- Introduction My business is turnaround management. I go into underperforming companies and help them improve their bottom line—that is, help increase revenues and reduce costs. Usually I have to “stop the bleeding” first. This means looking at ways to cut costs.
- One item often overlooked by companies is freight, both inbound and outbound. Why? Many business owners feel they’re trapped by their own size, so they don’t command attention or discounts from freight firms.My recent experience with two companies provides a different view. The annual savings of the two companies discussed here are $170,000 (Company #1) and $654,000 (Company #2).
Plush toys and “zone skipping”
Let’s start with a situation that combines inbound freight and distribution of products from California to Company #1’s operating entities in the Midwest. Company #1 operates plush toy crane machines throughout the Midwest and West. (Plush toy cranes, such as you see in family restaurants or supermarkets, come with bunnies, cuddly bears and trademark items from movies or television. Your child convinces you to drop in 50 cents and move the “claw” to pick the cuddly animal they want. Rarely does anyone leave with the prize.)
The suppliers of these plush toys make them in China. Company #1 is large enough (annual revenues of $20 million) to purchase sufficient quantities of toys to fill 40-foot containers that are shipped to Los Angeles. Approximately 160 containers are purchased per year from different ports. The company also pays fees for shipping during peak seasons and is subject to fuel surcharges.
Recent negotiations with the company handling this shipping resulted in rates being cut from $250-$550 per container, depending on the port. In addition, peak season and fuel surcharges were removed. If Company #1 had simply asked for bids from competitors, they wouldn’t have seen much improvement over their present rates. These savings were only achieved because negotiations were handled by people who knew what was possible.
Company #1 had to take these containers of plush toys, put 21 of them into bags, put the bags into boxes and ship them to the West and Midwest. It used UPS to ship the boxes to all the route drivers who put the plush toys in the machines. Approximately 1,250 bags were sent to the most expensive areas for shipping every week.
A technique known as “zone skipping” was used to reduce these expenses. Every week, a 53-foot trailer was loaded in California with 1,250 bags and driven to a UPS depot in Texas. UPS then delivered the boxes to various facilities, resulting in savings of $1.62 per bag on 1,250 bags per week—an annual savings of $100,000.
Company #1’s total annual savings of $170,000 (including inbound overseas shipping and outbound zone skipping) wouldn’t have been possible without extensive knowledge in the transportation area. The key is having someone available to you who knows what goes on inside the “transportation club.”
Controlling transportation costs
Company #2 has its own felt of trucks, drivers as employees, and a full maintenance shop to service the trucks. This company produces feed for animals for bulk customers (farm and ranches that take 5-20 tons) and sack customers (retail feed stores which sell bags of feed to their customers). The company has annual revenues of approximately $30 million.
An analysis of Company #2’s situation revealed that no fuel surcharge had been added to their customers’ invoices, even though oil had increased $20 a barrel (drastically increasing fuel costs). Although initially hesitant, Company #2 added a 15 percent surcharge to delivery charges and the only response from customers was surprise that this hadn’t occurred sooner. This step alone saved the company $144,000 a year.
In addition, Company #2 worked to identify actual transportation costs. Typical financial statements lump wages, workers compensation costs, health insurance pension expenses and payroll taxes together for all employees, and include fleet maintenance in total maintenance. These expenses are broken out for the drivers, truck-maintenance personnel and truck maintenance itself to develop both a cost per mile and cost per ton figure for both bulk and sack.
Major issues identified
Major issues emerging from the analysis included:
- Maintenance costs were well above industry averages.
- Drivers were working too many overtime hours.
- Trucks were leaving with less-than-full truckloads.
- Of the eight zones to where the product was delivered, only the customers in the closest zone were being charged enough to cover the company’s cost. Many companies like to quote a delivered price for their product. There is danger in this approach, since it’s unlikely any company can control fuel costs. In addition, workers compensation costs are almost out of control. If you can’t control the costs, you’d better not wrap it. Customers understand that your company can’t control all transportation costs, even if you own your own trucks. But if you manage your transportation costs properly, you should be able to charge more than your costs. You will then be going against your competition based on your product. If you’re doing it correctly, you should compete based on the price of your product at your dock. If the customer can get it delivered cheaper, you need to find out how and change accordingly. Vistage member Nicholas R. Duva is CEO of Bon Duva, a turnaround consulting firm based in La Jolla, Calif.