Understanding The Freight Component Of Delivered Pricing

Often times, companies purchase products (finished goods, raw materials, supplies and so forth) on a delivered basis, and they leave the freight responsibility up to their supplier. This can have benefits. For example:

  • Usually (but not always) title to the goods doesn’t transfer to the buyer until it reaches the buyer;
  • The buyer doesn’t have to be concerned with arranging transportation;
  • Transportation service and delivery times are the responsibility of the seller/supplier.

    In combination, these benefits may provide value to the buyer. However, unless a buyer knows what premium he is paying to get this value from his supplier, he can’t truly evaluate its relative benefit to his company.

    Although this situation frequently surfaces in the world of procurement, it is also a business challenge that is relatively easy to fix.

    I have found that there are delivered prices of products that do truly reflect the price of the product at its production location plus an appropriate actual cost—or very near actual cost—of transportation to the buyer. However, I have also found cases where the “add-on” charges and other factors to deliver the product inflate the cost well beyond where it needs to be to transport the product from origin to destination.

    These add-on factors, if not checked, can be a substantial, hidden cost for the buyer. This is especially true if the producer’s view of this add-on is that it is simply a cost they pass through since “the buyer is paying anyway.”

    Over the years, I have seen all kinds of charges thrown into add-on factors, including loss and damage costs, time value of money, perpetual transportation company rate increases, fuel surcharges unrelated to the incremental, increased cost of fuel, and many other fees.

    Another indication of add-on charges that I’ve seen is regional or statewide delivered pricing. This should be a red flag that you are potentially paying more than you should be paying for freight to deliver product to your usage location.

    So how do you fix this? Easy!

    Every time you buy something from a vendor, ask for both a price where you pick up the product at their shipping location as well as a delivered price to your receiving location. If you can’t get these two numbers from your vendor or there is hesitation to provide both numbers, be suspicious! They may be hiding something or making a considerable amount of money on the add-on fees they are charging you.

    Recently, I did some transportation analysis work for a large dairy company that buys a substantial amount of a dairy product from a supplier with multiple supply locations throughout the US. I suggested that my client go back to their supplier and get prices at the shipping location to compare to the delivered pricing from this supplier. The result was that my client saved almost $600 per load on freight!

    This does not mean that every supplier is out to make a lot of money on freight costs. Sometimes, if freight is simply a pass-along to the buyer, the supplier just doesn’t spend a lot of time thinking or worrying about the freight cost. One can easily see how that could evolve over time.

    Here is another important point to consider: If you take the time to get competitive bids from haulers to transport the product that you are buying, be sure to include the incumbent hauler. I have found that roughly 50 percent of the time, the incumbent will give you the best rate in a bidding process. Sometimes they just need a little incentive (like competitive bidding) to realize that their rates may have risen too much over time.

    Finally, if securing competitive bids from haulers, the more you tell the prospective bidders up front, the better the process works. For example, be sure to provide the following information:

    • Normal loading/unloading times;
    • Whether appointment times are needed;
    • Whether dropped equipment is required;
    • Whether any prior load restrictions exist;
    • Whether specialized equipment is needed.

       The more complete this information is, the fewer questions you will answer along the way, the more realistic the bids will be, and the fewer problems you will have when you transition the business to a lower-cost hauler.

       In summary, just check out the freight cost you are paying when you buy delivered. It could very well be the best possible freight cost achievable. However, it may not be.

       In closing, I can help you evaluate—at no up-front cost—the freight component of delivered pricing for the products you buy. If you want to take advantage of this service, give me a jingle or send me an email.

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      Axelson is vice president of transportation, Dariy.com, Plano, TX. He can be reached at 214-360-0061, ext. 235 or at carl.axelson@dairy.com.

       

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