6 practical tips for reducing your distribution costs

Distribution is your logistical link to the customer. Unpunctual deliveries and poor service from your carrier reflect directly on you in the eyes of your customer. Reliability and value-added services, on the other hand, generate important plus points. Many B2B companies therefore choose proven but costly CEP carriers. Across all industries, distribution costs often account for between 5% and 10% of sales, which is often in the same order of magnitude as the profit margin. Your sales department wants good service, while your controller wants a low-cost provider. For you as a logistics provider, this means that you have to achieve two opposing goals when designing your distribution. We will show you how to master this balancing act.

1. be sure to combine shipment and order data

Without a clear view of the facts, you will be fishing in the dark when it comes to reducing distribution costs. Worse still: if you want to drill the thick planks (and you have to if you really want to reduce costs), you need solid arguments – and in most cases these have the following unit of measurement: EURO.

You should therefore invest sufficient time in the data basis at the beginning of your project and create an interface between the data you receive from the CEP carrier and your own data.

Among the various options for merging the data, I recommend using the consignment numbers (or TrackingID). Make sure that the number generated by your shipping software is written into the order. At the same time, make sure that this number can also be found in the carriers’ monthly lists. If possible, also include data on product and packaging dimensions.

Now you can combine order and shipment data in a project database or a report. So let’s go cost hunting!

Create various evaluations by customer and by receiving country. Follow Pareto and focus on the important customers and countries. In an international environment, always pay attention to currency conversions. To get an initial overview, I recommend the following analyses:

• Absolute transportation costs
• Relative transportation costs in relation to sales
• Real weight of goods (product + packaging)
• Calculated weight (volume weight)
• Number of shipments
• Weight per shipment
• Transportation costs per shipment

2. consolidate the volume of shipments per recipient country to one carrier as far as possible

To say it right away: there may be good reasons why you should use two or more CEP companies per recipient country. Greater security against transport damage and other unforeseen events, a better negotiating position or generally more flexibility, to name just a few. Customer benefits can also arise from an earlier delivery time of a CEP carrier.

But there is also a reason to consolidate as far as possible: your transportation costs. You are able to negotiate an optimal price-performance offer for each recipient country. Take advantage of this optimal offer by limiting transports with other CEP carriers as much as possible and thus consolidating the majority of your shipment volume.

However, you should take into account the effects of the composite and consider your discount levels with the carriers you use. You may lose more money by downgrading to a lower discount than you can save through the nominally lower reference prices. Switching entire receiving countries to a preferred CEP carrier therefore remains a case-by-case consideration.

Be sure to involve your company’s sales management in your approach in order to break the power of habit on the part of both customers and your own sales staff. Use the easily calculable savings potential in your argumentation.

3. question the ordering behavior of customers with >5% distribution costs as a proportion of sales

Have you ever sent parcels to the same address several times a week? Would you have liked to send today’s order of heavy tools together with the voluminous rods from the day before yesterday? The probability is high, because customers pay attention to their own needs first and foremost. Fulfilling these needs is your company’s raison d’être. I don’t want to deny that in principle. But he who pays, creates and so you should actively question this behavior.

As before, the following also applies: customers are on the territory of the sales department. So work closely with their management when tackling this sensitive topic. Use your good data basis to calculate potential savings in hard euros and motivate your colleagues to cooperate.

Calculate the total transportation costs and the ratio of total transportation costs to sales for all customers. Create a diagram and focus on the customers “top right”. These have both high total transportation costs and an unfavorable cost-to-sales ratio. In practice, 5% has proven to be a good threshold value.

Go one level deeper and analyze the order behavior. Make a list of the products ordered and boxes shipped for all customers and all working days in your reference period. Do you recognize the patterns of the “black sheep”?

Form a task force together with the responsible customer advisors and investigate your customers’ ordering behavior. It is usually possible to identify a few main reasons. Now you can take concrete measures to bring about more cost-friendly ordering behavior together with your colleagues. You cannot eliminate all the causes, but every step forward counts and brings you closer to your goal.

4. adapt your standard packaging to the volume weight

The concept of volumetric weight is used to assess freight costs for bulky light goods. To determine the volumetric weight, multiply the external dimensions of your packaging (in centimetres) and divide this value by 5000. You can then find the price in the rate table. If your shipment weighs less, this minimum price will still be charged. The volume weight is therefore only relevant for companies that ship light or bulky products.

