Many larger shippers may use a Free Freight Allowance (FFA) pricing mechanism to recover handling and freight expense for smaller orders. The benefits extend across both shippers and their customers. Shippers reduce pick, packaging, handling and shipping expense with fewer and larger orders. Customers reap the benefit with a lower delivered price when they order a quantity that exceeds the freight prepaid add threshold. Customers will also see internal savings with the processing of one large purchase order versus several smaller purchase orders, much in the same way the shipper is benefitting with processing larger sales orders.
The FFA has great benefits for larger distributors that purchase from manufacturers with infrastructure and the distribution network to buy in large quantities. Unlike a larger distributor that can purchase in bulk and then distribute throughout the network, a smaller distribution company may have to place orders more frequently. As a result the FFA target becomes elusive to its real benefit from a cost standpoint. As buyers purchase with free freight as their threshold, the question of inventory carrying cost may get lost with the expectation that the true cost of the purchase is always lower since the increase in inventory is not being measured.
To identify true cost of your parts, components or raw materials, a holistic view of your materials includes freight and carrying costs. Simply defined, carrying cost is defined by all expenses related to storing unsold goods. Cost factors that come into play include warehousing, depreciation, deterioration, obsolescence and lost opportunity. The general range used to determine carrying costs range from 20% to 40% of the inventory value.
For more information on the various approaches to minimum order quantity and free freight allowance processes please reach out to your strategic account manager.
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