Supply Chain Savings: A How to Guide

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.

Inbound

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.

Air

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

Air Courier

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

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.

Ocean

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)

FCL

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.

LCL

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.

Domestic Trucking