The Real Business Cost of Damaged Packages in Food Logistics

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The Real Business Cost of Damaged Packages in Food Logistics

When your food shipment arrives spoiled, it's not just a monetary loss or a logistics problem, your brand could be impacted or worse, it could lead to legal troubles if it affects the consumer’s health. You can sell a customer a mobile phone that has an old operating system but never a food product that got contaminated during transportation. The financial impact goes beyond the visible replacement and re-shipping costs. Let’s explore the visible and the hidden costs that damaged packages can cost your food logistics.

As complicated as supply chains already are, food supply chains can be even more so as they involve condition management across the cold chain. The demand for timely and reliable food & beverage (F&B) shipping options is high because the need for edibles never stops; even during a pandemic; the consumer cannot cease to search for fresh produce and food items.

When transporting food & beverages, the items being shipped are not just time-sensitive, but also condition-sensitive. Manufacturers and shippers responsible for transporting food items are responsible to ensure quality and authenticity to meet food safety guidelines. Meeting such quality standards needs strict supervision at every stage, while at warehouses or at vendor facilities and in transit.

Every time your consignment does not reach its destination in the right condition, you’re not just losing a truckload, you’re also incurring a lot of additional costs, some of which are easily visible, but most of which are hidden.

What Are the Costs Associated with Damaged Packages?

The Real Business Cost of Damaged Packages in Food Logistics - Visible Costs

1. Product Replacement Costs:

Such costs occur when the product arrives in a damaged condition, mostly due to temperature and other condition excursions. The cost of replacement includes re-packaging and return freight costs as well. In addition to this, the time and effort spent on filling out insurance claims, repackaging, and reshipping the replacements add lost productivity.

For example, imagine shipping a consignment of aerated drinks worth $1 million out of which packages worth $100,000 are spoiled due to temperature excursion. The cost of replacement could include the costs of re-packaging and re-shipping for an FTL shipment, the financial impact of which totals to a lot more than the original value of the spoiled packages.

2. Freight Claim Co-Pays:

Even if you claim insurance, you will typically pay about 10% in co-pays amounting to $10,000 in the above example, which could be as much as or even more than the shipping cost. Further, the more such claims arise, the higher the insurance premiums get over time.

3. Replenishment Freight Costs:

Of course, there is the cost of re-shipping, but things such as inventory shortfall or the urgent need for new packaging material custom to your shipment could increase the cost you would normally pay to re-produce, re-package, and re-ship. When you add the cost of inspecting returned packages, the storage or disposal of the returned units, warehouse space and other utilities, the opportunity cost of the warehouse space, and the cost for expedited transportation (typically done by air or by booking a FTL for an LTL consignment), you may even end up paying twice or thrice the standard shipment amount for that lane.

The Real Business Cost of Damaged Packages in Food Logistics - Hidden Costs

1. Customer Dissatisfaction:

If your brand is constantly out of stock, your customers would rather fulfill their requirements with a competitor’s product than stay loyal and wait for your brand to be available. Receiving damaged products, especially when that means receiving spoiled food products and risking the health hazards that it can cause, ultimately affects your customers’ future buying decisions permanently.

2. Lost Dealer Loyalty:

When a dealer discovers that your package arrives damaged, they'll try and restock competitors' products on the shelf to meet short-term market demand than facing a stockout and losing their revenues. Worse still, with such cases happening more frequently, your dealers may lose faith in your commitments and strengthen their business with a competitor.

3. Lost Sales/Restocking:

As an obvious result of damaged customer relationships and dealer loyalty, your future sales could be hit if some quick damage control isn't done.

For example, a large chocolate manufacturer in Asia faced a drastic fall in its sales volume during that year's festive season. The underlying reason was found out to be improper packaging. It took the company 6 months to rebuild the brand image and restore customer, dealer, and even employee faith, which cost a lot more than the actual logistics and product cost.

Imagine that happening to your brand; a damage repair plan can be a lot more expensive in the long run than better packaging and a precautionary approach.

4. Administration Costs:

If a shipment arrives on time but not in full, a lot is spent to have it rectified, dealing with an angry dealer, coordinating from which place to move the additional inventory to satisfy the dealer, coordinating transportation, and getting approvals to expedite the re-shipment. Lost productivity makes for a big part of administration costs.

Lost Productivity — Imagine that a logistics personnel’s hourly cost is approximately $38 per hour. You lose $304 a day (hourly cost x daily workhours assumed to be 8 hours) per person involved. Not just this, you also have them defocused from their primary work for damage control. Imagine having 20 such escalations in a week. You lose $6,080 every week, $24,320 every month, and $291,840, that is much more than a quarter-million dollars a year just to handle damaged packages!

In Summary…

If you're a food and beverage supply chain professional, most of your in-transit damage could cost you much more than you would realize. That's because you can't possibly account for every cost in monetary terms, especially the loss of customer relationships, dealer loyalty, and cascading delays. While most of the visible losses get covered by insurance, the ripple effect of the hidden costs can result in further monetary losses as well as long-term business impact that might take very long to resolve.

The best, and often the only way to wade through both the visible and hidden business costs of in-transit damage is to package right, and to keep track of your shipments from door to door with the help of an on-demand F&B monitoring solution.

Minimize IN-Transit Damages in Food Logistics

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