When Angus Mansfield of reseller X Central saw that Ingram Micro's new freight matrix had a $33 charge for orders under $300, he knew his business had to change. For consumables such as printer toner the charge was too high for either his customers or his margins to bear.
"We have had to say, ‘We can get [the toner] to you but because of the size of the order we will have to pass on a charge', and they have then gone to an OfficeWorks or a Harris Technology.
"With us trying to be a one-stop shop for our customers for all their IT requirements, and we try to lock into consumables as well, it does hurt us."
The cost of freight is a touchy subject for resellers, distributors and vendors - and end customers. Although the channel moves millions of items around a country as large as Australia, asking people to pay for the effort involved is somehow a difficult prospect.
And it is getting more difficult. The cost of freight has risen thanks to the increase in fuel prices and just-in-time business models that encourage smaller deliveries.
In the cut-throat distribution business, freight charges are a sensitive issue. Some distributors choose to bury the cost of freight into the price of their products.
X Central is now asking clients to wait until they have a "critical mass" of products to order at Ingram Micro, says Mansfield. "Where there's a client that really needs it we will source it through another distie."
Ingram's matrix
Ingram Micro, Australia's largest distributor, has an enormous line of 120-plus vendors and a customer list that includes nearly every reseller. Whenever the giant changes its freight charges the ramifications are felt throughout the channel.
Ingram overhauled its variable freight structure in November after seeking feedback from focus groups and surveys. One message consistently came through, says Jay Miley, Ingram's Australia and New Zealand managing director.
"They were telling us clearly we want to understand, before I place the order, what the price is going to be on that transaction."
The company aimed for greater predictability and transparency by introducing a "freight matrix" of fixed delivery charges by order value. Before the matrix was released resellers couldn't get a quote on the freight costs until they had placed the order, says Miley.
One goal of the new system was greater simplicity. Most of the distributor's orders are Sydney-to-Sydney metro in the $300-$3000 ‘bucket'. These deliveries now cost a flat $12 rather than a dynamic rate based on the volume of the order.
In the past the freight charge "could have been anything under the sun. I'm not suggesting it's the lowest always but I can tell you 12 bucks is a relatively competitive rate for the services that we provide," says Miley.
A third goal was to encourage resellers to increase their order size. Internet buying of small items was driving the value of orders down but not the cost of fulfilment. Now orders over $10,000 are shipped free.
"Prior to these changes we didn't give free freight to anybody. As you migrate up the order value we are charging a lot less than we used to," says Miley.
Although it is only four months old the system seems to be working, according to Ingram. Revenue on product has gone up while recovery of the distributor's freight costs has gone down, which means that resellers are ordering more stock and yet paying less to ship it, says Miley.
"Our customer base has actually benefitted from this. Customers are saving money right now by dealing with us. That is not true for every customer, but definitely for those that are optimising their orders and logistical management, they're saving money comparative to what they used to spend with us on freight," says Miley.
"A lot of thought went into this," says Miley. "We believe we've put out an offer that is good for the industry, good for the Australian market and ultimately will help us strike the right balance on the order of distribution that we get from our customer base."
Next page: Drop shipments
Drop ships on the rocks
While Ingram's matrix may have brought greater transparency to its freight structure, it has revealed
a relatively high delivery charge for the lowest bucket - orders under $300. At $33 ex GST, it is double its major competitors.
Ingram is aware that it is less competitive in this bracket but it sees the higher charge as a stick to encourage consolidation of orders.
"We ship some pallet loads, but we're shipping a lot of one-unit shipments, right? Your freight recovery strategy will be different with those two approaches," explains Miley.
Unfortunately this strategy does not favour smaller resellers who often look after small and medium sized businesses which order smaller amounts of less expensive products.
Consequently it is harder for small resellers to reach the thresholds for cheaper or free freight.
Ingram's strategy also places pressure on a just-in-time business model favoured by online retailers - drop shipments which are couriered to the customer directly from the distributor.
Customers expect an order to arrive within a reasonably short timeframe and may not want to wait until the retailer or reseller can consolidate several low-value orders. However, customers are also unlikely to want to pay a $33 freight fee if the purchase is only $50 or $100.
Customer expectations aside, some resellers favour drop shipments because they reduce the risk of carrying inventory and the costs of running a warehouse, a logistics operation and a second delivery from reseller to customer.
A $33 minimum freight charge from the largest distributor could challenge that business model. Some smaller resellers have moved orders to competing distributors with minimum freight charges
about $10 to $15.
Mansfield and other resellers implied that at issue was the size of the minimum charge.
"No client complains about a $15 freight charge," said Mansfield.
Offers of free freight can also swing larger orders.
Paul MacNeill of Pro Integrations was disappointed at paying freight on a $4700 order with Ingram.
He put the order through Dicker Data, which promises free freight for orders over $500, and found that the goods themselves were $90 cheaper.
"I wouldn't have checked if the freight didn't make me," said MacNeill.
MacNeill claims he has moved $500,000 of business through other suppliers instead of through Ingram since its freight matrix was released.
In response, Ingram's Miley says the distributor is watching closely ordering patterns on the under
$300 bucket.
"We are getting some feedback that we are not always the most competitive there. But you have to take the total cost of procurement into consideration, inclusive of the price on product and the other services you provide," says Miley.
Even resellers who struggle with Ingram's minimum freight charge admit that the distributor's services still make it an attractive choice.
Although X Central's Mansfield says he buys more often now from other distributors, he finds it hard to find the same efficiency.
"Ingram is such a great distributor in that we order one day and it arrives the next and they very rarely let us down," says Mansfield.
And Techlink, Ingram's ordering portal, is a big time saver, says Mansfield.
