7 ways to optimize budgets as transportation costs rise

As freight costs continue to rise, manufacturers and retailers are starting to feel the pain.

Whether companies are using air cargo, ocean shipping, trucking or rail, transporting products along the suppy chain in 2021 comes with high rates, fees, and congestion. The issue is starting to show up in company financial statements as companies like General Mills are attributing their thinner margins to transport costs.

As a result, companies looking to avoid a big impact to their margins are looking harder at their budgets. Here are seven ways experts say companies can lower supply chain costs.

1. Know your costs

Before deciding what areas of the budget to hit, it’s helpful to know exactly what those costs are.

A distribution business might look at KPIs including the cost of goods sold as the primary cost driver, said Matt Abbott, chief strategy officer of Cavallo, which makes distribution inventory management software. With the ability to aggregate the data, companies can be more strategic in procurement, changing sourcing decisions based on cost and service level.

"With supply chain constraints, quite often the bottlenecks in business are forming because they’re waiting on product from Asia," he said. "It’s important to aggregate the data to understand the best supply choices that can drive down the cost of the product, but also make sure they’re meeting the needs of the customers in terms of availability and delivery."

2. Volume-based discounts

Take advantage of volume-based discounts, especially going into the fourth quarter.

"It’s important to track where they stand in terms of volumes built into the contracts," said Abbott. It’s possible that by increasing volumes with some vendors, a distributor can receive rebates, saving money overall. "Understand where you’re tracking volume-wise, and what that means for incentivizing the sales force to make advance spends based on minimums to drive down the cost of goods sold," he said. Abbott noted that looking at these numbers early enough can have a big impact for the upcoming quarter.

3. Introduce fewer products

Manufacturers will also want to track data and consider focusing on core products.

Innovating and introducing new products into the market only makes sense if a brand can achieve 50% distribution, meaning half of the markets carry the product and sell more than five units per month, said Jake Bolling, co-founder and CEO of Skupos, a technology platform connecting brands, distributors and convenience retailers. If the product doesn’t meet this mark, it should be cut immediately, he said, to eliminate trips needed to the distribution end points. "Really, just reinvest everything in the core portfolio," he said.

4. Stock enough core products

Retailers should understand their local buyers and ensure there are enough of the favorite core products.

That means bulk purchasing these staples. "Convenience stores have a strong loyalty to the locations from a consumer perspective," Bolling said. He’s seeing retailers sometimes self-distribute by shopping at Costco or Sam’s Club to ensure adequate stock. "That behavior is up year-over-year," he said.

Costs increase per unit with self-distribution compared to wholesale distribution, with additional time, labor and fuel. "Often the store owner is doing it," he said, and this compresses margins in this channel.

5. Know what to pass along, what to absorb

Retailers are trying to determine whether consumers will shoulder the increased cost burden, or when the retailer needs to absorb the higher transportation costs. That can depend on the product and customer value.

For convenience stores, said Bolling, prices have been relatively stable other than the beverage category, which is seeing 5% to 7% increases in carbonated drinks, and 6% in milk prices. For the center aisle, retailers are only passing on increases if they can’t make their preferred margin. For candy bars, that is 15% to 20%. If costs rise above that, they may try to pass along the increases, though consumers are relatively conditioned to specific candy prices.

When determining when to raise prices, it helps to consider the customer’s value. "How good a customer are they?" said Bolling. "Are they large? Have they paid on time?" Having that data at your fingertips can help the front line staff make these decisions. Sometimes distributors eat the freight cost for high value customers. "When are the costs appropriate to make an investment, and when do you want to make sure you’re recovering and charging. Make sure your customer service and sales people are fully aware of the value of any customer," he said.

6. Raise the delivery minimum

Given the driver shortage and increased fuel prices, distribution companies and manufacturers can determine their price point for free deliveries, as they want to compress those deliveries. The majority of convenience stores use distribution services, which are experiencing the bulk of the driver impact, said Bolling.

"Historically they offer free delivery over a certain delivery size," he said. So far, he is not seeing them raise their minimums. "I suspect that if it continuous, we would obviously see them try to pass that along, if possible."

7. Contract renegotiation

Contract clauses can sometime be negotiated. For parcel shipping, that means maintaining certain volumes and setting an expectation with your organization about what time you need to have all the product at the dock to go out, said Bolling. "You need a certain level of predictability, and that typically comes by establishing a strategic relationship typically with FedEx or UPS." Having relationships with both helps shippers with negotiating ability, he said, but they should mainly focus on one carrier to hit specified volumes.

With international freight shipping, disputes are common, whether missing a deadline, receiving products that did not arrive in the expected condition or as represented, or other delivery issues. Having a mechanism in place to resolve these disputes is crucial from a budget perspective, said Cristina Rodriguez, senior counsel at the Miami law firm Wolfe Pincavage. She recommends inserting an arbitration clause, but with additional mechanisms to identify and handle the conflict. That can include a named person or department that will negotiate or resolve the issue, followed by a mediation provision. If those fail, an arbitration clause takes effect.

Some companies use tiered arbitration clauses so that disputes below a certain amount include a limited amount of discovery, resulting in cost and time savings. Many countries abide by the New York Convention for arbitration, which has enforcement mechanisms. "It makes arbitration even more attractive if it’s an international transaction," she said. These dispute clauses are most often included in original contracts, but can sometimes be added in contract renewals.

It’s harder to negotiate clauses like this in a parcel contract with FedEx and UPS. "You’re in more of a consumer relationship, rather than two companies of equal standing," Rodriguez said. "They’re not going to let you change it. Their policy is their policy."

Editor's note: This story was first published in our Logistics Weekly newsletter. Sign up here.