Your supply chain is one of the biggest cost centers in your entire organization. Reducing your supply chain spend can help increase your net income without raising top line sales. Most organizations have a complex supply chain that contains many different segments which when totaled together can be quite intimidating. Breaking down these segments individually is important so you can focus on each area to find efficiencies and identify supply chain savings. Having a close pulse on each transportation vertical is critical, as well. Transportation verticals ebb and flow based on supply and demand and other macroeconomic factors so knowing when to negotiate in a favorable air import market vs., say, domestic truckload lane pricing is essential.
Supply chain savings should be a continual focus across your organization. Figuring out the inbound side is an important first step, but there is much more to look at including fulfillment, outbound shipping, and reverse logistics. In this guide, we will walk through all the sequential steps of a supply chain and provide some helpful tips on how to achieve supply chain savings.
It literally all starts here. Most consumer products are not developed, iterated and produced in the United States. A vast majority are created overseas due to cheaper and more stable labor and raw materials. If your vendor is overseas, then you need a way to get the products to your warehouse(s). There are two traditional ways of achieving this: air and ocean.
If you need your product urgently and your MSRP can support a high cost per unit (CPU) basis, air shipping may be the right transportation method for you. These services are good for both domestic and international. The domestic air market is traditionally more stable and the foreign air market is more volatile, which can lead to less predictability on costing. There are traditionally two ways of moving product via air: Courier and Cargo
This service is available from reliable couriers such as DHL, FedEx, and UPS. Typically, this service is used for small packages in size and a small total # of packages. It is commonly used for samples, one-offs, and emergency needs. These services are door-to-door meaning they pick up in the foreign country and deliver to your facility or end-user address. The freight costs here are pretty high, but there are few surprise fees. You will get one loaded ‘freight charge’ when shipping air courier. If you need something in a pinch and it is relatively small using an air courier will be your best bet. However, if you are a business that is importing larger amounts of freight you should consider using air cargo.
Air Cargo (AKA: Air Freight) focuses on reserving unused space on commercial and passenger planes. You didn’t think the airlines were using all of that storage space for checked luggage did you? This service is much cheaper on a per unit basis, often 30-50% cheaper than using an air courier. However, there are additional “haulage fees” that are passed down from airports. You should assume an additional 5-10% in fees above what you are quoted as these often trickle in post quote and are pass-through fees. One thing to keep in mind with using air cargo services is the rates are only airport-to-airport. You or your forwarder will have to arrange transportation from the destination airport to your facility.
Another difference vs. using an air courier is the need for a customs broker. Typically, the couriers will use their in-house inexpensive brokers. For imported air freight, you will need to align yourself with a Customs Broker, such as Expeditors. They will provide clearance for your freight and pay Customs directly on your behalf for duties and other fees (they will bill you separately). Air Freight is charged based on the weight of the shipment so you may see a rate from Shanghai to JFK Airport for $3.30/KG. If your shipment weights 300KG, then you would pay $990 in air freight.
A rule of thumb to help you decide on whether to use air couriers vs ocean freight is weight. Shipments under 200KGs shipping some air method opposed to sea freight in almost always cheaper and obviously quicker (2-7 days delivery on average). Another consideration on whether to use air services is the value of the products you are importing. If you are importing items that have high MSRPs (>$79.99) it is more palatable to pay for air freight. If you are importing items that sell for $9.99 each the economics usually don’t work out. The last consideration to be cognizant of on shipping any air services is dimensional pricing. You will have a set or negotiated dim factor. This can make the actual chargeable weight more than the actual weight of the shipment. This is applicable mostly on bulky shipments. The courier will take the greater of the two in actual weight vs dimensional weight (LxWxH/dim factor) to determine your chargeable weight.
Supply Chain Savings Tip: Negotiate tiered rates tables based on weight breaks. Your cost per KG will be decidedly lower the more weight that you ship.
If you are importing regularly, have strong volume, and are looking for a repeatable model, Ocean Freight may be right for your business. Sea freight is very common for businesses that are scaling or have scaled. You pay for the entire container so it is important that you fill them to minimize your CPU on your import costs. If you book a container and don’t fill it completely it is important your vendor or forwarder puts in adequate bracing to limit potential damage in-transit. There are two main types of Ocean shipping methods: Full Container Load (FCL) and Less than Container Load (LCL)
The full container loads come in multiple sizes: 20′, 40′, 40’HQ (high cube), and the less used 45’HQ. Again, you paying for the entire container with this service so picking the correct size to help minimize your cost is important. The standard size containers (20′ and 40′) are typically 8’6″ high and 8 feet wide, with a door height of 7.5 feet. High cube containers are a foot taller at 9’6″ high and 8 feet wide, with a door height of 8.5 feet tall. The foot doesn’t sound like a lot but if you are floor loading freight or even double stacking pallets it can make quite the difference on container utilization.
