For many of our clients an ongoing problem is “receiver pays” or “customer nominated” freight. Put simply, this is where the receiver nominates that they are happy to pick up the freight bill as long as the sender uses the receiver’s chosen supplier.
There are many reasons this occurs. Most often:
– A customer is in a difficult to reach location and believes that only one freight company can successfully deliver;
– A customer has such great freight rates that any charge from the sender will increase the cost of the order;
– The sender can set and forget. Once the order is shipped it is the receiver’s responsibility to chase it down;
– A customer thinks the sender is marking up the freight and therefore making too high a profit; or
– Receiver pays has been negotiated as part of the terms of trade under the mistaken notion that it saves money.
Receiver pays is a classic example of cost shifting within an organisation. The sender doesn’t see the cost of freight on their own bottom line, and the receiver sees it on their freight bill.
However the hidden costs of receiver pays are then borne by both sender and receiver. These include:
– Additional invoice reconciliation on the receiver freight account;
– Despatch delays due to potential additional carrier pickups, additional consignment generation and manual labour;
– Extra paperwork on both sides. Some Enterprise systems can’t handle zero freight costs or are only compatible with specific freight companies;
– Likely billing problems. Manual account numbers can be transposed quite easily; or
– Potential disputes between sender and receiver as to who is responsible for the freight in the unlikely event anything goes wrong.
Even with these potential problems, many businesses still run with this unattractive arrangement.
My solution is to negotiate with the receiver that their orders will have freight added, but the freight cost is to be nominated by the receiver. It is quite easy to establish a formula built on either a flat rate per order or a sliding scale by cost, unit or product type.
The key here is that the receiver has control over the freight cost but the freight is on the sender’s account and within the sender’s existing carrier suite. Neither party is financially worse off, there is minimal work involved at either end and both sender and receiver benefit by removing the extra costs and risks associated with receiver pays.
Depending on the sender’s flexibility the receiver may even be able to nominate the delivery service from the sender’s existing options. Rules can be established within a Service Level Agreement defining carrier and service decisions.
The freight charges can be reviewed periodically and if either party feels they are not getting a fair deal, can be altered accordingly.
As logistics managers our job is to point out the true costs involved and then produce a win-win arrangement. This solution requires both parties to be working with or in companies that sees logistics and supply chain as an integral part of their business. Perhaps I will cover that in another post.