WHAT IS THE TRUE COST OF GOOD SERVICE?

What is the true cost of good service? – A Case Study

Every business is concerned about keeping their operating costs under control, and if they’re not, they certainly should be.  Having said that, we constantly witness businesses focusing solely on cost reductions instead of what we believe should be the main focus of their business.  What is that focus you ask?  Servicing their customers, with the best possible service at the least possible cost.  So a question every business should ask themselves is, What is the True Cost of Servicing our Customers?  Most companies merely focus on the actual out of pocket costs they can easily identify, while in reality there are many additional costs that never get added to the “total cost” bottom line.  That creates a false picture of the true costs associated with any business.  Here is a real life example to prove our point.

A recent discussion with the operations manager of a beauty supply manufacturing company revealed that he is getting intense pressure from upper management to reduce his company’s LTL outbound to customer shipping costs.  In fact, his immediate boss believes there are “significant savings” that can be achieved by negotiating lower rates with a variety of LTL carriers.  While that may or may not be true, there is much more this client needs to take into account before beating his current LTL carrier to lower their rates, and certainly before he opens any discussions with any other LTL carrier for that matter.

This manufacturer’s products are sold in major retail stores throughout the country.  For anyone who is familiar with delivering products to major retailers’ distribution centers, there is much more to the business arrangement than just getting the goods on the truck and out for delivery.  Let’s look at the entire process from initial order to final delivery to get a sense of the enormity of the business transaction.

The first step in the process involves the manufacturer receiving a purchase order from their customer.  That step is followed by making sure they have all of the raw materials necessary to build the products in a timely fashion and to ship the order to the customer on time and damage free.  But that’s not all; the purchase order also provides the manufacturer of the MABD, “Must Arrive By Date.”  This is the  date that the manufacturer must have his goods “officially” received at their customer’s distribution center, or the customer will consider the order late.  Any late delivery causes a whole host of additional problems for the manufacturer and can cost them significant dollars.

This manufacturer’s current operation involves utilizing a single LTL carrier for all of their outbound customer orders.  The main reason for this decision is a fairly attractive pricing structure, (at least that’s what the manufacturer believes!)  In addition, they only have one carrier calling on their shipping dock to pick up all of his outbound orders each day.  So it’s easy to understand why the manufacturer is comfortable with his current arrangement.  It’s also important to point out that over the past several years, this manufacturer has had to change his “preferred” LTL carrier several times because of poor service.  More on this point later.

Once the goods are shipped, the real fun begins, and here’s why.  All the LTL carriers this manufacturer has used, now and in the past, have refused to make delivery appointments at the retail distribution centers until the shipment actually arrives at the carriers destination terminal.  The LTL carriers’ reasoning is that they want to make sure the goods are available for delivery before setting the appointment, which you can certainly understand.  However, there is much more to be considered here; some of the retail distribution centers require a 24 to 48 hour advance notice before scheduling any appointments for delivery.  So if the shipment arrives at the destination terminal a day before the “Must Arrive By Date” and the carrier gets an appointment for two days beyond that date, the order will obviously not be delivered on time.  And for those who are familiar with these late delivery scenarios at these major retailer distribution centers, there is ALWAYS a vendor chargeback that follows.  These chargebacks contain significant deductions in payments due the manufacturer as a result of the late delivery; and by the way, for a whole host of other reasons, too many to mention here.

Since these chargebacks are received on a fairly regular basis, this firms management requires each chargeback to be investigated thoroughly to ensure they are valid.  Certainly an important job function that is undertaken by this company with no less than 4 individuals getting their hands dirty in the process.  It is a laborious, labor intensive and costly process to say the least.

So when this manufacturer presented this ongoing problematic issue to us, we had some observations and recommendations we presented to them, and here they are.

  • First of all, we are all familiar with the definition of insanity; “doing the same thing over and over and expecting a different result.”  It appeared obvious to us that the model of using a single carrier for all of these deliveries nationwide just might not be the best solution based on the fact that this company continues to change carriers because of inadequate service; even if the rates they charge a very competitive.  If you factor in the chargeback dollars the company has had to write off because of these service issues; add the cost of the additional employees who investigate each of these problems, and add those costs to the outbound freight charges, the freight charges the manufacturer thought were competitive are no longer competitive.  The goal must be to calculate “total costs” in any cost analysis.  It’s critical to ensure all of the associated costs are included in the analysis so you have a true cost comparison by which to base your business decisions on.
  • Secondly, each of the retailers the manufacturer ships to has a “preferred” carrier list.  So we recommended they use the “preferred” carriers of each of the major retailers since they have access to deliver goods on a priority basis to the various retail distribution centers that other carriers may not have.  They typically have dropped trailer agreements with the retailer and as long as the goods are received within the DC gate, even if they are not unloaded for days, they are considered delivered on time.  By changing the carrier mix, on time delivery should be improved and the chargebacks should be significantly reduced as well.
  • One further recommendation we made was to utilize a Freight Broker that has a significant amount of business from other clients going to these very same retail DC’s and because of the large volumes of shipments they handle, the broker’s rates are extremely competitive. And to top it off, the broker has agreed to provide the following additional benefits, at NO ADDITIONAL COST.  (1) a dedicated customer service rep for all questions, concerns and required information; (2) The broker will provide weekly, monthly and quarterly reports of all the shipping activity, including time in transit and cost information the manufacturer never had access to before (3) and finally, the broker will provide proactive communication to the manufacturer providing advanced warning for any shipment that might be problematic, so the manufacturer can communicate with their retail customer before, rather than after the fact.  A huge customer service benefit.  Oh and by the way, the rates the manufacturer will now pay are actually lower than his “very competitive” rates they are currently paying.

The real key to a successful operation is understanding all of the elements involved in the entire operational process.  There are always a variety of key stakeholders in every business process and each of those stakeholders needs must be considered.  In this scenario, the overall freight costs have been reduced, customer service has been improved, late delivery chargebacks will be virtually eliminated and the operations manager’s boss is finally off his back.  A huge win for everyone.

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