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A guide to reducing logistics costs

Issue 5: Logistics

Introduction

02 Introduction

It is not just about getting goods from A to B.Speed to market, ever-increasing customerdelivery demands, fuel costs, inventory heldin the supply chain, heightened costcompetition, product customisation,overseas manufacturing, fluctuatingexchange rates are all critical considerationsfor users of logistics services as they impacton business performance and ultimatelyprofitability.

This guide – the fifth in our series looking atdifferent areas of cost reduction - aims toprovide a range of practical advice fromexperts in the field to help ensure yourbusiness manages its logistics costseffectively and efficiently.

It includes tips and advice on the following areas:

• International Freight – how to bestmanage your air, rail and ocean freightoperators

• Parcel Distribution – how to best alignwith your distribution partner

• Warehousing and Order Fulfilment – howto best select your partner and ensurevalue for money

• Fleet Costs – how to reduce your roadtransport costs

Logistics is a critical function in any business. It directly impactsbusiness development, customer service, sales and market share- above all, a company’s reputation.

International Freight 03

With many well-known brands now supplied from the Far East and India for sale in the UK high streets, ocean freight has seen amassive increase in demand. Consequently, these market forceshave resulted in a doubling of shipping costs during 2009.

International Freight

Ocean Freight

None the less, expert Kevin Fryer says thereis evidence that companies are benefittingfrom monitoring rates and buildingrelationships within the market, resulting in suppliers remaining market competitiverelative to volumes of business placed. Rates appear to have stabilised and lookingforward, should remain at present levels until at least the third quarter of this year.

Tips to control costs:

1 Ensure you have the best relationship possible with your ocean freight carrier/agent.

2 Appoint a carrier/agent with its own representation in each country of origin.

3 Challenge rates and surcharges regularly, and ensure your carrier/agent provides you with rates in advance of shipment.

4 Get explanations for each and every surcharge.

5 Do not accept quay rent or demurrage charges without explanation.

04 International Freight

Road Freight

During the past two to three years, in and outbound road freighttransport has remained very competitive and fairly stable. Carriershave tended to regulate their prices by the use of fuel surchargesand even currency surcharges. Kevin Fryer says companies need to query and understand the basis for fuel surcharge increases and always use well-known and published indices as the basis for comparison.

Most reputable carriers will offer suchindices as the basis for fuel surchargeadjustment and not an excuse to increase margin.

Tips to control costs:

1 Ensure you have a rate tariff that lists all the service options your firm requires.

2 Become familiar with fuel price indices and understand the basis your carrier uses for fuel surcharges.

3 Ensure your carrier is doing everything possible to consolidate loads with the consequent pricing benefits.

4 Maintain a close scrutiny of service levels to ensure you do not pay more for a lesser service.

International Freight

Air Freight

Air freight is a specialist but thriving market and widely used, even though costs are substantially higher than alternatives. Time is usually the deciding factor that forces companies to use this international freight option.

Whilst air freight rates have been relativelystable for the last 12 months, Kevin Fryer says 2010 has witnessed a massive hike inthe airline fuel surcharge.

Tips to control costs:

1 Assess forecast usage and negotiate rates based on forecast levels.

2 Understand all the aspects of costs that are included in air freight rates, and negotiate each aspect with your selected carrier/agent.

3 Grasp all the aspects of costs incurred in the UK. This is often misunderstood and where carriers can take advantage and increase margin easily.

International Freight

International Freight 05

Parcel Distribution

Selecting your parcel carrier(s) is no easy task, and poor alignmentwith your distribution partner(s) can cost you dearly.

The current economic climate not onlyhighlights the need for cost and purchasemanagement but also the immediaterequirement for contingency. What wouldhappen to your business if its current parcelcarrier went bust?

Expert Charles Reid says it’s essential toknow alternative suppliers. That meansdoing your homework.

1 Understand your traffic profile:Carriers vary on their core business strategy. Some charge per consignment while others charge per parcel. By conducting a full analysis of your shipments, you can identify the following, which will help you to best select your carrier:o number of parcels per consignments

shippedo average weight per consignmento size of packageso geographical spread of deliverieso business-to-consumer or business-to-

business deliveries

06 Parcel Distribution

Parcel Distribution

2 Research the market:Carriers differ from a charged cost base and service offerings. Identify the best carriers for your business needs. Poor carrier selection could cost you dearly.

3 Compare the market:Run a full market exercise and compare like for like. This will help you select the right carrier at the right cost.

4 Beware of fuel surcharges: The price per litre has just reached an all time high of 120p per litre. Some carriers will use this as an opportunity to increase margins. Be prepared and specific when negotiating fuel surcharges.

5 Look out for additional charges: Re-delivery charges, ‘no-one to receive’ charges…be aware that additional charges exist. Ask carriers about all of their charges in advance, and negotiate the price per charge.

