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How “Passthrough” Shipping Costs are Destroying Your Budget

One of the most common objections I receive when talking to a new customer about their current logistics spend (besides “I don’t pay for shipping”) is that their vendor treats shipping as a “passthrough” cost. Similar terms include landed cost, all-in cost, administrative, or even sometimes drop-shipped.

All of these terms mean one thing to most people: I am not being charged extra for shipping.

So let’s break that down, and see what’s really happening, and why am I taking some of your valuable time to talk about it.

First off, let’s assume that your vendor is being totally straightforward, and is just passing through their actual logistics costs. Behind the scenes what this means is that they have a relationship with a forwarding company they use to ship products to you, your warehouse, or some other destination. In many cases, for more reputable companies, this may be a large Freight Forwarder, in other cases, this is often a buddy of someone at the company who also happens to own a shipping company. In almost none of the cases is this defined by a well-managed, negotiated, quoting and shipping process.

Now process-wise this may seem fine at first. The issue comes into play by the fact that without a proper, sophisticated process around securing freight pricing, you’re likely paying a much higher rate on average. So while it may help that you’re not getting charged extra on top, it doesn’t mean you are getting a fair price.

Now, notice earlier I said “if your vendor is being totally straightforward.” The unfortunate truth is that often times this is not the case. Companies will go through hard fought negotiations on products/services, but when it comes time to discuss incidentals, like shipping, a good negotiating tactic is to take shipping off the table by saying “it’s a passthrough cost.” I.e. There’s nothing to see here. On the backend, however, they could be adding margin, getting a kickback from the shipper, or both.

So what do you do about this?

Upon realization of the above, the next common question is to ask exactly what you can do about this, especially if a contract is already inked. First off, remember, you are the customer!! It is always ok to go back and ask how much you’re paying for shipping. It’s always ok to have all your costs broken down. Understanding what you’re paying is step 1.

Step 2 involves determining how you’re fairing against a well-managed rate. Once you have the cost, this is pretty easy. Simply take some sample shipments and price out some competitive bids for the same profile and see what you get. A few notes of warning:

  1. You need to price things within a short timeframe – pricing from December is never going to match pricing from January. To get an apples to apples comparison, make sure you are comparing pricing from the same period.
  2. Close is good enough – on any shipment, many factors can drive changes in price. The idea is to determine if your pricing is usually within the ballpark of what you should be getting through a well-managed bid process. Don’t lose sleep over a few percentage points.
  3. Compare multiple shipments. Being able to show savings (or a loss) on a single shipment proves very little, but showing that over 3-5 shipments your provider is averaging 15% over your comparison pricing, well that’s a big deal.

In closing, I have a firm belief that at some stage for every growing company you are going to need to take full control of ALL your shipping. The guidelines above will help you figure out exactly how quickly you need to make that a reality. Happy Hunting!

More About Boxton

At Boxton, we’re building the future of logistics by automating best in class processes through easy to use management software that keeps team’s moving forward, without overspending.  We’ve built our platform and methodologies on the core belief that shipping should be easy, for everyone – and nothing on your invoice, should ever be a mystery.

About Joe Caprara

Joe has spent over a decade working with large enterprises to reduce costs, integrate new systems, and create better processes through upgraded technologies. His experience in management consulting at Accenture and Mergers & Acquisitions at Qualcomm have given him a strong foundation for developing custom fit solutions that are right for any organization.

How “Passthrough” Shipping Costs are Destroying Your Budget