Establishing a company’s expense plan is a year-round process where you must consider various areas, including one in logistics – how to budget shipping costs. Setting a budget for how much a business can spend on shipping and logistics is essential to prepare for the ups and downs of the year. And given that industry rates have been trending up recently, making sure your business has planned shipping costs correctly can prevent significant pain.
How do you prepare a logistics budget?
As with any type of budgeting, preparing a logistics budget can be a complex process. There are different areas of overall logistics or shipping costs that affect your bottom line, including broad categories such as transportation (which we will make interchangeable with freight / shipping in this space), storage, personnel costs and administrative costs – some of these may constitute broader contracts with an external logistics service provider (3PL) and / or carriers. Many of the administrative and labor costs for a particular company will depend on the size of the company, but should generally be more consistent / predictable.
Storage / warehousing costs may vary depending on the size of the facility, product type (or requires special storage conditions), property costs and any external contracts. However, transportation costs are likely to be the most volatile each year – as they are most related to market conditions. So let’s take a look at how to map these freight costs. First, freight costs consist of three key components: linehaul (route and freight specific costs) and fuel surcharge – both parts of the negotiated rate and accessories – basically anything beyond this negotiated rate. And beware, warehousing / storage can be part of the accessory when it comes to shipping costs.
In any case, in relation to budget shipping costs, you will want to know what your projected routes are, what cargo and what quantities you plan to ship, when / how often you will schedule the shipment and of course how (truckload, intermodal transport, etc.). Seems pretty basic so far, right? You will then need to decide if you want to use contract or spot rates with your freight provider (s). Contract rates give a more consistent view of how much you’ll spend over the course of the year, while spot rates are purely up-to-date (at the time of shipment) so very volatile. While you can sometimes save with spot odds, we recommend that you focus on contract rates for budgeting purposes, leaving room for budget maneuvering for those unforeseen scenarios that may require spot play. Contract rates also help you better manage your way during peak shipping season, which is a must in today’s environment.
In addition, maintaining long-term, positive carrier relationships (through contract rates) can lead to greater cost certainty – and potential savings – as you budget for shipping costs. Such a trusted partnership is a two-way street. The shipper obviously needs to see the results from their perspective, with consistent results in terms of timing and condition of delivery and transparency of operations. But the carrier must also be able to count on the shipper, with a similar level of transparency as well as reliability in itself, making the life of the carrier as simple as possible.
What are the problems with the logistics budget?
As with any budgeting scenario, there are pitfalls and problems that shippers may encounter when budgeting shipping costs. These logistical budget issues can be caused by software limitations or human error, but either way, there are a few areas to look out for. Many logistics professionals use Excel to create budgets, record past expenses, sort freight routes, track shipments, and more. While Excel is a useful and versatile tool, its limitations can cause problems. One common example is using spreadsheet software to list all freight lanes, sort them by price, and call it a day. This is only surface level information and overlooks valuable context such as usage, market conditions, etc. This is obviously a common problem in Excel – or for those who still rely on paper tracking. Context is lost. While we’re at it with Excel, another pitfall that affects every user also applies to logistics – human error – like misuse (or misspelling) of formulas and data entry errors that can be costly.
Coming back to these market conditions, another common problem with a logistics budget – which can also apply to record keeping in Excel – is only a comparison with the past. This means that when some logistics professionals work out a new budget, they set it based on their own previous shipping budget, which can be akin to burying your head in the sand. Price targets – and thus a logistics budget – must be based on broader market data. Not taking into account the wider market means you will not know what value you are getting in negotiating rates, and you can go over or under your budget for logistics costs. It can also be a problem when the finance department calls for a budget cut, it is much more difficult to say if the cut is realistic or find savings out of the market context. Data is available and easily accessible, so take advantage of it.
Where to get help with your logistics budget
Logistics budget assistance is available with different resources available. One of the easiest changes a company can introduce is to abandon the use of Excel or paper documentation in favor of the TMS (Transport Management System) platform. The right TMS solution, such as CSX crew’s MercuryGate platform, streamlines a company’s logistics operations by increasing the ability to collect and compare data, as well as offering cloud-based access from anywhere. You have to make market comparisons, the TMS software makes it much easier.
Another way to help budget your logistics is to learn more about everything that goes with it. And we have a ton of information to help you with this. Here is a list of useful articles, e-books, etc. to consider:
- Freight costs: insider a look at freight prices buyers need to know
- How to negotiate and fulfill the best freight rates
- Freight contract rates and spot rates
- Freight miscellaneous charges: definition, tips, and ways to avoid them
- Peak shipping season: a comprehensive view of effective management
You can always find more resources on shipping cost budgeting in ours Teaching Center just browse or search for a term. Have questions? We can use our extensive experience and industry connections to alleviate supply chain problems. Just let us know and we’ll be happy to discuss how we can personally assist you with your unique needs.