Distributors can improve shipping predictability and decrease costs by reevaluating how they receive product from their suppliers. This article looks at how LTL is a little-considered option but can cost half that of parcel delivery and a third of overnight air deliveries.
Beyond renegotiating existing contracts, many wholesale distribution executives don't consider changes that can be made to shipping procedures to save money and improve cash flow.
It's like this is the way we've been doing it for so long, we don't think that there is another way, says Doug Savage, president of Bearing Service Inc., Livonia, MI.
But reevaluating shipping options and processes to get product from the manufacturer to the distributor can lead to significant savings while at the same time improving your own customer service. Options such as Less-Than-Truckload (LTL) shipping have become more accessible and more efficient over the past 25 to 30 years.
LTL usually involves shipments of more than 200 pounds but less than 20,000 pounds, depending on the actual items being shipped. The cost can be half that of standard ground parcel delivery and less than a third of overnight air deliveries.
Changing the Mindset
One of the biggest factors in changing the way orders are shipped to the distributor is changing the mindset of the purchasing agents, Savage says. Currently, distributors tend to ask when an item will be shipped as opposed to when it will be received.
"I was paying my bills online and realized that I tell them when the payment needs to be there, not when they need to send it," he says. "Something clicked and I realized that that's how we should be doing our business, as well."
Shifting to a need-by date rather than a ship-by date can provide the manufacturer with latitude to determine the most cost-effective way to ship the order to meet that need. "If I say an item needs to be shipped on UPS on Tuesday, knowing that UPS will get it to me on Friday, I will pay the cost of parcel delivery," Savage says. "What I may not know is letting the manufacturer ship it LTL on Monday night could get it to me by Friday as well but at a third of the cost."
Consolidating multiple orders from a manufacturer into a single order can also improve options available for shipping. It doesn't necessarily require distributors to change the way they place their orders; but distributors need to allow the manufacturers to put those orders together at the shipping deadline.
Don Louis, president of CoLinx, a not-for-profit logistics and e-commerce company owned by a group of manufacturers, points out that the decision on how to ship can be made on the loading dock when all orders are together. If there are 25 50-pound orders from one company, they can be consolidated into one 1,250-pound LTL delivery.
"Some distributors are starting to realize they're not getting as good of service as they could be," Louis says. "By giving manufacturers the flexibility to make the shipping mode decision at the dock, we can use all the facts to determine the best option."
While providing that latitude may feel like giving up some of your decision-making power, Savage says the reality is that you never had power in the first place: "You really never had a say in how things were shipped; you were telling them when to ship it and tying the manufacturer's hands for options."
Some distributors have tried to consolidate on their own, Louis says. But usually that means that they hold the orders on their desks for as long as they can, which often adds extra days between order receipt and order invoice.
When cutoff times are missed, an order is either delayed, or shipped via a higher cost mode. Instead, Louis advises distributors should measure and minimize minutes between order receipt and order
Often the perception is that standard parcel delivery through UPS or FedEx will be quicker than using LTL delivery. While that may have been true in the past, today LTL can often provide faster service than the parcel carriers.
One of the biggest benefits we've gotten from LTL shipping is the schedule. For many of our distributors, if an order is placed by 5 p.m., it will be shipped by 11 p.m. and be received by the next morning," says Daniel Muller, president of Distribution and Services for the Bearings and Power Transmission group of The Timken Company, Canton, OH. Parcel delivery options can take up to three days for the same deliveries.
This leads to improved customer service in addition to reduced shipping costs. "Because we have scheduled pick-ups and deliveries with our LTL carriers, our customers know exactly when they're going to receive their orders and can rely on those deliveries each day," Muller says.
Because Timken is one of the owners of CoLinx, it is able to leverage extra volume from other member companies to ensure that their pick-ups meet that LTL shipping standard. But by implementing a few changes to how shipping decisions are made, even smaller manufacturers can take advantage of the savings available.
Muller does warn that long-haul deliveries may sometimes take longer, because of the transfers between trucks and routes along the way. But most delivery times will still be comparable if not better than standard parcel. The big parcel players have recognized the benefits of offering LTL services. UPS acquired Overnite Transportation Co. in April 2005 and at that time began to offer the order consolidation option.
Using LTL can not only decrease the cost of delivery, it can help improve cash flow. As the economy tightens and manufacturers invoice products as soon as they ship, distributors are dealing with a shrinking time between receipt of product and payment due date. And when it comes to logistics, cash flow is directly related to time.
"Distributors are finding ways to reduce the days between order receipt and collection of receivables by better understanding logistics choices," Louis says.
Business executives are learning that "cash is not a concept," Louis says. Cash flow, particularly in tight economies, is essential to providing a continued high level of service to your customers. Fast delivery from manufacturers is needed for both the distributor's balance sheet and their service reputation, he says. Minutes, hours and predictability count.
Consistent service also helps manufacturers build their reputation. "If a company knows we will get their items to them when we say we will, and save them money doing it, they're going to trust us to continue doing that in the future," Muller says.
Having that solid relationship helps improve communication and understanding of each other's needs. Louis advises that now is also good time to start building relationships with the LTL companies. "Once this recession is over, there will likely be an equipment shortage," he says.
Because of reduced order volumes, trucks that were in use in the U.S. have been sent overseas for use in developing countries. And because of cutbacks in the automotive industry and new regulations, truck availability may not be there when the orders start returning.
"If the LTL company knows that you're a good customer in down times, and you have that relationship, they'll find a way to get you capacity when there is a shortage."