In working on transportation cost efficiencies in the wholesale distribution industry for over 25 years, we find that the average available savings ranges from .75% to 1.25% of annual sales. For a distributor with $25 million in annual sales, this equates to $237,500 a year.
How much in sales do you need to generate to cover $237,500 in expense? At 3% net profit, the answer is $7,916,667. So… where are the savings?
Transportation costs for a distributor can be broken into three areas. They are the customer delivery system, branch transfer and LTL, small package and supplier paid freight.
In the customer delivery area, costs are made up of driver wages/benefits, truck depreciation/lease, maintenance, fuel, insurance, registration, taxes and route management.
It is easiest to think of delivery expense in terms what one truck with all annual expense including driver wages cost. The average cost to operate a single delivery route is $74,500 a year.
Route optimization is a key to delivery cost management. Due to the drive to provide the best customer service possible, distributors often have more trucks and use more drivers than is necessary. How full are the trucks? Are the trucks dispatched early in the day so that after the initial delivery run, they are available to make a second or third run?
Sales involvement in the delivery process is very important. Are customer delivery times properly qualified to allow the warehouse the time to efficiently set a route. Are emergency deliveries an exception or the rule?
For a typical distributor, a driver should make 15 stops and drive 150 miles each day. What we normally find are numbers well below that.
A 24’ delivery truck is costing upwards of $100,000 to purchase today. Truck financing options are abundant. Finance lease, fair market value leases and full service leasing are the most common. One way or the other, you still wind up paying a considerable amount for a truck.
The question to be asked is “do you need the truck at all?” If your current fleet is less than 70% optimized, the answer most times is NO.
In addition to servicing customers on the company fleet, an area of opportunity is to outsource certain deliveries to a third-party carrier such as a small package or LTL service. Distributors can mistakenly think that a delivery must be made on the company fleet to assure proper customer service.
However, what customers truly care about is that the product shows up when they need it. How the product gets there is immaterial to them. Outsourcing is an additional means of supplementing delivery capacity.
The second area of transportation savings is freight. Many distributors view freight rates as the beginning and end to good freight cost management. This view is plain wrong!!
What needs to be focused on is the total cost of freight expense to the company. To identify this, all freight expense must be identified (inbound supplier freight, outbound carrier freight). Subtract from this number the amount of freight billed out to your customers. What’s left over is the true cost of freight to your company.
We call this net freight expense. A properly managed freight program will run at .2% or less of annual sales. Total customer freight billed out should be 75% plus of total freight expense. Total freight cost as a percentage of sales should be less than .8%.
Like delivery, freight is an area that we find a great deal of opportunity in for cost savings. If you only address rates, there is 85%+ of the opportunity not being addressed.
Finally, the transfer area. Are the branches being serviced at the right frequency? Are only full box quantities transferred? Can deliveries and transfers be combined on a single run from a larger branch supporting another branch? Branches within 50 miles of each other are prime candidates for this.
The answer to those questions can provide yet another source of cost savings opportunity for the distributor.
More today than ever before, distributors are looking at their transportation processes with a critical eye. On close examination, unnecessary costs can be identified and eliminated. All that is required is not to full victim to the philosophy that “we have always done it this way”.