The boss asks you to trim the budget 10 percent and then you come in over budget. Why? It’s a good bet the reason goes beyond fuel surcharges, increased labor costs and the impact of tight capacity on freight rates. In one of the continuing education programs at the University of Wisconsin-Madison, we discussed and identified areas of variability that can affect freight expenses, making them difficult to forecast and derailing transportation budgets.

Freight cost variances occur for two main reasons: (1) increases in “prices and charges” for services rendered by carriers and logistics services providers, and ( 2) from changes in the “ operational” mix of transportation and logistics services used. That second category can catch transportation managers by surprise and dramatically change the amount they spend on services.

Here are a few of the potential budget-breakers we identified:

● Sizes of shipments, i.e., shifts occur in the sizes of shipments and, thus, rates are sourced from different weight breaks, such as more shipments occurring in parcel and small LTL shipments versus large truckload shipments.

● Shifts in the physical routing of the freight and modes of transportation being used, i.e., from over-the-road truck to rail intermodal; LTL to parcel; truckload to LTL.

● A switch from direct line-haul freight services to various types of consolidation services by mode, geographic region, specialized carriers and other ancillary 3PL services.

● Changes to transportation networks, i.e., new or closed DCs, new or closed plants, changes in supplier or customer networks.

● Imposition of more stringent service requirements for carriers, such as more time-definite deliveries.

● New, pricier service offerings from transportation providers.

● Product classification changes.

● On a broader basis, packaging, bundling, unitizing, and changes in containerization practices.

● Changes in product mix resulting from shorter product life-cycles and leading to more frequent shipments, and more returned goods resulting in increased LTL charges.

● Removal and return of packaging/shipping materials, removal of old equipment for refurbishing or disposal.

● Customers, marketing and sales request more accessorial or ancillary freight services, leading to increased charges by carriers.

● Surcharges associated with significant economic/world events, i.e., fuel, security, insurance, labor.

● New customer and supplier service requirements, i.e., next-day or scheduled delivery.

● Product line changes, and marketing-based pricing programs related to seasonal and dated deals to push sales.

● Chargebacks from customers and to suppliers for non-com-pliance with guides/purchasing/sales terms.

● Promotional events that spur sales.

● Changes in sourcing, i.e., more offshore purchases.

● Customer mix changes, i.e., customer rationalization, segmentation, percentage of big customers who account for sizable percentages of volume increases or decreases.

● A change in marketing trade channels affects shipment patterns, i.e., business moving through direct retail shifts to wholesale channels or Internet parcel sales.

● Changes in geographic distribution in sales and sourcing.

● Changes in government regulations, i.e., drivers hours of service, customs clearance, NAFTA and other trade agreements, diesel engine emissions, hazardous materials, security regulations.

● Cash vs. accrual methods for accounting for sales and freight data — especially if sales are uneven from month to month.

As Edward Deming used to emphasize: “You die in averages if you don’t identify and manage the variability in services/activi-ties and costs appropriate to your business.”

Transportation budgeting must involve more than taking the old expenditures by mode and increasing them by, for example, 5 percent each year. Therefore, the budgeting system must have enough detail to deal with the variability of the work and the variable costs associated with that work.

One company established a framework to deal with these areas of freight cost variances incorporating:

● A geo-coding system to identify “ship-to” volumes and costs — so-called demand control units or DCUs.

● A simplified product classification system.

● An analysis of differences in ordering patterns in different trade channels — including retail, wholesale and “big box” customers.

● Simplified weight breaks based upon parcel, small LTL and truckload, consolidations.

Accessorial services and costs were also accumulated by number and cost per service at the DCU level also.

Transportation managers need to be a part of the companies overall business planning process. They need to bring to the planning table information on the factors that will affect the overall dynamics of the business and the flow of goods to customers or the flow of inbound supplies.

The odds are that you will never hit the budget right on the head. The goal for transportation managers is to deal with the outliers that are causing major deviations from budget.

 

As emeritus professor at the University of Wisconsin-Madison School of Business in Madison, Wis., Marien directs and instructs in continuing education programs for transportation and logistics professionals in developing and implementing business, transportation, logistics and supply chain strategies to improve logistics fulfillment services, reduce costs, and increase asset utilization.