Reader Question

How do I go about figuring a pick-up allowance per cwt for my customer? More specifically, if we typically deliver to a customer and then they want to pick up, they are asking for a pick-up allowance. In the past here, it has been figured per hundred weight, as we have bracket pricing for the baking powder that is ordered. I just am not getting it. Typically, I have been told to take the  weight of the shipment x .100, then divide that by the cost to ship the load. This doesn’t sound correct, or maybe I’m over thinking it.

Lisa A. Krus
Clabber Girl Corporation

Category: Transportation Management


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Expert Panelist Response: Stephen Craig, EnVista

The short answer is that you figure out 1) how much transportation cost you will eliminate by not delivering these orders, and then 2) how much of that cost you want to let the customer have in return for picking up these orders.

The longer answer is that figuring out how much cost you will eliminate by not delivering the order may not be a trivial exercise. If these loads and transportation cost are not a significant portion of your outbound loads/cost so that losing them will not affect your carrier rates or your transportation overhead requirements and cost allocations, then estimating the reduced transportation cost is easier. In this case, and presuming from the wording of your question that the customer typically orders in LTL quantities,

I’ve seen pickup allowances that are based on LTL pricing weight breaks (i.e., if your order weighs less than 500 lbs., your allowance is X, if your order weighs more than 500 lbs, but less than 1,000 lbs, your allowance is Y, if your order weighs more than 1,000 lbs, but less than 2,000 lbs, your allowance is Z, etc.). The reason for giving pickup allowances based on the LTL weight breaks is that the weight breaks affect the cost you will be avoiding if the customer picks up the order. Now, I have seen a lot of “blanket” pick-up allowances of a certain amount per hundredweight (i.e., CWT) regardless of the order size, and it is certainly easier to provide one number than many numbers, but it also can cause a little gaming of the system if the customer can really vary their order size (i.e., they chose an order size where your allowance is actually more than you will be saving by not shipping the order so that you are actually lowering the price of your product).

Frankly, whether or not you want to offer a blanket allowance or base your allowance on weight breaks is really driven by how variable the orders are, or can be, and honestly, how important that level of precision is to you. With respect to calculating the pickup allowance on a hundredweight (i.e., CWT) basis, the math can get a little tricky, but the concept is simple. If shipping a 1,000 lb order will cost you $300, then a pick-up allowance that offers all of that $300 to the customer would be $30/CWT (you divide the weight by 100 to determine that there are 10 “hundredweights” in 1,000 lbs, then divide $300 by 10 to determine the pickup allowance per CWT should be $30). Don’t get confused by CWT pricing, it is just a way to keep from having to use really small numbers when we are talking about LTL pricing (i.e., $22.50 per CWT is the same thing as 22.5 cents per pound).

Of course, if these loads and transportation costare a significant portion of your outbound loads/cost so that losing them will affect your carrier rates or your transportation overhead requirements and cost allocations, and particularly if losing these loads will affect your fleet or backhaul operations, then estimating the reduced transportation cost is complex. Answering that question would require quite a few more paragraphs and likely a dark beer or two.

The second part of the short answer, figuring out how much of this cost avoidance to should share with the customer, may be more fun. Remember that though you may be reducing transportation cost, it is possible that a customer pick-up (CPU) will increase your DC costs. This is not necessarily always the case, but the CPU might require that the load take up scarce staging space, require a dock door be sub-optimized to keep it open for the customer’s carrier, or increase costs in some other way. Also remember that the cost you will be avoiding is not the only factor in this decision, as you also need to keep in mind how much the customer will pay to make the CPU. Let’s say, for example, that the CPU will reduce your transportation cost by $1,000 and increase your DC costs by $50 for net cost reduction of $950. If the customer’s pick-up cost is $600, will they be any less likely to take the CPU if you offer an allowance of $850 rather than $950? Probably not and you “make” $100, while they “make” $250.

Now, there is simply no denying that we in transportation seem to enjoy this particular version of the “How much do you want for that cow?” game (Farmer 1 - “Oh, that is a very expensive cow.”; Farmer 2 - “That skinny old thing, it can’t be expensive, it’s almost dead.”; etc.). The important thing to remember during these negotiations is that who should move a load is not a matter of philosophy, it is a matter of money. If we make sure that whoever can really move the load least expensively is actually moving it, then we generate savings to share among us (perhaps based on how well we play poker). But, if we both show so few cards that the load costs more to move than it would have if we cooperated more, then we both lose. So, have some fun, but remember that the objective is real money.

Lastly, remember that in the example above, there would be a $150 “savings” generated by the transportation group and a $50 cost born by the DC group. So, not only do you get to play the “How much do you want for that cow?” game with the customer, but you also get to play some “shell game” with the DC group to see whose cost center is credited with how much of the savings (Trans person – “Your costs don’t do up by $50, they actually go down by $5, so I should get all the $150 in savings plus $5 from you.”; DC person – “Down by $5, are you crazy? Our costs go up by $155, so I should get all the savings and you should subsidize us $5 for handling this CPU for you.”).

We’re having some fun now, right?

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