The three challenges of freight-free limits

Sometimes it can seem as though your suppliers are going out of their way to making buying their stuff unnecessarily difficult. They just don’t seem to get that their customers want to buy their goods in quantities that will help them meet regular, predictable demand. Instead you’d be forgiven for thinking they’d set their rules based purely on their own calculations and economic modelling, just to make customers jump through every resulting hoop at the crack of a whip. Those rules are often binding – ’buy this way or don’t buy from us’ – or they can give customers an incentive; for instance a discount if certain purchasing criteria are met for an order. Very often that discount is in the form of freight-free delivery (to the customer’s warehouse).

To be fair to manufacturers and distributors, they have every right to set up their business to ensure their own profitability, and if they do get it wrong they’ll drive away customers. As far as you, the buyer, are concerned, if they offer a good deal you want to buy from them. But wouldn’t it be nice if it weren’t so hard.

Below we have listed the three different kinds of challenges that buyers face from freight-free limits.

1. Complying with complex rules can be difficult

The rules can be complex and complying with them can take up a lot of time and effort. In many companies purchasing executives have to create supplier-specific Excel sheets to build the orders up to the desired limits. Many rules are simple; for instance they relate to total value, weight or number of pallets on the order. However in some instances it seems suppliers have run their own research project to develop innovative new rules simply to fry the tired brains of the poor souls who have to make sense of them; for example requiring a combination of at least five different products in an order; minimum and maximum amounts for each product in addition to volume requirements for the overall order; and in some instances the rules change according to the day of the week that the order is placed!

The good news is that however crazy your supplier’s rules, we know that a good supply chain management solution will untie every knot they try to tangle you up in. We’ve had customers who have halved the time spent on routine ordering simply by automating purchase order optimisation – and they put the time saved to far better use working on value-adding tasks.

2. Discounts and freight-free deliveries does not always make sense

Very often people go after discounts and freight-free deliveries even in situations where it makes no economic sense. In many highly-seasonal trade sectors such as DIY and builders merchants or wine wholesale, the decision whether to meet freight-free limits, or transport goods in full containers or trucks, really depends on the time of year. Too often companies in these areas use the same ‘optimal transport unit’ all year round. It might even prove to add to overall costs across the year as a whole if the selection is done by average volumes.

Best practice in our experience means optimising the use of freight-free limits or transport-unit selection based on the forecast demand volume for goods from that supplier. That way it’s possible to balance accurately the freight cost savings against the inventory carrying and warehousing cost of the extra stock resulting from the increased quantities bought to gain the discount. This is a possibility that’s often overlooked even by solutions that boast purchase order optimisation tools.

3. Meeting the discount criteria can result in wrong goods and overstock

Lastly, many customers hoping to meet minimum or discount limits don’t order the right quantities of the right products. Quite often the limits are simply filled with the products that sell fastest, which of course partly limits overstocking risks. However that often means the slower-selling lines run out quickly, long before the fast-selling ones do. This can lead to both unnecessary gaps in stock availability, but also often to overstock as you need to re-order, and you end up with a mountain of the fast sellers.

Of course clever buyers and purchasing managers calculate the cost of fulfilling the supplier requirements – both analysing when to use them and when not – and dedicatedly using that information in supplier negotiations to get complex and costly rules removed from the equation.

Think of it as a game, for in many ways that’s what it is – the better you know the rules, the better your chances of winning. And if you have a system that knows the rules for you, you can simply get on and play.