Understanding how shipping costs are paid is essential to building a great relationship with fulfillment companies, customers, and strategic distribution and supply chain partners. Understanding legal terms, building proper relationships with your customers and 3rd party fulfillment companies, and understanding internal shipping systems are essential to controlling shipping costs.
Inbound Shipping & FOB Clarifications
First and foremost, before selling products to customers, companies must get their products from the manufacturer to their warehouse or third party fulfillment vendor. This process of shipping finished goods to a distribution warehouse is referred to as “inbound shipping”. If the shipping requires movement of the product from an overseas manufacturer, then the process may also be referred to as freight forwarding, and can include the container or freight shipping, as well as customs clearance, and movement of the goods from port to the warehouse (otherwise called “drayage”).
The FOB acronym causes much confusion, as it is used by many marketing and business planning professionals in the United States to mean “Freight on Board” and used by the international chamber of commerce to mean “Free on Board”. Although the acronyms are different, the basic idea behind FOB shipping is that the vendor may send something with a shipping agency and expect the customer to pay the costs.
FOB also deals with when ownership of a product transfers from a vendor to a customer. FOB Destination means that the customer pays upon delivery and receives ownership at delivery of product. FOB Shipping Point means that the shipping cost is paid and the customer receives ownership as soon as the item ships. This is the default for most consumer shipping arrangements, while many business arrangements use the FOB Destination system.
Outbound Shipping to the Customer
Ultimately, the customer will oftentimes pay shipping costs, whether through pass-on pricing, absorbed into the cost of the goods, or done as an actual mark-up on the item as an incurred shipping cost. Because of this, many business arrangements focus on shipping costs to the customer. Even still, customers gain much through different shipping arrangements garnered by vendors and fulfillment company relationships with various shipping companies.
Because of the bulk nature of shipping concerns, a single customer will almost always incur higher costs of shipping than a vendor or a fulfillment company – except is instances where the single customer has significant shipping volumes on their own. Bulk processing and shipping costs have enabled much of the reduced costs available to consumers in the last fifty years.
Tackling Shipping on Your Own
Without good planning, a vendor ends up incurring the bulk of shipping costs, whether they pass them on to customers or not. (For ideas on how to charge your customers on your web store, check out this article by FulfillmentCompanies.net) Even when costs are passed to customers, shipping costs may not be fully covered when the vendor has not charged adequate shipping costs, has not utilized FOB shipping systems, or has not built adequate business relationships with shipping or fulfillment partners. Relationships are important for reducing the costs associated with shipping, as well as sending bills to the right prospective party. Furthermore, programmatically calculating costs, for example, on web store shopping carts require extreme attention to detail, updates when costs change, and overall management to make sure that shipping costs charged to customers meets or exceeds shipping costs charged by carriers.
Relationship management is essential to managing shipping concerns. Through building a relationship with shipping concerns, a vendor will have better choice options with a shipping company than a customer, but less than a fulfillment warehouse or logistics partner. Through properly managing methodologies and technologies related to charging customers freight, shipping costs will be adequately covered by customers. In some instances, customers can make their own arrangements with a shipping company, further reducing the costs and management incurred by the vendor.
One last point of note when companies manage their own freight relationships – terms are tightening by most freight carriers, oftentimes requiring companies to pay freight invoices either weekly or multiple times per month. When companies work with a fulfillment services company, as outlined below, sometimes more lenient terms can be negotiated, allowing monthly invoice payments of freight invoices instead.
Using a Fulfillment Company to Manage Freight
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Fulfillment services companies have one of the best options available for building relationships with over the road, international and inter-continental shipping concerns. Because fulfillment companies move large amounts of product through their business, they have many bulk discounts as well as specific shipping arrangements like shipping containers regularly moving between warehouse locations. These shipping arrangements give fulfillment companies the ability to reduce costs associated with shipping for both vendors and companies who use them. Essentially, users of fulfillment services “piggy back” off of the fulfillment company’s steeper freight discount, where the fulfillment provider offers a larger discount than the company would achieve on their own. Even after the discount given, the fulfillment provider oftentimes continues to make a profit margin on freight in order to compensate for the increased risk of carrying the freight invoices for multiple companies.
Large companies, like Amazon, will enact their own fulfillment services because of large amounts of moving inventory. Smaller companies will group together with other companies to move inventory through the services of a third party fulfillment contractor.
This is often the best way to reduce costs to both vendor and customer, as well as to manage relationships with various shipping concerns. The fulfillment company will provide the physical and IT infrastructure necessary to manage relationships positively and reduce shipping costs to all parties involved.