Many purchasing people I talk to place a very high level of importance on the cost of freight. As they develop purchase orders, the cost of freight often drives the size of the PO. In an effort to reduce freight cost, they often increase the size of the order significantly to “make freight”. Making freight might include getting to a full truck load for a cheaper rate or getting to an order size where the supplier pays for the freight. However, if you look at total freight as a percent of total materials purchased, while the dollars add up, it is most often a very small percentage of the total. If you factor in the cost of holding inventory, especially warehousing costs and obsolete inventory (see my article “Avoiding Obsolete Inventory…” on my web site); freight can become the proverbial tail that wags the dog.
The following graph (prepared by one of my clients), shows the impact of warehousing and logistics on total costs. As you can see, once you get to a certain point, order size gets counterproductive, and the freight cost you save can drive up other costs to the point where they are far greater than freight. Be careful to keep freight costs in perspective.
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