Should Your Manufacturing Company Perform A Freight Cost Analysis?Written by Neal Willis
Performing a freight cost analysis for your manufacturing company can provide insight on how your current carrier pricing compares to the pricing your industry competitors have achieved, and conducting a freight cost analysis can be a relatively simple task, if you’re already measuring and tracking freight data and monitoring carrier performance. Conversely, if you’re not really in control of your freight operations and don’t understand current market conditions, a freight cost analysis may be a complicated process that involves many intricate steps.
In simple terms, performing a freight cost analysis involves comparing what you’re currently paying for freight to what your peers in the industry are paying for the same types of shipments. With regards to freight and transportation, look at your industry peers who are performing the best and make an effort to determine the metrics they are using to drive their performance. Unfortunately, shippers often lack the ability to evaluate the performance of their current carriers and are often left susceptible to paying higher than necessary freight costs and experiencing less than optimal service because of the lack of data.
Before gathering any type of data for the freight cost analysis, make sure that you understand the current market environment. Analyze your current carrier mix to determine if the carriers align with your business model and if your needs are truly being met. Ideally, you want quality carriers that service your geographical areas with the appropriate service(s) according to your needs and your customer’s expectations. If your freight cost analysis is merely comparing rates against other shippers in different industries, it may seem like you’re paying more than you should. For an accurate freight cost analysis, you have to know what is considered to be good pricing within your industry and what level of pricing can be reasonably expected. In some cases, a freight cost analysis may simply confirm that you already have good pricing in place.
Shippers also need to understand how carriers price their freight, so they can better work together with the carriers to achieve mutually beneficial cost savings and achieve process efficiencies. Having a thorough understanding of the carriers and their niche markets can allow for added leverage in freight rate negotiations. Most freight carriers value certain lanes over others, and knowing which ones they value most can help you determine which carrier(s) could potentially benefit the most from servicing your business. Carriers perform their own freight cost analysis with every shipper they service and use operating ratios to track the cost of doing business with each shipper to determine if the business they are handling is profitable for them. Ask the carriers to share your operating ratio with you. With an understanding of what drives carrier performance, shippers can better work with carriers in a collaborative effort in which both parties are better able to reduce and maintain lower freight costs.
Take the time to gather complete and accurate freight data for your freight cost analysis and make an effort to not only understand your own freight and freight characteristics, but also to understand the carrier’s business and the overall market conditions. Performing a freight cost analysis for your manufacturing company can take a lot of time, but it can offer multiple benefits such as better pricing and freight rates, solid carrier relationships, stabilization of freight costs and insight in to your customers and operations.