The 2018 budget season is heating up!
We all know how it goes. The heads of each department work on their annual budgets and turn them in to finance. Finance then returns with remarks like “the budget is too high, make it leaner.” How do you go about “trimming the fat” off of the transportation budget? Transportation is typically a 10-12% cost band on the general ledger for most manufacturers and distributors and once the 2018 budget is locked in, it doesn’t change.
MABD and OTIF Affecting 2018
There will be challenges rolling into 2018 with freight carriers and big box retailers making their Must Arrive by Date (MABD) programs or On Time In Full standards (OTIF) rules more strict.
Huge retailers have very strict rules when it comes to receiving products by a certain date to restock their shelves. If a manufacturer or distributor is not getting their product to the retailer by the (MABD) or Must Arrive By Date, the retailer can hit the business with a ‘charge-back’ for a certain percentage of the invoice value. Not only will the business have to pay a fee, but it will reflect poorly on their business scorecard as well. Now, Walmart is taking it one step further with OTIF, On Time In Full standards that can penalize businesses for being too early or not having matching amounts of product.
General Rate Increase with Less-Than-Truckload
At the beginning of every year the LTL carriers will begin to roll out general rate increases also known as GRIs.
Something to remember about LTL carrier GRI’s, is that the announced GRI isn’t necessarily indicative of the true impact to a shipper’s bottom line freight cost because the GRI is not a flat percentage rate increase across the board.
It is merely an aggregate combined average percentage increase across all lanes serviced by a carrier. Rates in some lanes may remain unchanged but some may increase by more than 4.9%.
A shipper could be seriously impacted by a general rate increase much higher than what’s announced by the carrier, so it’s imperative for shippers to check each lane for actual impact on costs.
Has your transportation and supply chain departments brought these items into consideration when rolling out transportation budgets?
Freight Cost Allocation
There is also the issue of past freight cost allocation. True freight cost allocation should show your most profitable ship to locations, customers and products. Were you able to deploy sales people, advertising and marketing budgets to the correct locations? Were customers and product lines also accurate in relation to your budgeting for 2018 as well?
Transportation cost is much more than beating up LTL Carriers on price, sending out an annual RFP and picking carriers based on cost alone.
Don’t just remove a carrier and bring in a new one if you have a spat with the driver or if a shipment gets damaged. Make the decision based on the total of the carriers activity.
Consider a 3PL When Budgeting
Transportation costs affect all aspects of your organization and should be taken very seriously. When working on the 2018 budget, consider working with a third party logistics provider (3PL), as they will take the time to learn your business and see how these costs can affect everyone in your organization.