Factoring Freight in Home Furnishings Retail

The costs associated with transporting your inventory might feel out of control lately. With the help of technology, precisely monitor your freight to stay ahead of maximizing margins.

CARGO SHIPS. FREIGHT TRAINS. AUTOMOBILES

A global pandemic and costly inflation have crystallized just how far our goods travel before making it home.

Home furnishings retailers are experiencing a rise in their Cost of Goods Sold (COGS). Market stressors may be out of your control. Yet the costing tools within your home furnishings technology solution can be a valuable resource to monitor variable costs, manage accounting with accuracy, price to ensure margin attainment, and devise partner strategies.

Here, we demonstrate how furniture & appliance retail freight & costing tools can provide a competitive advantage in a competitive market.

To view the infographic of the Guide, click here.

Let’s start by defining important terms and measurements we’ll use in this piece.

• MATERIAL COSTS: This metric represents the dollar value of the physical merchandise as seen on the Purchase Order from your vendor.
• FREIGHT & LANDED ADD-ONS: An itemized breakdown of the various cost components that go into transporting your goods across your supply chain. In addition to the Freight or actual transportation expenses, Landed Add-Ons can include insurance fees, customs, duties, tariffs, as well as other origin and destination charges.
• Landed Cost: By adding a product’s Material Cost, Freight, and Landed Add-Ons, you get the total Landed Cost of your goods.
• Cost of Goods Sold (COGS): This metric represents the total expenses incurred in procuring merchandise, accounted for at the time the product is sold.
• Gross Margin: Calculated by subtracting the COGS from the Selling Price of those same goods and then dividing by the Selling Price; this metric is expressed as a percentage and measures profitability.

Accounting for Freight in your COGS provides greater precision.

Now that we have reviewed important measures to monitor your true costs of obtaining your furniture, bedding, and appliance inventory, let’s dive into 4 key steps to managing freight using technology. With these steps, you can optimize the costs associated with procuring your merchandise. After all, we master what we measure.

1.Landed Add-On Costs

With costing tools in your inventory management system, you can determine the Landed Add-On Costs you want to account for. Your furniture retail technology solution should provide flexibility in determining what you want to measure. Landed Add-Ons can be set up globally, by vendor, by vendor ship-from, or by product depending on the level of variation in your merchandise assortment. Sourcing internationally vs. domestically can cause high variation in these costs.

Freight & Landed Add-Ons include:

• FREIGHT: The charges associated with the logistics companies physically moving goods from point A to B.
• TARIFFS & DUTIES: Import and export fees imposed by governments to move goods across borders.
• INSURANCE: Optional plans to minimize and protect against risk if goods are damaged or lost in transit.
• FREIGHT FORWARDERS: Third-party agents that may be contracted to assist in organizing transport along a portion of the supply chain.

By itemizing these variables, you can isolate your costs and make business determinations such as reviewing the supply chain partners you work with to lower your expenses.

2.Calculations for Approximations

When facing variable costs, you need reliable data to make timely merchandising decisions. Now that you have determined which Landed Add-On Costs you want to track, it’s time to do some freight approximations. The Purchase Orders you receive from your vendors will provide products, quantities, and Material Costs. However, it can take months to receive its associated freight bill and understand your true Landed COGS. In that time, you may sell a substantial quantity of the inventory you receive. However, if you are not accounting for the
Freight and Landed Add-Ons costs, you can be severely underpricing your merchandise. In fact, when you later receive your Freight Bill, you may realize you did not hit your margin goals, especially as logistical costs rise.

Software is here to help during that time gap. Within your system, you can set up Freight Factors to approximate your Freight and Landed Add-Ons values. Upon receiving the Purchase Order into your distribution center or warehouse, the configured freight factors in your software will approximate the values based on the Material Cost of the PO. Your freight and each Landed Add-On can be calculated uniquely.

Here are the methods to the math:

• FLAT $ AMOUNT: Use this method to associate a fixed, flat rate to your Freight or to a Landed Add-On.
• PERCENTAGE: For costs with variation, calculate each as a percent of the good’s Material Cost.
• CALCULATED: Some Freight Factors are more complex and may require a custom calculation.

As an example, you may configure settings in the system to reflect the following scenario: when bringing in SKU ABC from Vendor X’s factory in Vietnam, you estimate your Freight is 10% of the Material Cost, a tariff of 5% applies, and flat fee of $300 is added for insurance.

Using approximations for your Freight and Landed Add-On can give you a Fundamental understanding of cost at the time it’s most important – when you are pricing your goods. By using estimates, you are much closer to the Landed Cost of Goods and can ensure you are meeting your margin goals, even before receiving your Freight Bill.

3. Exact Freight Distribution

After time has passed, your accounting team will receive the Freight Bill which outlines the logistical costs associated with the Purchase Order. Once you enter the exact Freight value, the system will update your cost approximations with your exact cost.

A key component of proper cost accounting is how you distribute your Freight Bill. As retailers, you care about the cost at the product level to ensure you are selling at your margin goals. Therefore the next step is to break out the lump sum of the Freight Bill to the item level.

Your freight bill won’t specify the exact Landed Cost of each item. This is where integrated inventory and accounting software really shines. Using furniture retail software, you can choose a method to evenly distribute your freight bill across the products on the PO or a container with multiple PO’s worth of inventory, using their relative percentage to the total.

Methods Include:

• MATERIAL COST: The most common method distributes total freight in ratios that align with the material dollar cost of each product.
• CUBIC VOLUME: Because the physical space an item takes up in transit impacts cost, you may distribute freight by cubic volume.
• ITEM WEIGHT: Some carriers calculate transportation costs by weight, therefore, this is another cost distribution method to consider.

As you transition from Freight approximations to exact Freight, the system gets smarter in approximating your Freight the next time you receive the same product. The more data your system accrues, the closer the approximations & exact values for Freight will be over time.

4. Keeping on Top of Costs

Now that you have set up a detailed system of measure, it’s time to ensure you are keeping on top of your costs by reporting on Landed Freight Asset Values. You can make it a part of your processes to review trends related to the percent of Total Landed Cost each Landed Add-On Represents. By using conditional formatting, you can quickly identify outliers and determine if an area of your supply chain needs to be reconsidered to protect your profit margins. Further, as you review the true value of your Lands Cost of Goods, you can also determine your pricing and promotional strategies to ensure you are selling your goods at a profitable price.

STORIS’ Integrated Inventory Control Solution includes Buying, Purchasing, and Logistical Tools for home furnishings and appliance retailers to holistically manage your merchandise. We are here to help you stay ahead of variable freight costs to make timely inventory decisions.