For companies in the distribution industry, profitability depends on efficient inventory management and order fulfillment operations. These key elements are affected dramatically by transportation costs associated with sales territories that can extend several hundred miles from the warehouse.
According to the U.S. Department of Energy, the average price for diesel fuel was approximately $1 a gallon higher in April 2011 than April 2010. The increased costs of fuel, demand, and other uncertainties have distributors closely monitoring and adapting to changes that affect transportation costs.
Distributors may own or lease a fleet of delivery trucks, which in many cases are specially equipped to transport products such as gas, beverages, chemicals, or refrigerated foods. The operation and maintenance of a delivery fleet can be costly. Conversely, some distributors contract with transportation companies to deliver their products. Regardless of the means of delivery, fuel costs are a major concern.
Several questions to consider in monitoring and responding to transportation costs:
- When is freight cost incurred?
Companies must monitor both inbound and outbound freight costs, which average 3 percent of gross sales on inbound and 7 percent of net sales on outbound. In the event a business monitors only outbound freight, it could miss a significant opportunity.
- Why are companies trending toward drop shipments?
Drop shipments are more prevalent in the distribution industry because the supply chain management technique can result in significant savings. They reduce inventory carrying costs and transportation associated with the shipment.
- Can modes of transportation impact state nexus?
Creating nexus can be an unanticipated outcome of conducting business in more than one jurisdiction. Public Law 86-272 addresses the imposition of a net income tax as a result of specific activities being conducted within a state. The law addresses shipping goods via common carrier or the United States Postal Service as opposed to company vehicles. The use of company vehicles for the delivery of goods must be taken into account when considering state nexus issues.