Are freight cost headwinds sailing into your earnings?
by Dan Boutin, Synapsum’s VP of Strategy & Growth
What I’ve noticed in recent earnings calls, especially over the past 2 years, is the dramatic shift in discussing the supply chain as a business risk, especially in the B2B and yes, B2C space.
The first noticeable change started in late 2019 and went full-steam ahead through mid-2021. Prior to this time, rarely was the supply chain mentioned in an earnings call, unless the mention was around investment being made to expand or improve. (Bloomberg was nice enough to track this)
Recently, especially in Q1 2022, the mentions have gotten even more granular. Capacity issues have led to inventory being purchased months if not a full year in advance of demand to avoid missed revenue. Some inventories are piling up while other goods are on backorder. These issues are compounded by inflationary cost pressures on freight, warehouse labor, and raw materials. I’ve compiled a few examples for you:
Inflation & Rising Freight Costs
Procter & Gamble "Freight Cost Headwind"
Well, enough, you get the idea. Now let’s see what you can do about it.
Since most of the earnings calls focused on transportation and freight costs, we’ll concentrate our focus on those two areas.
Current State - The Hard Reality of Freight Costs
Many businesses struggle to understand freight costs (along with fulfillment, returns, servicing) at the order-line level. When visible on the P&L but not at the line level, it is common to ‘peanut-butter’ spread costs-to-serve in prices and fees. Yet, this can result in wide variance in profitability across customers and orders. High margin business can go unsold and depress margins on what is sold. (And ending up being a discussion topic by your CFO on the next earnings call.)
When it comes to outbound freight, we start with the controllable drivers of freight costs in the context of today’s business process.
When a customer places an order, shipping charges may be shown in the cart at checkout even if package dimensions are not yet known. A company may make carrier calls to get estimates of cost but if there are multiple carriers, they may calculate freight costs using Transportation Management tables that are updated ad-hoc.
In other cases, the shipping costs may be calculated once a package is ready for delivery. A carrier quote is requested (e.g., ShipConsole or Shipwell in Oracle) by using package dimensions. Once the estimate is returned, a shipper may elect to discount the cost to the customer and the freight is book and items delivered.
Then 45-90 days later, the carrier processes the bill - and sends it to the shipper for payment. The issue? The invoice arrives with penalty charges and adders atop the base booking rate that were not visible when originally estimated.
Synapsum finds that up to 35% of total freight costs on final carrier invoice for domestic parcel ground shipments can be driven by accessorial charges. The variance is bigger when estimates are made upon order booking when package dimensions may not be known. Accessorials generally makeup a greater percentage of delivery costs for parcel ground than for air or LTL by comparison.
Here’s parcel & LTL:
Cost makeup of final carrier invoices by mode
When the shipper selects or estimates the rate & carrier, the amounts may only reflect base freight and fuel. There is limited visibility into accessorials without looking at historical billing data. The unfortunate reality shows up only on the final bill. Freight auditors may seek recovery from carriers by contesting bills if the charges fall outside of contract or were billed in error. But many of the accessorial charges remain.
What drives these accessorials? Oversize products for one - length, width, height, dimensional weight, weight, etc. Address corrections including PO Boxes, residential deliveries, cross Canadian border entry prep fees, peak surcharges, and the list goes on. The TMS may not be aware that a shipment to a particular customer location requires a customer lift gate, for example. Without this information, it will return a freight charge that is missing up to $350 of added cost. These accessorial costs are covered in more detail in our last blog post.
All of this impacts profit and leads to the “freight headwind” we hear mentioned in the current earnings calls cycle.
Synapsum works with several shippers, many B2B manufacturers and distributors that ship everything from small parcel parts to large-scale equipment. The Synapsum install-base utilizes many different Transportation Management Systems (TMS), carriers, and freight commercial terms, so we are confident that our findings/issues discussed here are fairly common across the industry.
Enter Synapsum
Synapsum helps shippers know what drives freight costs that contribute to wide variances across order, product and customer profitability.
What makes this possible is Synapsum's Cost-To-Serve.io for supply chain data that can turn raw data into profit insights, revealing where our clients can reduce and recover costs.
Synapsum’s Cost.IO data models are used by Operations/Finance to reveal operational efficiencies and margin expansion opportunities – used for bottoms-up cost forecasting/simulations, free shipping continuous adjustments (qualifiers/exclusions), accurate paid shipping rates/surcharges on orders based on real costs, contract terms and conditions and pricing, and more.
Our solution helps our customers get to returns 5x faster and at a fraction of the investment of potential alternatives. Synapsum connectors route actionable cost insights to existing CRM, eCommerce, and transportation management to aid in cost reduction and recovery .
Takeaways & Call to Action
Knowing what drives accessorial cost is a great first step. What products or combination of products in a package drive oversize charges for parcel vs. LTL? What customer ship-to locations require lift-gates? What types of addresses will repeatedly come back with charges?
If customers are charged for shipping locked in at time of order, predicting freight costs can help reduce the freight recovery gap beyond what is possible with static transport tables or carrier APIs. Checkout our last blog on this topic.
Beyond identifying drivers of accessorials, here are other strategies that worked for B2B distributors to reduce and recover freight costs while keeping the top line growing.
If freight is free or reflected in price, targeting cost outliers can reduce freight costs, boosting margins by over 200 basis points, as experienced by this equipment distributor.
If freight is out-of-planned-mode or a not consistently the least cost shipping method, highlighting when and where that is occurring can help recalibrate the planning process.
If customer requirements – lead time, expedited orders, economic order quantities, or small frequent deliveries – drive a spread in cost to serve, reflecting the cost in price and customer options can deliver efficiencies and carbon emission reductions as seen with this agricultural distributor.
Synapsum would welcome the opportunity to help you sail away from “freight cost headwinds” in time for your next earnings call.
Until then, follow us on Twitter, @Synapsum1, or on Linkedin Synapsum.
You can follow me on Twitter @DanBoutinUST