Distributor Pandemic Alert – Freight Costs Impact Profitability
Distributorland who hasn’t heard or talked about these three driving issues, let me tell you, they are real.
1. The difficulties in attracting quality/qualified employees.
2. Supply chain issues and shortages of the parts your customers need.
3. Ongoing price increases and inflation.
I want to provide a demonstration of how the combination of supply chain issues and inflationary pressures needs some management attention.
A glance at supply chain “stuff”
It’s not impossible to get products from our suppliers, it’s just impossible to receive them on time. Despite all the media hype tied to supply chain issues, our customers are not quietly sympathetic. They still have factories to run and machinery to ship. Most customers still judge our service on getting products to them when they need them. They bark, bother, and badger distributor sales teams. Reports from the field indicate inside sales/customer service people get some of the worst of this.
Expedite, beg, borrow or steal anything available, seems to be top of mind. Distributors everywhere are bartering with friends, and occasionally foes, to get the stuff their customers need. In their zeal to help customers, business practices are thrown to the wind.
If purchasing from another distributor, a customer with surplus inventory, or some other entity, the distributor pays a premium for the product. Gross Margin is reduced, escalating freight costs, sometimes massively. If luck and the expedite gods smile down, the parts may be located with the supplier. The margin may remain stable, but special freight or handling is required.
Freight can be a big issue
In a soon to be published article, I focused on the cost of transportation and deliveries and said this:
The rising cost of freight and deliveries
Inflation first hit fuel. But that is not the extent of the escalations in cost. One distributor told me their new delivery truck has been on “backorder” for five months and still the expected delivery date is a month away. With this kind of shortage, the truck dealers aren’t overly anxious to make price concessions. Count on delivery truck prices going up in the future.
On top of your own delivery truck, the long-haul truckers are facing all the fuel and vehicle issues and they are running “a quart low” on drivers. When drivers are in short supply, wages go up. Our incoming freight issues move forward, and the cycle turns into what looks an awful lot like – inflation.
Freight of any kind is expensive. Air Freight has always been pricey, but the current situation has added nearly 30 percent to the cost. Truck shipments jumped around 15 percent since the start of 2021. For some products, freight can represent a substantial percentage of the cost.
For distributors accustomed to receiving products with freight pre-paid by the manufacturer, these special orders are not something rank and file workers consider because normally, it is not an issue. However, these orders fall outside of the norm. Freight is added. And, during our research, we discovered instances where the freight charge equaled as much as 12 percent of the product cost. This puts a major strain on profitability.
Now is the time to measure and capture incoming freight
It is always good practice to measure and attempt to recoup at least a portion of your incoming freight costs. Now is an even better time. Here are a few points to consider:
• Finding and expediting something for your customer is expensive. If your organization is willing to invest in the time and effort to locate it, shouldn’t the customer pay for the special freight?
• Emergencies create costs for the customer. Downtime is expensive. Delayed shipments of OEM equipment are often tied to penalty fees – again, expensive. In today’s environment, part shortages are no one's fault and extra costs should be shared.
• Customers who “cherry-pick” your product offering and only buy a few items at reduced GM levels should especially be tied to incoming freight costs.
Beware of inter-branch transfers
If you happen to be a distributor with multiple locations, now is the time to also consider freight from other locations. Our research points to a marked increase in the number of items transferred from branch to branch to cover customer emergencies.
Even distributors who track and attempt to recoup inbound freight are not measuring intercompany transfer costs. Further discussions with distributors who use inter-branch transfers point to a single transfer resulting in a chain reaction of new freight costs.
The chain reaction is a result of one branch “stealing” a scarce part reserved for a good customer. Once the part is sold, the original branch must then duplicate the process of finding a replacement for their customer - lots of time, effort, and freight costs lost.
A few final words on freight
In the article referenced above, we also made some recommendations on freight costs. Allow us to share these with minimal comment:
Since distributors serve as one of the critical hubs in the supply chain, we must always work to manage our costs. This is particularly true during inflationary times. Here are a few things to think about in your business:
• Evaluate orders based on freight terms provided by suppliers. Free freight is worth more now than ever.
• Renew your efforts at capturing incoming freight costs. If the customer orders a non-stock item, consider charging for the incoming freight.
• Analyze the costs associated with deliveries. Can you pick consolidated shipping days rather than shipping every day?
• Some of your customers should be paying for deliveries.
• Be more aggressive with drop ships orders.
Inflation is going to stick for a while. Freight costs are just one of the areas in which we need to be prepared. In the soon-to-be-published article, I cover four more points to consider in inflationary times. If you are interested in a “sneak peak” shoot me an email.
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