If it doesn't directly affect them, most people are completely oblivious to damage. Unless it directly affects their package or their cost center, they sure as heck don't understand the need to pay for fancy protective packaging.
And, really, think about it. Put yourself in the manager’s shoes: is the cost to replace the few damaged widgets worth the expense? That manager wants immediate return on his investment. And, maybe, that's just not possible.
It's time to do some easy math (which is all I can do, so we're keeping it elementary over here): while the direct costs of shipping damage may be associated with the logistics or packaging departments, the true cost of damage effects the entire corporation, indirectly affecting many departments and many decisions.
For example, filing a freight claims typically takes about two hours; that’s two hours of lost productivity.
And damaged items must be inspected and stored; when prorating the total costs of damaged goods storage, including property taxes, utilities, and rent or mortgage, the costs escalate.
Globally, damages amount to about $84 billion in lost profits each year. You don't need a degree from MIT to realize that's hugely ridiculous.
Valuable time is wasted at destination terminals putting damaged freight back together. The need for reworking, restacking, re-wrapping, recouping, and re-banding hinders dock production, accounting for lost time and revenue. Delays in delivery and poor presentation damage customer relationships. And returns due to shipping damage take time away from new sales.
The accepted industry standard states that a manufacturer must sell seven new products to replace the lost profit of one unsold product. The Reverse Logistics Executive Council noted that the cost of handling, transporting, and determining what to do with returned products costs US companies more than 200% to 300% more than a standard sale, including the fact that there are up to 12 steps in the return process for every one step in the initial sale.
Sales also may be affected, potentially putting salvaged, discounted items in direct competition with full-price items. If too many damaged items are available, they may subtly damage the company’s reputation.
Reshipping items increases costs, especially if overnight shipping is required, and have the potential to cause delays that could affect a customer’s current and future buying decisions because they may have lost faith in the company’s commitment to quality. For future orders, customers may favor its competitors.
Damaged freight also must be measured in terms of lost opportunity, which measure what the company could have been doing if it wasn’t held up dealing with returned, damaged, and unsaleable items.
- Instead of dealing with irate customers who’d experienced damage, sales reps could have been calling on potential new customers.
- Packaging designers could have been developing better packaging options rather than troubleshooting existing packaging.
- The company could have hired additional staff to sell more products, expanded facilities to manufacture more products, or implemented new marketing campaigns to attract new customers to grow their profits.
Money, money, money, muuu-nney! Let's talk about the true cost of downtime
- In the energy industry, GE reports that offshore oil wells lose $7 million per week each time a well is out of commission.
- At refineries, the downtime costs attributed to delayed delivery of turbines costs about $1 million per day. At power generation stations, it costs about $45,000 per day.
- Among data centers, Emerson Network Power says downtime costs average $7,900 per minute.
- At a paper mill, GE reports the cost of failed machine drives at $3,000 per hour, and an average downtime of 3.5 hours per drive.
The most frequent causes of freight damage are associated with transit. If in-transit damage is a factor in these costly delays, your company may be held partially responsible. As a supplier, you can be penalized financially for your role in causing or prolonging the downtime.
The type of packaging and modes of transportation affect the amount and type of damage. Appropriate packaging helps to ensure that customers receive the product without damage. Damage is one of the major factors in lost revenues because damaged products usually need repair or replacement and can cause customer dissatisfaction and brand abandonment. It's time to staunch the bleeding.