Strengthening your supply chain one link at a time. 

Bracket Pricing: Partnering with Customers to Save Money

A bracket pricing effort, as it relates to and order’s resultant shipment size, and in particular, weight seeks to increase the weight of each customer’s shipment by incenting them to consolidate orders as much as possible to maximize each shipment’s weight, reduce the number of shipments and minimize outbound freight.  The initiative is called bracket pricing because companies tend to group orders into brackets to provide similar incentives to like customers.  While bracket pricing can also incentivize a customer to order carton quantities (rather than individual pieces) or pallet quantities (rather than individual cases) this particular discussion will focus on the overall order size and weight in particular.

Consolidating orders, or decreasing the number individual orders, in order to increase the size of individual orders can be very useful to combat order proliferation that can result from a company growing through acquisition or brand expansion.  This often means they end up shipping multiple orders to the same customers.

There are primarily four reasons for this:

1. Customers may have different vendor numbers for each company that existed prior to an acquisition.
2. Customers may have different buyers for each product group. For example, in home improvement retail, there may be one buyer for flooring and another buyer for kitchen and bath.
3. Customers may want separate orders because it is currently the lowest cost for them to ship to multiple locations from a single DC.
4. Lastly, minimum order quantities have not been recently reviewed and customers prefer more frequent deliveries in pursuit of just in time inventory

The savings associated with larger orders shipped less frequently are significant.  Each time two orders are consolidated to one the shipment costs are noticeably reduced.  This is especially true for customers that receive product in less than full (LTL) trucks.  Companies should anticipate the highest cost per pound shipments, such as parcel and light LTL, to be eliminated and shipped with larger LTL and FTL shipments.  In fact, there is very little benefit to consolidating orders for customer that ship full truck single stop on full trucks.

There are three common challenges with implementing a bracket pricing program:

1. Identifying overlapping customers. This is much more difficult than it may sound.  When consolidating systems, each customer likely has its own customer ID and name.  The naming conventions are not the same.  This is probably the most time-consuming effort for the company but is essential.  Focusing on top customer by pounds shipped is a good start because this will target the largest cost opportunities.  However, remember it is the consolidation of smaller orders that offers the greatest cost per pound benefit.
2. Determining the financial benefit of a bracket pricing effort is done during a network optimization project and is often aided by an outside consultant. There may be additional costs, such as resupply among warehouses or additional safety stock that is required to consolidate products to a single source per customer.  At the same time, the savings in outbound freight varies by customer depending on the number shipments consolidated and the higher consolidate weight per shipment.  A network optimization effort will help identify the total logistical cost impact per customer.
3. Once the savings has been identified, the company will need to decide how much of the savings to share as incentive for their customers’ order modification. If the company prepays freight to their customer and without bracket pricing, there is little incentive for customers to order in larger quantities.

A bracket pricing effort is a large undertaking and can be very disruptive.  Any solution will need to determine each weight break and the right level of incentive.  The benefits can often reach hundreds of thousands of dollars in logistics savings.  Finding the right partner that can help navigate the process can not only save money but strengthen the relationships between a company and their customers.
 
—Jeff Schmidtke, St. Onge Company
 
 

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