will feel the love if the company their buying from lets them know of the cost breaks if they buy more. In that scenario, everyone wins.
Understanding the Cost of Freight on Inbound
This article is leaning heavily on outbound freight but it’s just as important to understand freight as a percentage of invoice from vendors. Data makes people smarter so if purchasing people are armed with the true impact of freight, the more intelligent decisions they can make.
There may be two vendors who sell the same product. One vendor might have 5% lower product prices but because of where they are located, their “after freight” charge might make them 5% higher than the second vendor. It’s having the data that makes such decisions a no-brainer.
Same goes with weight break thresholds. If purchasing has a good understanding of at what threshold does their freight cost per pound go down, they can be well informed to buy the proper quantities.
How Do I Find this Metric?
Some companies don’t utilize metrics because they think it’s too hard to gather or might require too many resources to pull. But finding what freight is as a percentage of invoice might not be as hard to find as one might think.
Companies surely have their order data at their fingertips. So locating that should not be difficult. Companies probably also have the freight cost info keyed into their system as well. Generally there is a common number that can connect the two (i.e. order number, job number, etc.). So if this info lies in two separate spots, generally a simple merge in a comma delaminated format can be the basis for this reporting function.
There are many different metrics and analytics that should be used within the supply chain. Freight as a percentage of invoice is a vital one. Companies that don’t have visibility to this metric should strongly consider this as a viable measurement. Freight can make or break profits if not properly managed.