To save on transportation costs, you should adjust the dimensions of your packaging to the weight classes in the rate tables. As a rule of thumb, the volumetric weight of your packaging should always be slightly below the upper limit of the respective weight class.

The most effective way to reduce the volume weight is to reduce a few centimeters along the smallest dimension of your packaging. An example: The original carton measures 70cm long, 35cm wide and 7cm high. The volumetric weight is 3.4kg. If you reduce the length by 2cm, you reduce the volumetric weight to just 3.2kg and thus remain in the same weight class. Effectively, there would be no reduction in distribution costs. If you were to reduce the height by 2 cm to 5 cm instead, the volumetric weight would be reduced to less than 2.5 kg – a jump of two weight classes.

To do this, analyze the order distribution of the product sizes in the two main dimensions. Then convert the limit values of the weight classes into dimensional limit values and also draw these as straight lines in the diagram. Now select several standard packaging dimensions for which you can display the most shipments.

5. minimize customs clearance fees in third countries with the help of break-bulk services

If you export your products via DDP (Delivered Duty Paid) to third countries that have not concluded comprehensive free trade agreements with the EU, processing fees may be incurred in addition to the actual taxes and customs duties. It is irrelevant whether you make the customs declaration yourself or leave this to your CEP carrier. The European Commission’s Market Access Database provides a good overview of tax and customs duties as well as any processing fees.

To do this, analyze the order distribution of the product sizes in the two main dimensions. Then convert the limit values of the weight classes into dimensional limit values and also draw these as straight lines in the diagram. Now select several standard packaging dimensions for which you can display the most shipments.

In some importing countries, such as the USA, the handling fees are calculated depending on the value of the shipment. They are often limited by a minimum and a maximum amount. For the example of the USA mentioned above, these handling fees amount to 0.3464% of the value of the goods, with a minimum of USD 26.22 and a maximum of USD 508.70. If your shipments are worth less than EUR 6,900, you will have to pay a disproportionately higher handling fee. You only benefit from the upper limit if the value of the goods exceeds EUR 134,000 per shipment. Naturally, the former occurs more frequently than the latter.

This is where the so-called break-bulk services of CEP carriers come into play. Consignments that are exported to third countries using this shipping method are declared to customs as one consignment with a corresponding cumulative value of goods. The corresponding consignments do not require joint outer packaging. Your individual consignments are packed and addressed individually as before. Your shipping process therefore requires no change.

Break bulk services are offered by all major CEP carriers such as FedEx, DHL and UPS. Their use is associated with additional distribution costs, but these are not too high and are easily offset by the savings described above.

6. use different CEP carriers to avoid out-of-area and bulky goods surcharges

Extended area surcharges and handling surcharges can easily double or even triple the transportation costs for individual shipments. However, the CEP carriers have different rules according to which these high surcharges are calculated. For you, this means that you can significantly minimize the surcharges to be paid by making an intelligent selection.

First of all, you need the detailed monthly statements, on which all surcharges such as fuel or safety checks are listed separately. Link these invoice items to your customer orders and search for those orders for which you have been charged out-of-area and bulky goods surcharges.

The out-of-area surcharges are calculated according to the destination address. You will notice that these surcharges are charged significantly more often in some countries, such as Italy and Greece, than in other countries. Compare the out-of-area surcharges for the CEP carriers you use with each other or talk to alternative providers. You will notice that by selectively switching individual receiving addresses from one carrier to another, you can significantly reduce or even completely avoid the out-of-area surcharges. For some destination countries, there are also local, specialized CEP carriers whose standard delivery areas cover significantly more zip code areas. Take advantage of these options too.

Proceed similarly with bulky goods surcharges. Compare your monthly invoice statements with the packaging used. If you exceed certain belt circumferences, fall below certain minimum dimensions, use round packaging, etc., you will be charged additional transportation costs. Here, too, it is worth comparing the carriers you use or alternative carriers. Here too, select other carriers depending on the packaging used.

Summary

The retail sector already relies heavily on CEP services, but parcel shipping is also increasingly being used in industry. However, this is where too much money is often spent. By implementing the practical tips described here, you will find a good starting point for operating your CEP distribution more cost-effectively.