Full containers can cost anywhere from $2,000-$7,000 depending on your origin and destination combination. There are additional security, bunker (fuel), and other accessorial charges that can add up, as well.
Less than Container Load is an interesting option if you have enough freight where air doesn’t make sense, but not enough where a 20′ or 40′ container could be justified. The easiest way to visualize how LCL works is comparing it to Dometic LTL. With LTL, you are typically shipping 1-10 pallets. The carrier picks up your freight along with freight from other vendors to make a full truckload that is then brought back to the local center to be nationally dispersed. LCL works the same for imports. Your forwarder will offer this service in and around foreign port cities. They will consolidate freight from many different shippers until they make a full container load.
When using LCL you pay just for the space you take on the container. Your freight is then combined with other vendor’s freight so each party is paying for their space. The issue with LCL is the time it takes. Depending on the origin, it can take multiple weeks or even months for a full container to be completed as the forwarder looks for volume. Your freight is not going to sail until the container is full so this service is typically used less ,but is good for non time-sensitive imports.
Supply Chain Savings Tip: Negotiate rebates with your steamship line or forwarder contracts. This can be based off of total number of containers and your growth year-over-year.
If your supplier base is more domestically based, then domestic trucking will be the most cost efficient method to inbound freight. There are two main methods of domestic trucking: Less than Truckload (LTL) and Full Truckload (FTL). Depending on how much freight you need moved and the distance from your supplier to your facility will help influence which method to use to deliver supply chain savings.
An alliterative example: Your fulfillment center is based in the Midwest, but your supplier base is mostly on the West coast. You have a supplier in Los Angeles that has three pallets of freight you need. Booking a LTL shipment with a national carrier (YRC, Old Dominion, UPS Freight, etc) allows you to mimic the ‘pay for space’ model we discussed previously with LCL imports. You will pay a few hundred bucks and have your freight in 3-5 days. This is a great service for shipments that are 1-10 pallets.
Supply Chain Savings Tip: A lot of individuals think you can only negotiate ‘lane pricing’ for full truckload shipments. If you are savvy enough and have repetitive supplier->your facility moves you can negotiate specific pricing with LTL carriers to lower your costs for these moves.
Now, let’s use that same example but this time you have 14 pallets you need to bring in from Los Angeles. Booking with a national truckload carrier will allow you to essentially rent the entire trailer, usually a 53′ space. In this space you can fit 26 standard size pallets and 52 double-stacked standard size pallets. If you don’t fill the trailer, however, be sure your supplier properly braces your load to decrease the likelihood of damage in transit. Hypothetically, you could still send the same 14 pallets with a LTL carrier but you will get hit with an expensive volume quote since you taking up more space than you should with this service.
Another key differentiator between LTL and FTL is the number of touches and thus the opportunity for damage. LTL shipments are picked up from your facility and taken back to the carrier’s local hub. Your freight is consolidated with other freight going to the same destination state or city. The longer the transit the more times this hub consolidation can occur. It is common to have several touches on LTL freight. With FTL, you have essentially ‘bought the trailer’ for your move. The owner/operator will pick up the goods from your supplier and apply a seal to the trailer. Then, he/she will drive the load direct to your facility. You should ensure the seal # matches what is on the paperwork when the driver has arrived. Truckload shipments by nature have less touches and far less damage occurrences vs. their LTL counterparts.
Supply Chain Savings Tip: For domestic palletized shipments a rule of thumb is to send 1-10 pallets LTL and >11 as FTL. You should rate shop this both ways though to see which delivers the best freight CPU as all carriers are different.
A less frequently thought of and used transportation method is the ole’ faithful rail. Yes, there are many benefits of using trains to move your cargo. They are very reliable from an on-time percentage, they are capable of hauling large loads, have low damage rates and are more environmentally friendly. For door-to-door imports often the rail segment will be included. Common import ports on the West coast are Los Angeles, Seattle, Vancouver, and Prince Rupert. If you are located in the Midwest, then the containers will be loaded on a train and will be railed down to the closest rail yard. From there a drayage carrier will complete the final leg of delivery.
Supply Chain Savings Tip: Rail can be used for fully domestic loads, as well. They will be a little slower than using a LTL provider but will be more cost efficient. This makes the most sense for long-distance loads.
We won’t spend too much time here as most individuals are familiar with domestic parcel shipping (FedEx, UPS, DHL, USPS and others) and we have covered them in great detail in this previous blog. One key thing to point out, however, is the benefits that UPS and FedEx provide for multiple parcel shipments shipping from the same origin pick-up point to the same business destination.
UPS calls this hundredweight service. Instead of getting the full price individual charge on 20 parcels from your supplier to your facility you get a tiered discount. This is available if the total weight of the packages is between 100-1,000 pounds. The calculation is simple: Divide the total number of pounds by 100 to find the hundredweight (CWT). Then, reference the current hundredweight tier sheet to find your discounted pricing.
