Professional Approach to Transport Budgeting (Part - 2 continued)
It's all about Time and Money!
Get it wrong and you lose money and/or customers
Some of the more common errors
Closing the Relationship Divide
Before continuing this conversation, both shippers’ and carriers’ attention is drawn to what was stated previously - that the proceeds to fund their beneficial relationship can only be found in removing existing wasteful and unnecessary practices. Both parties should appreciate that road transportation [freight] is a real-time, highly capital-intensive, service industry. The service rendered provides what is considered a Time-and-Place-Convenience, thus increasing Value of the freight delivered.
As factors affecting efficiency in all road transport operations are infinitely variable, certain assumptions are necessary in order to estimate the cost of performing the service in a Public Domain.
Costs essentially relate to a combination of mass, time, distance and money. The common denominator, however, is TIME. This infers that each component in the equation has a monetary consequence in relation to time in hours. Logically, less or more time used will result in lowering or increasing the cost of moving a load. This applies to all fixed and variable costs as well as servicing the capital employed.
Coping with the challenges of pricing road transport services
In what follows you will see that cents/kilometre [cpk] should not be used in pricing road transport services as it is impossible to estimate a vehicle's average speed in all situations. Look at it this way: the shipper is really only interested in what it costs to move materials and/or finished goods in meeting the challenges of servicing supply chain demand. On the other hand, carriers, need accurate information about the mass (size) of the load as well as the total time it takes to complete the delivery to price the service.
Obviously, each load has a unique set of variables:
What is to be transported?
When must it be transported?
How long will it take to load and offload the vehicle?
How long will it take to complete the whole trip?
Things the carrier will decide when costing the operation
The type, mass and size capacity of a suitable vehicle
Schedule a vehicle to the operation: [total trip turnaround time hrs]
Allocate budget for standing time: [load and offloading hrs]
Allocate budget for hub-time: [trip travelling time hrs]
The carrier will then have the necessary information to calculate the most economical price relative to the optimum set of variables.
The price will be determined by:
Period/dates vehicle is scheduled to complete trip: (optimise fleet asset utilisation)
Cost of servicing capital [total elapsed hours]: (based on asset value of vehicle deployed)
Recovery of the total fixed costs: (crew, vehicle, plus overhead apportionment costs)
Recovery of vehicle total transit time expenditure: [variable cost per hour of hub-time].
Calculate ratio of transport billing expressed as per cent of cargo value transported.
Submit a variance report
Analyse both negative and positive variances.
Carriers' working environment
Only some of the road blocks encounted in moving freight
There is a great deal more to this methodology, which will be discussed further on. However the most radical suggestion is that variable costs should be charged out at cost. They are simply priced at zero margin. The rationale here is that carriers are transport service providers, who generate a return on capital employed by rendering a service; not by selling variable cost materials. Failure to identify with this core reasoning is most likely to result in under or over recovery of the service rendered which leaves service providers exposed to hungry competitors.
Likewise, shippers who nickel and dime carriers to pass on their inefficient and wasteful practices by playing carriers off against each other to get the “cheapest” deal, mostly end up losers as transportation lies at the very core of their shipper/customer service relationships.
In accepting the above rationale the question remains: how much attention is being given to managing TIME as the common denominator in assessing your transportation performance?
So just what do we mean by time?
The following three definitions were selected from a vast number quoted in various references:
A duration or relation of events expressed in terms of past, present, and future, and measured in units such as minutes, hours, days, months, or years.
The continuous passage of existence; where events pass from a state of potentiality, through the present, to a state of finality in the past.
The period between two events or during which something exists, happens, or acts; measured or measurable interval.
Definition (2) is probably the most explicit reference in this case as we see how there is a time to research and draw up a budget (potentiality); implement the strategy (through the present); then provide meaningful KPIs to review effectiveness (state of finality) which is the most beneficial proposal to fulfill the needs of a truly Beneficial Relationship to the satisfaction of both parties. It’s only when this position is reached that the collaboration pays off in a lasting win-win deal.