Reductions in Distribution Costs Helping Retailers Compete

Lisa Henthorn | Apr 23, 2015 53 views No Comments

Retailers have begun to increasingly focus cost-cutting efforts on Cost of Distribution, and it’s paying off by quickly and simply reducing net landed cost of goods by as much as 30 percent

Net landed cost of goods, the total cost associated with getting goods into customers’ hands, consists of cost of manufacturing (CoM) and cost of distribution (CoD). For decades, manufacturers and brands have worked to reduce CoM as a means to reducing net landed cost of goods to compete and succeed in increasingly competitive marketplaces. Nearly every conceivable strategy has been explored to reduce CoM, including reducing labor costs, increasing reliance on automation, negotiating reduced cost of materials and so on.

As this strategy reaches its limits, companies looking to remain competitive must find new ways to reduce costs, and they increasingly turn to the often more rewarding yet complex opportunity to reduce the other side of net landed cost of goods: CoD.

Distribution costs rising

Companies across every sector face increasing CoD due to transportation industry labor shortages, which create higher demand and fewer available shipping lanes, as well as regulatory changes.

According to the American Trucking Association, the trucking industry currently faces a shortage of roughly 25,000 drivers with expected increases over the next decade pushing the total closer to 200,000. Shifting demographics, changing regulations and the need to spend a lot of time away from home have led fewer potential drivers to enter the profession each year with no clear solutions available to lure them back.Simultaneously, the American Trucking Association predicts freight tonnage will grow 23.5 percent from 2013 to 2025 and freight revenues will surge 72 percent. Changing regulations for the transportation industry also bring cost increases.

The net effect? An increasing shortage of drivers combined with an increasing demand for their services, creates a highly competitive environment and skyrocketing shipping costs. Retailers that do nothing to reduce CoD will, by default, see their CoD rise rapidly in the years ahead.

Many retailers favoring long-term solutions

Instinctively, companies trying to reduce CoD look to renegotiate carrier rates in their favor. While this may provide short-term dividends, this strategy has limited long-term viability. Plus, as carriers foot the bill for rising costs, their rates stand to increase, reducing their willingness to negotiate supplier-friendly discounts.

So how can manufacturers and brands find CoD savings outside of carrier discounts? By finding more efficient ways to distribute, savings can be found in nearly every facet of distribution, from inventory management to transport planning. Any goods with significant distribution costs (representing a significant portion of net landed cost of goods) can benefit from this approach to cost cutting, including goods ranging from apparel and other consumer products to industrial steel coils weighing as much as 20 tons.

Shippers can tap a variety of strategies to use carriers and vendors more efficiently. Route optimization and planning technologies, which apply algorithms to every order, can help mitigate the impact of driver shortages and increased road congestion by examining shipping orders for variables such as order size, type and destination and combining them with local variables such as street restrictions (one way, no trucks over a certain size, etc.) and fees (tolls, border taxes, etc.) to determine optimal carriers, fleet types and routes.

While it’s possible to handle some of these optimizations manually, as orders grow in number and size, the calculations become increasingly complex. Optimization and planning technologies enable companies to take control of operational and cost-related shipping variables without increasing staff workload or responsibilities, by responding to complex problems with more informed decision-making in a fraction of the time otherwise required. Plus, thanks to the cloud, these types of technologies are available to boost efficiencies for even small shippers and manufacturers.

Similarly, execution monitoring and cost management technologies can be utilized for full visibility into carrier performance, rapid adjustment for unplanned delays, and quick auditing and invoice settlement, which can help preserve quality relationships and collaborative partnerships with carriers and vendors. Even with the best route optimization and planning technologies, unforeseen variables such as accidents or severe storms can cause delays. Real-time insight into these delays enables quick route adjustments and rapid communication to all vested parties (staff, carriers, customers, etc.).

More efficiencies can be found in areas including inventory and warehouse management and order consolidation. When combined with regular route optimization and planning, execution monitoring, and cost management efficiencies, companies who stay diligent can reduce their net landed cost of goods as much as 30 percent to stay competitive without squeezing any harder on manufacturing costs.