CASE STUDY: Transportation Costs
A successful direct marketing company had posted steady profits for over 20 years and had big plans for growing their key markets but found themselves spending more and more of every sales dollar on transportation costs. KEYSTONESG professionals were able to dramatically reduce their costs by more than 26% generating savings of over $400,000 per year and improving their gross-margin by 1.9% of sales.
With sales between 20 and 25 million per year DMC, Inc. is a small to medium sized business by many measures, but not when it comes to transportation costs. As a direct marketer of small consumer products DMC, Inc. ships a lot of packages, more than a thousand a week, across all 50 states. With such a broad geographic customer base the only sensible transportation solution is to use a major parcel carrier which they've been doing since the beginning. DMC, Inc. thought they had done all they could do to manage transportation costs. They had switched carriers in the past and they had negotiated a significant discount during the last round of negotiations. However, with rising fuel costs and annual increases in transportation tariff rates DMC, Inc. knew they needed to do something. Freight costs were as high as 7% of sales and they needed to return to a target level of 5.5% before they could afford to invest in sales growth opportunities.
DMC, Inc. decided to start looking around to see if there were new options. It had been a few years since they last evaluated the top two carriers and since then a third player had entered the market and was aggressively pursing the small to mid size market. They started the process of looking for a new carrier and just a short way into the project asked a KEYSTONESG professional to help with the project. The KEYSTONESG team member was assigned responsibility for leading the analysis and logistics portion of the project as well as assisting in the negotiation phases.
After several months of negotiation and analysis a new carrier was selected for a test period of 90 days. The carrier had the best promise of delivery times and the lowest rate structure. The test phase exposed several key issues including a perceived reduction in service level due to brand bias, real impacts to service levels in certain geographic areas, and a reduction in customer service support. DMC, Inc. was forced to make a hard decision, reduce costs by 25% and experience slightly lower service, or reduce costs by 15% and stay with their current carrier. The solution was obvious, go back to the negotiation table and give the current carrier another chance.
Through another 30 days of negotiations and open dialog about how to retain the carrier of choice DMC, Inc. and the Carrier reached a workable solution. DMC, Inc. decided to give their preferred carrier an opportunity to prove their claims that their ground service had improved significantly in the last 18 months. Through across the board rate reductions and change in service mix (air vs. ground) DMC, Inc. was able to maintain existing service levels and delivery times while reducing annual transportation costs by nearly 27%.
Instrumental in making the changes was the fact that the KEYSTONESG professional was able to work very closely with the carrier's business analysts to work out a freight model that not only reduced costs but also maintained service levels. The decision was easy to make when the facts were laid out on the table. There were few unknowns and numbers told the story.
Today DMC, Inc. transportation costs run about 5.2% of sales down from 7.1% when the project started. This translates into an increase in gross margin of over $400,000 annually. In addition to reducing freight costs DMC, Inc. also put an internal focus on reducing freight discounts to customers and setup controls to ensure that freight costs were covered on every sale. These efforts have allowed DMC, Inc. to focus their efforts and capital on growing sales channels rather than paying freight bills. Applying valuable capital to growing the business is better for DMC, Inc. and the freight carrier.
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