FedEx calls their program ground multiweight. It works in a very similar manner. However, FedEx starts their program at 200lbs. They have additional pricing tiers based off weight breaks which mostly match UPS.
The benefits of these programs are no pallet cost, more consistent transit times, deliveries do not require a loading dock, and tracking is more real-time and reliable.
Supply Chain Savings Tip: These bulk parcel delivery programs can be surprisingly competitive vs LTL palletized shipping. The next time you have a LTL shipment try comparing it to UPS Hundredweight or FedEx Ground Multiweight. You might be pleasantly delighted.
Alright, so you have now arranged the inbound transportation with one or a hybrid-model of the above options. Now it is time to make sure you can efficiently receive, store, pick, pack and ship the product to your end customer, whether that is B2C (business to consumer) or B2B (business to business). There really are two key ways to perform the needed operations: in-house or partnering with a 3PL.
If you decide to take this route it is important to make sure your operation is set up efficiently. Several factors to consider:
- Receiving & Putaway
- How many dock and drive thru doors will you need?
- What does your receiving process look like? Check off vs. packing list or bar code scanning
- Putaway. Where will you store your goods? Some facilities have bulk storage areas and forward pick locations for fast moving inventory. Think strategically here as it matters greatly.
- Warehouse Management System (WMS) – this integral software is needed to help keep track of all the inventory in your warehouse and to optimize your picking process. This software helps to optimize your processes, ensures accuracy, balances your inventory, and reduces operational expenses
Supply Chain Savings Tip: Don’t go without a WMS if you are past the start-up phase. The monthly subscription fee will pay for itself in spades if you utilize the software correctly.
- It is wildly important to ensure you are efficient as possible in this segment to deliver impactful supply chain savings
- Set-up stations where your packers have limited movements. Work should be brought to them from the pickers and work should be taken away from them with material handlers. You want these individuals to ship out as many packages as possible per hour while maintaining a high level of accuracy
- Time studies here will help to get you a CPU for labor calculations
- Be sure to account for other value-add and non value-add touches
Supply Chain Savings Tip: Ensure your packers are directed to use the most efficient size corrugate or packaging available. Ill-fitting packaging can cause dimensional weight charges and potential damage in transit.
- Carrier Selection & Outbound Shipping
- The biggest individual contributor to your supply chain cost on a per unit basis
- Rate shopping among a base of carriers is suggested. Use either a Transportation Management System (TMS) or an integrated WMS solution
- Continuously update your contracts and leverage carriers against each other
- Use mode validation religiously
Supply Chain Savings Tip: Ensure transit time expectations are aligned with services chosen. Too often at Lessgistics we see clients that are choosing a faster and more expensive service than the customer needs/desires.
All of the above activities can also be done by a 3rd Party Logistics provider. Often, partnering with a 3PL can provide you with cost savings across receiving, storage, picking, packing and shipping functions. Most 3PLs are doing these activities at scale and with scale comes cost efficiency. Also, 3PLs have expertise that you may not have in one or all of the functional areas of running a warehouse. By brokering out these activities it can allow you more time to focus on growing the business.
Supply Chain Savings Tip: At minimum, you should do an apple-to-apple comparison between expertise and cost per function. Lessgistics can do a free audit and analysis.
What, you thought we were done? This is often the least focused on piece of the supply chain, but it is critically important. Returns are part of any B2C or DTC (direct to consumer) business. Certain industries have higher return rates (apparel) while others have much lower return rates (pharmacy and beauty products). Regardless, you need to have a strategy behind your returns. Returns can quickly eradicate your profits.
Focus on providing the lowest cost returns provider that still makes it convenient for your customer. At Lessgistics, we often suggest to our clients to use FedEx SmartPost or UPS SurePost returns. This allows your customers to place their return in their mailbox or on their porch and USPS will pick up for free. From there, USPS will transfer back to FedEx/UPS and they will do final consolidated delivery back to your facility.
Supply Chain Savings Tip: Provide your customers with a prepaid return label with their outbound shipment. This streamlines the return process and keeps your customers from having to reach out to you every time they need to return an item. This is customer service labor you can direct elsewhere.
By providing prepaid return label options to your customers you will also get more visibility on what returns are inbound back to your facility. You want to be able to increase your return velocity: the level in which you can process returns and resell them if the item is in good condition.
As you can see supply chains are complex, interconnected flows. Getting the product from your vendor to your end customer can be quite the journey. Every company’s supply chain will vary in design based on necessity and subject matter expertise. However, every supply chain can always be more efficient. There are supply chain saving opportunities consistently. Throughout this article you read about CPU a lot. Getting every segment of your supply chain broken down to the cost per unit level can then help you understand the full cost of getting products to your customers. It will also show you where to spend your time first as you look for supply chain savings. Systems such as TMS and WMS can help to streamline your processes and lower your costs. However, there is no substitute for expertise. Reach out to Lessgistics today for a free audit of your supply chain. We guarantee we can deliver savings!