Setting a company's spending plan is a year-round process with a variety of areas to consider, including one partial to those in logistics - how to budget shipping costs. Budgeting how much a company is likely to spend on shipping and logistics is vital to be prepared for the ups and downs of a given year. And with the industry's rates tending more toward ups lately, ensuring a company has correctly budgeted shipping costs can prevent considerable pain down the road.
How do you prepare a logistics budget?
Just as with any type of budgeting, preparing a logistics budget can be a complex process. One must factor in the different areas of overall logistics or shipping costs that affect the bottom line, including broad categories like transportation (which in this space we'll make interchangeable with freight/shipping), storage, staffing costs, and administrative expenses - some of which may fold into broader agreements with a third party logistics (3PL) provider and/or freight providers. Many of the administrative and labor expenses borne by a specific company will depend on its size, but should generally be more fixed/predictable.
Storage/warehousing costs may vary due to facility space, the type of product (whether it needs special storage conditions), real estate costs, and any outside agreements. But transportation costs will likely be the most volatile each year - as they're the most tied to market conditions. So let's take a look at how to map these freight costs out. First off, freight costs are made up of three key components, linehaul (the route and load specific costs) and fuel surcharge - both part of the negotiated rate, and accessorials - basically whatever else comes up beyond that negotiated rate. And a note, warehousing/storage can be part of accessorials when it comes to freight costs.
At any rate to budget shipping costs, you'll want to know what your expected routes are, what freight and what quantities you plan to ship, when/how often you'll plan to ship, and of course, how (truckload, intermodal, etc.). Seems pretty basic so far, right? Then you'll have to decide whether to pursue contract or spot rates with your freight provider(s). Contract rates give you a more fixed sense of what you'll spend for the year, while spot rates are purely of the moment (at the time of shipment), so extremely variable. While you may save with spot rates sometimes, we'd recommend focusing on contract rates for budgeting purposes, while leaving budgeting wiggle room for those unforeseen scenarios that may require a spot play. Contract rates also help you better manage your way through peak shipping season, a must in today's environment.
Additionally, maintaining a longer-term, positive relationship with a carrier (through contract rates) can lead to more cost certainty - and potential savings - as you budget shipping costs. Such a trusted partnership is a two-way street. The shipper obviously needs to see results from its perspective, with consistent performance in terms of delivery time and condition, and transparency into operations. But the carrier needs to be able to count on the shipper as well, with a similar level of transparency as well as reliability in its own right, making life as straight-forward as possible for the carrier.
What are some logistics budget problems?
As with any budgeting scenario, there are pitfalls and problems shippers may run into when budgeting shipping costs. Those logistics budget problems may be due to software limitations or human error, but either way there are a couple of areas to watch out for. Many logistics professionals use Excel to create budgets, keep records of past spending, sort freight lanes, track shipments and more. While Excel is a useful, versatile tool, its limitations can cause problems. One common example is using the spreadsheet software to list all freight lanes, sort them by price, and call it a day. This is only surface-level information and leaves out valuable context, like usage, market conditions, etc. That's of course a common problem with Excel - or those who still rely on paper tracking. Context is lost. While we're at it with Excel, another pitfall that affects any user applies in logistics as well - human error - like misusing (or mistyping) formulas which and data entry errors, which can be costly.
Going back to those market conditions, another common logistics budget problem - which can also relate to Excel record-keeping by the way - is only comparing against your past. That means, when some logistics professionals craft a new budget, they're setting it based on their own previous budget for shipping costs, which can be akin to burying one's head in the sand. Rate targets - and thus a logistics budget - must be based off broader market data. Not accounting for the broader market means you won't know what kind of value you're getting in a rate negotiation, and you may either under or over budget for logistics costs. That can also be a problem when the finance department calls for a budget cut, it's much harder to say whether a cut is realistic or to find cost savings without market context. The data is out there and readily available, so use it.
Where to get logistics budget help
Logistics budget help is out there, with a variety of resources available. One of the more straight-forward changes a company can make is dropping a reliance on Excel or paper record-keeping in favor of a TMS (transportation management system) platform. The right TMS solution, like InTek's MercuryGate platform, streamlines a company's logistics activities, enhancing data collection and comparison capabilities as well as offering cloud-based access from anywhere. Need to do market comparisons, TMS software makes that much easier.
Another method for logistics budget help is broadening knowledge of all that goes into it. And we have plenty of information to help you with just that. Here's a list of some useful articles, eBooks and the like to consider:
- Freight Costs: An Insider’s Look on Freight Pricing Buyers Should Know
- How to Negotiate and Execute the Best Freight Rates
- Freight Contract Rates vs. Spot Rates
- Cost of Freight Accessorial Charges: Definition, Tips & How To Avoid
- Peak Shipping Season: A Comprehensive Look at How to Manage Successfully
If you're ready to take the next step, at InTek Freight & Logistics, we can help. Just tell us what you need and we'll discuss how our expertise can help with the unique shipping challenges your business faces. Rather do a bit more research first? View our Freight Guides for comprehensive articles and eBooks on all things freight and logistics.
