Delving Into Cost Per Pound to Drive Down Freight Costs

by: George Muha

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Date: Wed, 28 Jul 2010 Time: 8:25 PM - 0 comments

The metric of all metrics when it comes to drilling down freight costs is (drum roll please) cost-per-pound! End of article. Thank you! I'll be signing autographs at the table outside the conference room in five minutes.

All kidding aside, let me further explain about how cost-per-pound is the mother of everything to a well run supply chain.

In the transportation world we spend a lot of time on freight class, distance and weight. However, it's the cost-per-pound that should mean the most to shippers.

When it comes to negotiating freight deals, pricing out products, selecting vendors and evaluating rate increases to customers, nothing is more important than the cost-per-pound.

There is a lot of good information in this article so please pay attention.

Why is Cost-Per-Pound So Important?

Cost-per-pound is so vital to any business because it does not lie. I know you were probably looking for more in this paragraph but there is no reason to add any fluff to this statement. Plain and simple, cost-per-pound tells the truth.

How to Find Cost-Per-Pound?

Cost-per-pound is quite easy to extract. Almost every single freight carrier in the industry publishes the weight of the shipments on their freight bills. If the weight is on the bill of lading, it will likely get transferred to the invoice.

Many companies are already key punching freight invoices when they come in or they are pulling the data from reports sent from freight carriers. The key part of analyzing cost-per-pound is getting the data into an Excel spreadsheet. The data needed is shipper and consignee information (company name, city and state), freight class, weight and the freight charge. If using a 3PL, all of the data is usually lump summed and easily downloaded from their website.

There is a ton of stuff that can be done with the cost per pound of freight. But shippers, who also tie in their invoice price for the product, can drill down even further. So if possible, adding another field for product invoice price will just put this project on steroids.

What Kinds Of Things Can Be Done With This Data?

This is the fun part! When a shipper knows the cost-per-pound of their freight and their product, they can become extremely efficient! Knowing what to look for becomes the keystone of this process.

1. Analyzing Existing "Free Freight" Programs. One of the most important things I suggest to do with this data is to evaluate the profitability of all customers. I cannot tell you how often I see the same "free freight" program for a customer that is down the street as is for the customer that is 3,000 miles away. Why should a profit margin be so high a neighboring customer (who is also likely much easier to service as well) but so low on a customer on the other side of the country?

By knowing your cost-per-pound, you can price your products more effectively. Perhaps increasing the "free freight" threshold makes more sense for further away customers. Or perhaps lowering the "free freight" deal for customers that are closer provides more perceived value to that customer. Shippers are often surprised when they see how much their profit varies on different customers based on geography.

I know it can be hard to just randomly raise rates. So this data is imperative when its time for customers to take a price increase.

2. Bigger Weights Mean Lower Cost-Per-Pound. Shipments with higher weights have a lower cost-per-pound. The way freight rates are designed, or at least the way less-than-truckload rates are designed, is the lighter the
shipment the higher the rate per hundred weight (and the higher the cost-per-pound).

Looking at the weights of shipments requires an understanding of how freight carriers charge for freight. Less-than-truckload carriers use a matrix of weight breaks to charge a "per-hundred rate". The per-hundred rate is based on a specific zip code pair and freight class.

So an example of how this matrix works is like this: shipments under 499lbs are billed at the highest rate per-hundred, 500-999lbs are billed at a slightly lower rate per-hundred, 1,000-1,999lbs at a little bit lower rate per-hundred, 2,000-4,999lbs a little bit lower, 5,000-9,999lbs even lower and 10,000-19,999lbs even lower. After that, it gets into full truckload rates which are based strictly on miles and capacity.

An example of how rates per-hundred are calculated for a specific lane go like so:

L5C: 34.30
5C: 28.32
1M: 24.25
2M: 23.04
5M: 17.58
10M: 15.74
>20M: 10.47

So when reviewing a six month or a year long list of shipments to a customer or from a vendor, its easy to see where those shipments fall into the rate per-hundred. The low hanging fruit are the shipments that are teetering at a specific weight break. Boosting those customers to get to the next weight break could mean a big decrease in cost-per-pound. When dealing with inbound shipments from a vendor, then perhaps buying a few extra widgets would do the trick. If a customer is close to the next weight break, then increasing their "free freight" threshold so they are forced to hit that cheaper rate per-hundred will be effective.

3. Freight Class Can Change Everything. Another item to take note of when reviewing cost-per-pound is class. Shippers, whose product mix requires them to ship at different classes, will have to keep this in the forefront of their mind when reviewing the cost-per-pound. As an example, there is a 75% different in yield between a class 50 and a class 100. The higher the freight class, the higher the freight charge.

That is a big difference in cost-per-pound! So it is important for shippers to consider freight class when putting together pricing programs, free freight deals, vendors and rate increases in place.

Integrating the Entire Supply Chain

Personally I love delving into cost-per-pound data. Nothing works better to help to identify areas to lower costs, to provide a benchmark for years to come and to hold freight carriers accountable. Having this data also is imperative in putting some serious muscle into any supply chain.

Logistics managers can use this data to have a positive impact on all aspects of the company. They can help purchasing managers to make smarter buying choices. They can work with the sales team to creatively incentivize customers. Pricing analysts can price products more effectively. Sky's the limit when this information is used in the right way.