Freight Focus / Columns / Resource Management

Freight Focus: Freight as a Percentage of Invoice

August 1, 2012
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Creating visuals like this map can be very helpful in identifying how freight impacts invoice prices. Tracking such data is useful in moving toward more profitable percentages.

"Companies don’t know what they don’t know.” “Knowledge is power.” “You cannot manage what you cannot measure.” While many executives agree with these common business phrases and can even be heard saying them, most do not use this methodology where it truly counts—within their supply chain.

Metrics and Analytics

Manufacturers often overlook supply chain metrics and analytics. When employed correctly, however, these measurements can be a powerful tool in the drive to exceed revenue goals and greatly improve shareholder value. On the flip side, a lack of measurements can erode company profits without anyone being aware of the situation or how it might be fixed.

 One measurement that is especially underused is freight as a percentage of invoice. As vital as this information is, companies often 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 is essential for this measurement to be in place and regularly monitored.

Regular Monitoring

Companies that subscribe to a delivered price methodology especially need to understand how freight costs impact the cost of goods, and companies that pass freight through on their invoices also need to pay attention. It is 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 something 1,000 miles away than it does to ship the same item five miles away. It also costs more per pound to ship something that is 100 lbs than it does to ship an item that weighs 2,000 lbs. 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 eye-opening for a company that has never looked at the impact of freight on profits. Looking at a healthy sample of time (e.g., a year or more) can arm a company with excellent data on which to base decisions.

For delivered price customers, having this data will significantly improve their business intelligence. It is this information that will help them to make meaningful changes.

Adjusting Delivered Pricing Programs

This data can help improve the shippers’ free freight program. Companies generally have a free freight threshold; that is, they offer free freight if a customer buys more than a certain amount of volume. This is usually a universal threshold for anyone who buys from them, despite the customer’s location.

However, this kind of logic results in problems because, as previously noted, costs vary to ship all over the country. The company loses much more profit on customers located far away. Having a universal freight-allowed program over a certain buying amount does not make sense.

With the proper metrics in place, a shipper can properly evaluate free freight programs and create thresholds that maintain profitability. After studying the data, it will become evident which companies in certain geographical areas can have higher thresholds. In the same regard, it might make sense to reward closer customers by giving them a lower threshold.

 Companies that pass along freight should also look at this data. Identifying the weight breaks in the freight rates where the cost per pound drops can be significant. Customers will appreciate it if their supplier lets them know of the cost breaks for higher volume purchases.

Inbound Freight Costs

Although outbound freight costs should be measured and analyzed, it is just as important to understand freight as a percentage of invoice from vendors. If purchasing personnel are armed with the true impact of freight, they can make more intelligent and informed decisions.

For example, say two vendors 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. Having the proper data makes such decisions a no-brainer.

The same goes with weight break thresholds. If purchasing has a good understanding of the threshold at which the freight cost per pound decreases, they can be well-informed to buy the proper quantities.

How Do I Find This Metric?

Some companies do not use metrics because they think they are too hard to gather or require too many resources to pull. However, finding freight as a percentage of invoice might not be as hard to find as one might think.

Companies have their order data at their fingertips, and likely have the freight cost information keyed into their system as well. A common number can generally connect the two (i.e., order number, job number, etc.). If this information lies in two separate spots, a simple merge in a comma-delimited format can be the basis for this reporting function.

Many different metrics and analytics should be used within the supply chain. Freight as a percentage of invoice is a vital example. Companies that do not have visibility to this metric should strongly consider adding this viable measurement to their process. 



 

Any views or opinions expressed in this column are those of the author and do not represent those of Ceramic Industry, its staff, Editorial Advisory Board or BNP Media.

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