"Techlink is the easiest to navigate. An order I could do in five or 10 minutes on another distie's website would take one or two on Ingram's," says Mansfield. "We speak to Ingram very, very rarely because we can find everything through Techlink."
The range is also a major drawcard. "Dicker is great for HP stock, but Ingram carries a whole lot of other brands. They are easily the most diverse distie."
While there has been disapproval of the minimum freight charge, Miley claims his statistics show that the percentage of drop shipments hasn't changed significantly. The exact percentage is a commercial secret.
"We are looking at this every day and looking at the trends that have occurred in our business since we implemented this. It's remained relatively constant with us," says Miley, who adds that most of his resellers are passing freight costs onto their customers "in some way or another".
Miley says at just four months old the matrix is still under review. He confirms that Ingram intends
to be competitive for deliveries of all sizes and that the company is "fighting every day" to earn its customers' business.
"The bottom line is we want to make sure we don't want to lose business. We do believe we are a cost effective model for the vast majority of our reseller customers."
Next page: How to save on freight
How to save on freight
The most enduring channel slogan, apart from the "trusted adviser", is being a customer's "one-stop shop" for all their IT hardware, software and services.
Drop shipping and pre-delivery configuration by value-added distributors made it easier for resellers
to fulfil the promise of the one-stop shop.
"When drop shipping came in it definitely opened the doors for us being that one-stop shop for our customers. The introduction of the higher freight fees means we have to rethink that," says Mansfield.
For resellers that don't want to warehouse stock, they have to accept higher freight costs or abandon cheaper products.
"We in effect have to represent what is a fairly confusing freight matrix to our customers or we walk away from that part of the business and only deal with big ticket items," Mansfield says.
X Central now does take combined orders from several customers to its own premises, and then working in delivery with its four staff who are on the road most of the time, says Mansfield. "It's definitely an inconvenience to us," he says.
Warehousing may be an inevitable direction for resellers who deal in low-value consumables.
PCS Australia's Borg says warehousing through his distribution business is essential to minimising the cost of freight for his systems integration business.
"If I was just a retail outlet or a small reseller without my warehouse and without my logistics, I'd be a lot worse off. You'd be really hurting," says Borg. "Those charges, they really, really add up."
"Business sense would say [warehousing] would be the way to go," agrees Express Data's national distribution manager, Fernando Gutierrez.
"The reseller you buy from should carry run-rate items. And for the backorders that you do have, the cheaper the freight along the supply chain.
"Businesses these days want to run so lean and they are ordering things last-minute and paying for freight more and more times."
Ordering 20 cartridges instead of 10 may cost more up front and increase risk, but it could also save money, says Gutierrez. "You may think it's a bit of a gamble but it's there on the shelf and you pay the freight only once instead of two or three times," says Gutierrez. "If you can keep the freight under your 3-4 percent value of goods you're doing really well."
However, managing inventory adds a whole new dimension to a business; requiring forecasts, monitoring usage and history, and so on, not to mention extra office space.
It's worth minimising freight at every step in the supply chain. Although everyone expects next-day delivery, sometimes a customer is happy to wait a day and pay for a cheaper method of transport.
Express Data's Gutierrez says he reduced the distributor's reliance on air freight when he joined three years ago. The company was using Australian Air Express for land and air freight, and consequently Express Data was "paying a little bit too much at the time" for freight.
Gutierrez kept Australian Air Express for air freight and brought on Allied Express for road. He also preferred road deliveries for the east coast which reduced costs without extending delivery windows.
"Anywhere along the eastern seaboard can be serviced out of Sydney overnight on a road service a lot cheaper than an air service within the same delivery time," he says.
Other states such as Western Australia and South Australia require air freight for overnight delivery, but if a customer can wait two days he prefers to send by road.
"It's a matter of asking the reseller or customer whether they can wait," says Gutierrez.
Another option is to join a buyers' group and/or distribution specialist such as InterSell. InterSell provides resellers with e-commerce engines that plug directly into Ingram's backend systems and uses its 400 members to get better prices on common business expenses.
The company claims its resellers can ship freight up to 15 kilograms anywhere in the Sydney metro (including from Ingram to a customer) for just $7.50 through its deal with Australian Express.
One thing to watch out for are extra freight costs on backorders. If a reseller places an order for five NAS boxes but only two are in stock, some distributors will charge a freight fee for each single NASbox as they come into stock and are sent out.
Dicker Data doesn't charge for backorders as a general rule - but it reserves the right to do so.
Sales manager Chris Price says some resellers have ordered one item that is in stock and five that are out of stock to hit the free freight threshold (over $500). Once the in-stock item has been delivered they go online and cancel the order for the five out of stock items.
Charging for backorders "pisses a lot of small guys off", says Price. He says at other distributors the backorder charges are optional per customer - "there's just a screen that the account managers turn on and off". Larger customers don't pay freight on backorders, Price claims.
Pro Integration's MacNeill says that despite having several HP distributors to choose from, he has started placing more orders with Dell. Dell ships direct from the manufacturer with free freight for all orders, which makes the total price more competitive with vendors operating two-tier channels, according to MacNeill.
There are several truisms when it comes to freight. No-one likes to pay for it and there will always be protests when it rises. However, freight itself is only one element in using a distributor and Dicker Data's Price doubts whether freight increases at one distributor will cause it to lose a significant amount of business.
Price compares the ongoing freight debate to Australian politics. "There are a large amount of people are going to stay with Labor and a large amount of people that are going to stay with Liberal and then those people in the middle are the ones who are going to swing and it's the same with freight charges," he says.
"We'd be Labor because we're for the people. We're fighting for the small resellers," he laughs.
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