Alleviate the Burn: Five Strategies to Defray Rising Landed Costs

It’s no secret that freight costs have exploded in recent months—supply chain woes have been dominating the news cycle. As a consumer goods distributor, you’re feeling the burn as transporters of every type have jacked up their rates to extreme levels.

Some distributors have reported a jump in rates as high as 700%—from about $3,000 to $25,000 per container. For large retailers like Amazon or Costco, they can simply send their products through private charter planes or charter their own container ships.

But for most small- to mid-size distributors, there are very few options. You either pay the exorbitant freight rates, or you wait. There is a third option, though. If you can increase visibility into your supply chain operations, you can implement viable strategies to overcome rising freight and landed costs—now, and in the future. It’s all about getting ahead of any vulnerabilities.

Here are five tactics to help you weather the supply chain crisis and rising freight costs that have accompanied it.

Strategy #1: Know Your Costs

You need to know exactly what you are spending on freight to get a more accurate picture of how much landed costs are eating into your EBITDA. With the ability to aggregate cost data, you can be more strategic in procurement. Simply put, you need to determine how profitable your business is by dissecting the profitability of each customer, product and supplier. Once you know both above-the-line and below-the-line costs, including freight, allowances, royalties, commissions and chargebacks, you have the data you need to make strategic decisions about the future.

Aptean’s Distribution ERP has a built-in Profitability Scorecard tool that will give you in-depth insights on your profit margins.

To survive this supply-chain mess, you need to know what prices to raise and what costs to absorb. You can’t just raise your own prices commensurate with freight costs and expect your retail customers to be okay with it. After you’ve done your profitability analysis, you’ll know which products have been hit the hardest with rising freight prices and which have remained relatively stable.

Now you need to do a strategic analysis so that you know what you can afford to absorb. You’ll know which customers can afford to shift to the higher pricing, and for which customers you’ll need to eat the freight costs. For this strategy, you need a nimble cost structure, and for that you need data.

A robust Business Intelligence (BI) tool can help you shift your company’s approach. Instead of reacting after the fact to freight cost increases, you can use strategic data to make informed decisions based on intelligent analysis. Excellent demand forecasting is a game-changer for the consumer goods distribution vertical. Aptean uses the power of Microsoft BI to help you make informed decisions based on real, actionable insights about current and future costs. It can help you leverage a contingency budget so that you can navigate this crisis and any others that arise.

Strategy #2: Take Advantage of Discounts

If you don’t have discounts built into your contract already, work with your suppliers to get volume-based discounts or see what else they have available. Many distributors are opting to simply let the products sit in overseas warehouses rather than paying for higher freight costs.

While the manufacturers try to play hard ball and demand payment, they are still sitting on massive product overages. Strike while the iron is hot—ask for a huge discount. Most likely, the manufacturer would rather sell to you at the discounted rate than take the chance of not selling the products at all.

From the shipping side, talk to the shipper about reducing dunnage. Many shippers use far more packaging than is necessary to prevent damage. Reducing dunnage can save you about 3% per load. If you have a good relationship with a particular carrier, you can also discuss sharing loads with companies that are near you.

Talk with your retailers about relaxing some of their contractual pricing. We’ve been hearing that even the strictest retailers have lowered their pricing structures in the face of rising costs and are now allowing their distributors to raise prices, despite existing contractual agreements.

If you have a long-standing relationship with a retailer, now is the time to leverage that partnership. Chances are, they will be understanding because they are getting hit with delays and shortages also. Again, they’d rather have products to sell than face a store with empty shelves and no customers.

Strategy #3: Streamline Your Product Lines

Keeping inventory lean and building working capital are going to help your company survive in the face of extreme supply-chain volatility. If you can afford to do so, eliminate your less-popular products. Keep your important core products and try to keep an inventory in reserve. Again, this is where knowing the profitability of every aspect of your business is imperative. If you generally carry hundreds—or even thousands—of SKUs, how do you know which ones are selling? Sure, your sales team might have some idea, but you need to know how every item is selling in every region.

Once you know which of your products are your best sellers, you can order those in bulk (hopefully getting your newly negotiated discounts in the process), which gives you time to anticipate any delays.

The lean inventory approach isn’t new—most economists credit it to Henry Ford in 1920. The concept applies to enhancing value in a company by identifying and eliminating waste of materials, effort and time. In the more modern era, the Six Sigma concept states that you should continuously refine your inventory management processes to improve quality, cycle time, efficiency and cost. Even without rising landed costs, these concepts are just good business sense.

If you haven’t embraced digital systems to manage your inventory, you need to do so now. You need strong analytical tools to create reports that will give you the data you need to maintain an efficient, lean operation. We recommend trying out the built-in Profitability Scorecard that comes standard with Aptean’s Distribution ERP and then utilizing BI to run scenarios that will give you the most bang for your buck.

Strategy #4: Raise Delivery Minimums

Implement delivery minimums if you haven’t before because you will have massive freight charges to offset. Work closely with your sales team and get your customers to take larger orders. It's a lot cheaper to ship six pallets once than one pallet six times.

Even if your retailers drag their feet, remember that they are going through the same issues that you are. Create incentives for them to take more inventory than they might want right now.

For example, if you have a strong, profitable relationship with a retailer, and you know that they will pay on time, offer them a flooring arrangement. They can stock and display the merchandise—and get it out of your warehouse in the process—and then pay you once it’s sold.

Obviously, you will need to delay or cancel any upcoming promotions, as well, unless it’s a product you can afford to cut prices on. Again, it all comes down to knowing exactly when and where you can alter your pricing structure.

Strategy #5: Renegotiate Contracts with Vendors and Retailers

Most distribution companies have contracts that have been rendered obsolete by these abrupt changes in the market. Now is the time to perform an analysis to determine if there is a legitimate basis for renegotiation.

Here is where knowing all your current costs is crucial. OTIF, or on-time, in-full, charges need to be waived right now. Obviously, customer satisfaction is important to the health of your business, but so is your bottom line. Delays in shipments and shortages are inevitable in the current climate, and if your retailer is still going to insist on OTIF being met, it’s time to sit down with them and discuss those charges.

You are going to have to examine the current contract you have with your retailers and discuss how you can adapt the prices so that you both can make a profit. There isn’t time to delay—industry analysts predict that supply bottleneck and shortages will continue well into the next year, particularly in the face of China’s burgeoning water crisis.

Contracts should be flexible, collaborative tools that benefit both parties. Contractual agreements in the distribution vertical need to be nullified or altered when economic changes and crises occur, and there is no bigger crisis than the supply chain issues after the pandemic. At the same time, it is your responsibility to review these contracts to ensure that you are getting what you need out of it. Contract review is also a tool to identify areas where it’s possible to increase efficiency and productivity while mitigating risk.

Putting It All Together

The globalization and full visibility of the supply chain was already important before the pandemic. Resiliency and management of supply-chain risk is now imperative.

As a distributor, you need to anticipate disruption and deal head-on with both challenges and opportunities. Your biggest asset to face the supply-chain crisis and rising freight costs? The treasure trove of data that your company holds. By knowing your historical sales transaction data and using industry- specific analytical and digital tools you can unlock almost limitless resources.

You’ll increase productivity in inventory management, warehousing and logistics. With better demand planning and forecasting tools, you can deliver the right products at the right time in the most efficient way. Now is the time to start using digital tools.

Want to see how an industry-specific distribution ERP can help you alleviate the rising costs of freight or related warehouse carrying costs to make it through the supply chain crisis? Our industry experts are here to help. Find out how, now.