6 Look for customer service technologies:As a means to improve customer service, some carriers are investing heavily in software that provides parcel-tracking information. ‘Proof of Delivery’ and ‘delivery window’ notifications are now a reality. Select a carrier that’s investing in technologies that directly help you.

Parcel Distribution 07

Warehousing andOrder Fulfilment

Entrusting your product to an external provider should not be taken lightly. Its ability to store and care for your product and prepare it for despatch to your customer is not only costly but key to your business success. Select your partner wisely and ensure you are getting value for money, says expert Fergus Smith.

1 Decide what you actually need: Carefully consider your true requirements.Yes, you need the basic functionality of a secure, environmentally sound and professionally run operation. However, do you need a state of the art building (will you be taking clients there)? Do you need instant on-line access to stock figures or order status? These come with a cost, which may not be necessary to your business.

2 What to outsource: Professional logistics providers can offer more than storage and order fulfilment. They can undertake other supply chain functions on your behalf such as order processing and stock replenishment. There is a cost to this, but it may be more cost-effective than your in-house operations and may free you to concentrate on your core business.

08 Warehousing and Order Fulfilment

Warehousing andOrder Fulfilment

3 The tender process: When going out to tender, ensure the supplier has as much information as possible about your current and future business. Detailed product, stock and order profiles, down to line item enables potential suppliers to accurately model and cost the operation with few assumptions.

4 Get below the surface: Always visit a prospective supplier. View the operation. Is it clean and tidy with care in housekeeping? Is the building secure and watertight? Do they have long serving staff? Are the employees working in an orderly fashion? Interrogate their processes. Warehousing is a relatively simple but high volume activity. It is very easy for things to get out of control, especially at peak periods, if the necessary processes and controls are not in place and rigorously adhered to.

5 Contractual issues:Warehousing has a high fixed cost element. Ensure you have not committed to any long term liabilities should your business requirements change. Contractual performance targets should also be incorporated with the right to terminate should they not be met.

Warehousing and Order Fulfilment 09

10 Fleet Costs

Fleet Costs

With world oil prices set to rise continually, and the Government’songoing determination to levy tax increases on transport fuels, fuel now represents typically 35% of a road transport operator’scosts. However, according to expert Ken Rogers, there are smallsavings to be gained that when combined together, have significant impact.

1 Review the market:When buying fuel, look to see what is happening in the local market. Typically, hauliers ring around their local suppliers toestablish the lowest price. However, in time, the local market will soon establish the levels above wholesale prices where you are buying. This means you will not continue to get the best deals. Ask your local peers what they pay.

2 Fuel distribution: When it comes to distributing fuel, the biggest cost is UK terminals to end user transport. Therefore, transport providers (who buy in bulk) need to ensure they practice what they preach by ensuring their suppliers are proactive in suggesting an optimum load delivery size.

Avoid situations where additional vehicles are unnecessarily required to deliver your fuel requirements or where you buy more volume to get a lower price only to see thiseradicated by inefficient transportation. Know the different size vehicles: 36,000, 23,500, 18,500, 17,500 and 10,000 litres.

3 Fuel on the go: Review extra charges paid when drawing fuel on the road. Savings in fuel costs can soon be lost in administrative fees, card charges, handling fees, etc.

4 Professional driver training: Look to engage with professional trainers to ensure your drivers follow best practice and follow up with ongoing monitoring programmes.

11

Expense Reduction Analysts is a global leaderin cost and purchase management consultancyand focuses on reducing non-core operatingcosts for private, not-for-profit and publicsector organisations.

Handling an annual supplier spend of millionsof pounds on behalf of clients in all sectors, theconsultants at Expense Reduction Analysts usetheir significant purchasing influence toachieve optimum value from suppliers, oftensuccessfully retaining incumbents and usingexpert analysis and market intelligence tocombat ‘contract fatigue’.

Expense Reduction Analysts has 170consultants across the UK. It also has a global influence in more than 35 countriesspecialising in more than 100 non-corebusiness expenditure categories.

Other topics covered in our series of costreduction guides include:Issue 1: Property and PremisesIssue 2: Banking and FinanceIssue 3: Back Office SuppliesIssue 4: Professional Services

For more information, contact Expense Reduction Analysts on: 02380 829 737

or visit our website at: www.expense-reduction.co.uk

What else?

There are other areas in which transportproviders can secure cost savings such asthe purchase of tyres. Manufacturers arekeen to promote the longevity of theirproducts and the positive impact they haveon fuel consumption.

Hold them to these claims and agree, aspart of any tyre contract, mileageguarantees and a credit if these guaranteesare not met. Also, get the supplier involvedas they know the best tyres for differentapplications. This will ensure operators get the best tyre life.

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