How much in sales do you need to generate to cover $237,500 in expenses? At 3 percent net profit, the answer is $7,916,667. So, where are the savings?
TAG Logistics, an IMARK member service provider, has been working to deliver transportation cost efficiencies in the wholesale distribution industry for more than 25 years. The company’s research demonstrates that average available savings range from .75 percent to 1.25 percent of annual sales. For an IMARK member distributor with $25 million in annual sales, this could equate to as much as $237,500 a year.
A distributor’s transportation costs can be broken into three areas—customer delivery system, supplier paid freight and branch transfer.
In the customer delivery area, costs are made up of driver wages/benefits, truck depreciation/lease, maintenance, fuel, insurance, registration, taxes and route management. Think of delivery expense in terms of one truck’s annual costs plus the cost of the driver’s wages. The average cost to operate a single delivery route is $74,500 a year.
Route optimization is key to delivery cost management. To provide the best customer service possible, distributors often have more trucks and use more drivers than necessary. How full are the trucks? Are the trucks dispatched early in the day so that they are available to make a second or third run later in the day?
Sales involvement in the delivery process is very important. Are customer delivery times properly qualified to give the warehouse enough time to efficiently set a route? Are emergency deliveries an exception or are they the rule?
For a typical distributor, a driver should make 15 stops and drive 150 miles each day. TAG Logistics normally finds numbers well below these.
A 24-foot delivery truck costs upward of $100,000 to purchase today. Even though truck financing options, such as finance leases, fair market value leases and full-service leasing are abundant, it still costs a considerable amount for a truck.
The question to ask is, “Do I need another truck?” If the current fleet is less than 70 percent optimized, the answer most times is no.
In addition to servicing customers with the company fleet, distributors can outsource certain deliveries, such as small packages or less than load services, to a third-party carrier for cost savings. Distributors can mistakenly think that a delivery must be made with 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 to look at for transportation cost savings is freight. Many distributors view freight rates as the beginning and end to good freight cost management. This view is plain wrong.
Focus on the total cost of freight expense to the company. To do this, identify all freight expenses (inbound supplier freight, outbound carrier freight) and subtract the freight rates billed to customers to determine the true cost of freight to your company, which is called net freight expense.
A properly managed freight program will amount to .2 percent or less of annual sales. Total customer freight rates should amount to 75 percent or more of the total freight expense. Total freight cost, as a percentage of sales, should be less than .8 percent.
Like delivery, freight is an area where TAG Logistics finds a great deal of opportunity for cost savings. By only addressing rates, distributors miss more than 85 percent of this opportunity.
Finally, look at branch transfer. Are branches serviced at the right frequency? Are only fullbox quantities transferred? Can deliveries and transfers be combined on a single run from a larger branch to support another branch? Branches within 50 miles of each other are prime candidates for delivery consolidation.
More today than ever before, distributors are looking at their transportation processes with a critical eye. When closely examined, unnecessary costs can be identified and eliminated. All that is required is not falling victim to the philosophy that “we have always done it this way.”