Countless companies in America are heeding the battle cry to answer competition with improved quality and reduced costs. Every company wants to be the lowest-cost, highest-quality producer in its industry.
All too often, however, such companies become so focused on the direct costs, they overlook significant opportunities to cut other costs, such as transportation.
As with many industries, the trucking industry is highly competitive, but also somewhat specialized. A carrier with a high concentration of business in certain shipping lanes can offer much better rates in those areas than its competitors.
Shopping for the best overall shipping costs can be a complicated process, however, because there are so many variables that affect rates. Destination, classification, cargo weight and volume are the more significant factors. It’s much like shopping for long-distance telephone services. It’s hard to know exactly which deal is best for you unless you meticulously monitor your calling patterns (frequently called numbers, time of day, etc.) and apply various providers’ packages to your actual use.
The first step in selecting the appropriate shippers is to narrow the field. Identify those with the services that are most compatible with your shipping patterns. Communicate your needs to a variety of shippers and ask them for their best deal. Aggressively negotiate for discounts, and do so at the corporate level for multi-plant systems to be sure you are getting the best possible deal.
Larger carriers offer their rates and services on diskette, which allows customers to input their own data, such as weight, shipping classifications and ZIP codes, to get an accurate cost projection. The differences in cost can be significant, especially for larger shipments.
To get the most accurate comparison, analyze your historical shipping records. Go through your accounts payable files, pull your inbound freight bills for the past three months and use those numbers in the carriers’ rate diskettes. Pay attention to which geographic areas are the most cost-effective for each carrier.
If your vendors prepay for shipping and pass the costs on to you, investigate whether they’re getting the best deals. If your suppliers are very large, they may well be getting volume discounts, but you’ll need to question whether those discounts are being passed on to you.
Check the classification codes carefully as well. Carriers generally set their rates by weight, but they also factor classification codes into the final cost to protect their margins when shipping lightweight, bulky and hazardous materials.
After all the obvious costs are considered, then there are the intangible factors to weigh: the shipper’s track record for on-time deliveries, safety record, reputation, etc. Those issues won’t show up in the bottom-line numbers, but they certainly should influence your final decision.
Once you’ve made your choices, document your needs to each vendor and ask a representative of each to sign and return your letter of instructions. With a signature, there can be no claim of misinformation or misunderstanding. Be sure to specify that any excess freight charges incurred because the vendor failed to follow your instructions will be the vendor’s responsibility.
With the system in place, give maintenance responsibility to the accounts payable department, but plan to spot-check the routings every six months or so to make sure the rates remain competitive. If you’re importing materials through U.S. Customs, it will pay to work with an international freight broker. Many of the same rules apply, especially documenting your shipping specifications with international vendors; but excess cost is only one consequence of mishandling international transactions.
The trade laws and regulations governing imports and exports are nearly as complex as the U.S. Tax Code. Customs officials don’t examine every shipment that crosses the border because they expect importers to understand the regulations and have systems in place to assure compliance. Instead, they use an audit approach, which speeds transactions but also engenders a false sense of security. Business owners may not realize they are out of compliance until it is too late.
Few small- to mid-sized manufacturers have the resources to staff an in-house expert on tariff classifications, duties, required paperwork and other import/export regulatory issues. Importers are required to exercise “reasonable care” in managing their cargo, but fines for lack of “reasonable care” can approach $10,000 per violation, even when no documentation errors are detected.
While outside help may be in order for international shipments, the analysis of domestic shipping costs can be a simple process. Any company that wants to remain competitive must consider not only the direct costs of serving its customers, but the indirect costs as well.
R. James Rollins, CPA, is a senior manager with the Manufacturing Assurance Services Group of the regional accounting and business consulting firm of Meaden & Moore, based in Cleveland.
