Rising freight costs were strangling the profits of one of our clients, an equipment manufacturer supplying retail businesses. Common industry practice was to offer customers "free freight" on orders over a certain threshold quantity. Our client asked us to review the competitive situation and determine how their freight policy should be structured.
Allocated freight more accurately
Enforced threshold quantity
Designed new freight policy
The ProAction Group's first task was to create a better method of allocating freight. The current approach to freight allocation used only a percentage of total shipment weight as a means of distributing costs. Our client's shipments typically made multiple stops and delivered various product classes to several customer locations. We created an allocation system that took into account lane charges, fuel surcharges, stop-off charges, load factors, and the size, weight, and destination of specific orders.
Our second task was to design a new freight policy. The ProAction Group sampled three months of manually generated invoices, totaling 418 shipments. As a part of that analysis, we assessed average order size by customer. To the surprise of our client, we discovered that numerous shipments fell below the "free freight" threshold quantity. Capturing this missed opportunity added $400,000 to the bottom line.
Based on the data, we introduced five options for passing freight charges on to our client's customers. These options included strategies for negotiating with customers and incorporating freight into the purchase price. We analyzed the pros and cons of each option, weighing the potential of customer loss.
$1.1 MM EBITDA from freight pass-throughs
The ProAction Group designed and recommended a comprehensive solution to our client's freight dilemma. The new freight policy would add $1.1 MM in EBITDA by systematically passing freight charges on to customers.
