The Whole Package – Procurement Shipping

Have you considered why procurement shipping is crucial?

Procurement Shipping True Story – Names Have Been Changed

In what seems like a lifetime ago, there was a company with 18 buyers whose sole focus was on acquiring Indirect Material MRO parts to support an extensive nationwide IT infrastructure. If our memory is correct, there were 40 to 45 delivery locations.

With a demanding Service Level Agreement or “SLA” in place, the emphasis was on getting the right product for next-day delivery at the lowest possible cost. In short, the moment the buyer received a part request from a field technician, the clock was ticking.

If you think that conditions such as the one above are a recipe for disaster, you would be right on many different levels. However, and regarding this post, we will focus on one.

Parent-child SKU issues, and products sourced in another country having to clear customs on a timely basis, were only two of the “problems” buyers faced daily. While we will cover these pain points in future articles, today, we will zero in on costs—specifically, shipping costs.

Misguided Metrics

It is important to remember that buyer performance was based on low product cost and timely delivery, which meant an almost mandatory requirement to empty their order queue by the end of business every day.

Of course, in their haste to meet these two objectives, something was bound to fall through the cracks: shipping costs.

For whatever reason, the company did not incorporate the shipping costs for overnight delivery into the COG calculation. What this meant is that the product “buy price” was the only amount captured and recorded. It was only after receiving the vendor invoice that the company recorded the shipping fee.

So, let’s take a brief pause at this point and see if you can tell us why this approach was problematic.

The Bottom-Line

As you probably surmised, the problem with not incorporating shipping costs at the point of purchase led to the following three serious issues:

1. While it was convenient to have the supplier take care of the shipping and bill it back to the buyer, the company lost the ability to leverage its collective purchasing power to take advantage of significantly lower ship rates.
2. Since the only cost captured was the actual COG without shipping, the company’s mark-up to its end client was eroded. In other words, the mark-up that the company was billing to the client was 20% on the COG MINUS the shipping cost. As a result, the company made less money than expected and lost money in the worst-case scenarios.
3. Beyond the bottom-line impact of points one and two, by relying on the supplier to look after the shipping, delivery performance suffered as the vendor usually went with the carrier that offered the lowest cost. By using the low-cost courier, SLA performance was 52% versus the required 90%. Not only was the company losing money, but they were also at risk of losing the multimillion-dollar contract with their customer. Adding insult to injury, some suppliers were even marking up the shipping costs to cover packaging and handling.

A Happy Ending

Through a third-party “intervention,” the company was able to implement the necessary measures to realign their buyer performance metrics to include the “Landed Cost of Good.”

They also took control of the logistical component of the buy coordinating the pick-up and delivery of all parts through a central buyer-side managed contract with a single courier.

So, here is our question: after reading the above, are you the before or after in the above story? Have you considered why shipping should be part of a buy?