Trucks and trains and boats and planes, All about Landed Cost
by Patricia E. Moody, tricia@patriciaemoody.comPutting It All Together on Trucks and Trains and Boats and Planes!There’s Money On Those Trucks! Dave DiSanto (www.disantoandassociates.com) believes that seventy percent of US companies don’t have a formal logistics program on the premises, despite the fact that for many of them ten to fifteen percent and more of their total spend goes to logistics and distribution. “For 70% of US companies, it’s just too much effort,” he says, and the costs of doing business globally are too big to ignore. Then how do they manage all the trucks and boats and planes? “Well, it’s pretty amazing. Sometimes it’s all managed by a cost accountant, or a purchasing agent, or a customer service rep or an operations manager who has no transportation /distribution experience. Or it may be run by Joe The Shipper – you know, the guy down in shipping with the big biceps - they build the business around them.”
Amoskeag Mill, Manchester, NH, on the Merrimac River,
done in Legos! at the SEE Science Center museum
All that worked well in the olden days, that golden era of perks, tickets to the Bruins, pizza parties and lux free dinners and a boat load of service providers. But now, advises DiSanto, “Carriers are so lean, they’re not making any money in LTL business. It used to be you had choices of five or six or eight carriers for two pallets. The head shipper picked the carrier that gave him the Bruins tickets…. And that’s the way it worked!”
But skip ahead to extreme lean. And that means leveraging your transportation spend with many companies to optimize the cost. “That’s what I do with my clients,” he explains. “We arrange shipments to be handled by one or two carriers at most, a Preferred Carrier program. The bottom line? Now you’ve leveraged your tonnage, and if we multiply that by 15 shippers companies, we’ve got a conglomerate, and that saves huge money.” The conglomerate, or council as DiSanto dubs it, tenders freight to its one or two providers on any mode of transport.
DiSanto started shipping councils when he was with Illinois Tool Works and it saved them millions of dollars - the savings ranged from fifteen to twenty percent annually. The prework required to set up a shipping council cannot be bypassed – identifying the lanes, tonnage, characteristics, customer needs, then developing the rules, contracts, negotiations, commitment and on-going communications that make it all work. “The basic driving force,” says DiSanto, “is that common denominator, the commodity, that’s the secret to success of leverage.”
DiSanto urges CEO’s to take a closer look at the spend resident in transportation, logistics and distribution. “Although everything gets dumped on transportation and logistics - there is still great opportunity there for savings.” Here is an example.
Off to College!
Managing the spend is difficult enough in for-profit markets, but that hungry growling sound that emanates from our wallets around tuition payment time tells us that the cost of supporting worthwhile non-profits is eating us alive. Here’s an example from Boston’s education industry.
True costs
The subject, a private, mid-range commuter college in Boston’s suburbs was troubled by spiraling costs. Like just about every school, there was not enough expertise on hand to determine what their costs were.
The phone call came on Monday, an anxious request, “would I please drive over and tell them why their costs were out of control. I knew,” recalls DiSanto, “that they had a great CFO, someone whom I happened to have worked with at Logan Airport in import export.” The CFO knew that we could identify something right away in the supply chain. ‘Grab the low hanging fruit,’ he said, so I started scanning the numbers. Something stood out, an unusually high recurring figure. It was the bookstore! Every semester they got slammed with a huge slug of new supplies, and something about it stuck with me, the numbers just didn’t feel right.”
Books, sweatshirts, beermugs, shot glasses, batteries, snack food, all the products sold in the bookstore, even furniture, “that’s how it migrated into the whole operation.” He settled in to identifying and reviewing “buyer seller” agreements, revealing the actual costs of goods sold, reviewing purchases of MRO products, utilities etc.
DiSanto decided to zero in on books, a spend category he knew that because of its bulk and weight might be a heavy contributor to rising supplies costs.
“How do you get them in?” he asked.
“From McGraw-Hill” came the simple answer.
“And when they come in, do you pay freight?”
“No, it’s a landed cost.”
“Now that,” says DiSanto, “that’s an issue. Because you’ve got a book coming in at landed cost. Let’s say the book costs the bookstore $10, and it’s selling here for $25.00. I was thinking about what it takes to make a book, how much it actually costs, and what’s the freight on each shipment.”
Learning about Landed Cost
But the answer, as he expected, was not there. DiSanto went to the General Ledger and after three days of digging through receipts and invoices, a few critical numbers appeared. “What’s the freight charge?” he asked. Although he found that the bookstore took out something that appeared to be freight, that number turned out to be a red herring.
By Thursday, it was all clear, and the numbers were huge. DiSanto extracted the freight charges from a series of shipments – “we’re talking half loads, truck loads - just think of the bookstore as a shipping dock. We determined their actual total freight spend to be $800,000 per year - a good sized spend. Based on gross sales for the school – where we have to think of the students as the end customers - transportation spend represented 10% of gross sales. That was high,” he said, “more than we ever expected.”
“So we were able to cut that in half. Here’s how it worked – a publisher ships in a pallet. Let’s say it weighs a thousand pounds. In comes an invoice for the books, and at the bottom the invoice says just ‘cost of books.’ We’ll call it $15,000.” From that invoice total DiSanto had to extract actual freight costs by estimating the weight. “The invoices didn’t show actual weight, so we realized they were burying profit in cost of goods sold, what would naturally cost $200 to deliver, without putting freight charges on the invoice.”
“If procurement insists on a delivered price without knowing how much freight actually costs, the only approach to accurate determination of the spend is by deriving it. You’ve got to go back to the publisher and tell them the school wants to buy these books not landed. Find out the cost of the books without freight. Offer to pick it up separately.”
“So now, instead of charging you $1 it’s down to $.50. And here’s the beauty of it, now you know there was at least $.50 for shipping and handling. It’s legal to put shipping and handling, but if they put freight on the invoice, they are required by law to put in the actual freight.”
“If I negotiate to get 50% freight charge off a particular carrier, I want to hide that. And that’s why they sweat,” says DiSanto. “They’ll put ‘shipping and handling,’ nice and vague, because they are including their costs of labor, freight, components, packaging.”
“So what you want to do is to be able to control your own freight charges - you don’t want somebody else to decide that because then they are building a profit center.”
Bottom line savings for the college? Managing freight dropped the spend from $800,000 to $400,000. DiSanto believes that although it is very difficult to get colleges to talk about this type of spend solution, there are so many people involved in transportation charges who know nothing about supply chain, it’s an area where non-profits can truly reduce costs.
“The medical field is getting smart on this,” he says “because of federal pressure on pharmaceuticals. The medical sector is starting to look at their spend, starting to siphon it out the way we did with the bookstore.”
“There’s more,” he adds. “MRO are support products, such as janitorial supplies – they’re all out of whack too. When I say 70% of the companies don’t know what they’re spending, that they don’t know where it goes, I mean they just don’t know. They’re so lean they can’t put somebody on it and they don’t have expertise - they make decisions inside their four walls – ‘you only hear what you want to hear and disregard the rest.’ They’re vulnerable – if somebody comes in and says this is what you should do, use Federal Express, or DHL, whatever, of course you’re only seeing it from their prospective. And they bang consultants all the time – I’ve been on both sides, been a service provider and been a shipper, and I know the margins on the outside, how freight moves and I’ve measured from both sides of the fence.”
This is huge story, and it’s all about landed cost. Just don’t forget, landed cost.
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