Getting control of profitability starts with reducing the leaks that cause lost margins. One of the most overlooked leaks involves outbound freight. Freight costs to customers is an easy target to recoup lost margins, and here’s why.
Most companies have freight policies in place that include a schedule for outbound freight charges including when and how much is applied. The problem lies in runaway exceptions to freight policies. Sales and customer service often wave freight charges altogether or discount freight fees. At the same time, management believes they are in control of freight practices because they have written policies. But, in reality, they lack the visibility to the leakage caused by these exceptions.
The only way to know if freight is causing margin leaks is to monitor freight costs and freight revenue. Let’s look at an example.
Comparing our freight costs to freight revenue on a transaction basis provides the metric to measure performance. This example shows the margin of individual freight transactions. As you can see, the majority of freight charges are insufficient to cover the freight cost with most transactions below the break-even line.