Your company is pressuring you to reduce distribution costs, or your customers want more frequent orders and you need to optimize the distribution process. Regardless of the reason why, reducing distribution costs is among the most impactful ways to increase your operation’s profitability. If you haven’t optimized your distributions before, the amount you’ll save could be huge.
Huge as in upwards of 15% in distribution costs. Hard to believe? Let’s go through the best methods to save and how to implement them in your distribution process.
Distribution Cost Reduction Best Practices
Successful distribution logistics relies on improving handling, transport, and storage of the product as it is distributed from the manufacturer to the customers. Customers include the final customer, distributors, or processors (learn more about distribution logistics basics here). If you want to improve your spending on handling, transport, and storage, it is important to consider the costs associated with distribution, such as:
Distribution logisticians aim to reduce these costs (primarily freight) as well as increase market influence and product availability when they are optimizing their spending and profits. As a consulting agency with experience optimizing our clients’ distributions, we have logistics cost reduction strategies to help you save.
How to Reduce Costs
When you are reducing your distribution costs, the challenges often come from having a lack of resources, system capabilities, and freight volume that large packaged goods companies have access to. The good news is if you are a small to mid-sized packaged goods company, the solution can be simple. You can take advantage of third-party logistics providers (3PL) that specialize in mass consumer goods distribution. As we will explain later, they can provide access to larger freight sizes, more efficient shipping, and analytical data that most mid-sized companies lack, getting you to locations where you are not.
Here are six reliable ways you can leverage your distribution costs:
1. Negotiate in the Distribution Process
The biggest savings come from negotiating freight contracts. If you don’t negotiate it right, it could end up costing you for a long time. Many companies overlook or undervalue this part of the distribution. One problem is most small companies do not look at enough freight service providers or do not have enough access to a range of providers. Another problem is freight service providers tend to know the subtleties of contract negotiation as they do it more often. There are companies, like us, that know the intricacies of freight contracts and can help you negotiate contracts on your behalf. To be prepared to negotiate contracts:
- Lay out your freight needs
- Find the right freight services to meet those needs
- Negotiate appropriate rates with the service providers to meet those needs
After you get in a good position with your contract, explore other cost reduction methods and take savings a step further.
2. Streamline the Distribution Process
If you have a large distribution area, we recommend simplifying the distribution process by transporting bulk products to different centers and then delivering from that point. Alternatively, you can streamline the process by having a packaging unit in your distribution center. Your goal is to remove waste to reduce costs and increase the workflow. The fewer steps the products take before reaching the customer, the better.
Having multiple distribution centers reduces logistics costs because the delivery to the customer will take less time. Transporting the product to the distribution center will also be much cheaper per unit. This is best done if you deliver to a large area. If you have a small distribution range, another option is to remove locations and deliver straight from the manufacturing location.
A packaging unit in your distribution center is a great way to reduce logistics costs. The products are moved around, saving on freight and preventing inventory loss. Packing the product in the distribution center instead of a packaging location means the product does not have to leave the distribution center until it is ready to be shipped to the customer. Also, look at the packaging itself: does it take up unnecessary space in transportation and storage?
Reducing distribution costs is a great opportunity to implement the Lean method. Contact our Lean experts here!
3. Consolidate and Analyze Sales Data
You can make important business decisions more easily if you analyze your sales and inventory data. The goal is to make decisions on where to allocate available inventory based on the customer’s priority, not their time of purchase. The key to doing so is using your sales and inventory data to better rank customer priority without bias. With a full analysis of the distribution process, alternative methods or shipping patterns can be evaluated, trends can be detected, and adjustments can be made. Shipping products based on who key customers are instead of who needs the items first will improve distribution costs.
Don’t have the resources for system integration? Contact our operations experts!
4. Reduce your Inventories
Reducing your inventories reduces your storage costs. There are a number of cost-effective methods to reduce inventories. You can centralize slow-moving products at one location, have fewer locations in general, or restock locations less frequently. Another effective way to optimize logistics costs is to introduce cross-docking into your distribution process.
Cross-docking can be difficult to implement but essentially removes the need for storage locations, greatly reducing logistics costs. What is cross-docking? Products are unloaded from delivery vehicles and directly reloaded onto outbound trucks. Cross-docking can be done by sorting the product pre-delivery or post-delivery, depending on if the customers are identified before or after delivery. In the post-distribution sorting process, the products spend more time in distribution and cross-docking facilities, but customer decisions can be more informed.
Cross-docking is not easy for small companies because of a lack of systems and resources to coordinate and manage the process, but the results are worth it. A cross-docking process can be implemented with the help of a 3PL. They have the systems and facilities to get a cross-docking strategy started and help you save on distribution costs.
If you want help making a leaner, more efficient supply chain, give us a call today.
5. Combine Loads with Other Shippers
Are you shipping full truckloads? Small companies tend to have lower freight volumes meaning shipments are less-than-truckload (LTL). The result is higher shipping costs. To fix this, combine your loads with companies that are shipping to the same customer. You can reduce freight costs by working with other companies, competitors or not, and shipping full truckloads instead of LTLs. This is easier said than done. If you are in the right situation though, combining loads can be a great way to save. Consider working with big trucking companies like FedEx to consolidate loads.
6. Get Customers to Order More
One way to reduce distribution costs that may sound obvious is to increase the demand and order volume. Improving customer service and customer experience will increase the number of orders. Make your product more visible and your customers more satisfied in order to increase the order volume, increase sales, and reduce the amount of LTL freight shipments. The Next Step has experts dedicated to customer service and marketing to help you stay focused on the things that matter.
Track the Cost Reductions Impact on your Business
After implementing cost reduction methods, track your impact on your business with KPI and SQDC (Safety, Quality, Delivery, Cost) analyses. Tracking distribution costs over time is important because it gives you a baseline. With a baseline, you can more easily notice product quality changes or distribution cost increases. Track logistics costs on a per-unit basis to have a better understanding of specifically where costs could be improved.
Want to save time and resources on KPI and SQDC analyses? Schedule a call with us today!
If you are still unsure of where to start reducing distribution costs or you lack the time and resources to do so, The Next Step is here to help. We have experience running operations and achieving KPIs. Enlist our expertise and optimize your distribution process.