Finding Efficiency in your Transportation Logistics Costs
Martin Pahulje - July 27, 2021
Transportation costs can be one of the most significant logistical expenses for a company, particularly those moving large volumes of inventory. Especially today, when organizations are just getting back into normal operations, it is essential to lower costs where you can. Fortunately, successful logistics management can do this, particularly minimizing shipping and transportation costs. As companies lower their transport expenses, they can simultaneously lower retail prices for consumers. This allows them to dedicate their budget towards more demanding operations, such as inventory management and production. In doing so, not only will you save significant costs, but you can also enlarge your company’s profit margins – it’s a win-win.
Transportation Costs: Simplified
While reducing transportation costs sounds appealing to any organization, that’s a broad department. Every organization incurs different types of transportation costs, each with its own unique characteristics and impact on budget. Generally, there are five overarching types of transportation costs.
The first type of transportation costs is distribution costs, which are divided into two categories. Internal costs, also known as user costs, are paid by the consumer. Alternatively, external costs are accrued by the businesses within the supply chain and do not directly impact consumers. Social cost is the sum of internal and external expenses.
Variable and Fixed Fees
Next are variable costs and fixed fees. Variable costs also referred to as marginal costs, are directly proportional to consumption. This means that if the consumption of a product increases, its variable cost will increase as well. For example, if a company increases its use of a carrier company, the associated variable cost will increase to supplement the fuel, travel time, and cash risk being accrued. Alternatively, fixed fees do not fluctuate. Using the same example, the carrier's insurance and depreciation rate would be fixed fees as they remain consistent regardless of user frequency.
Market and Non-Market Expenses
Market costs consist of bartering goods in a competitive market, which in the transportation department would include vehicles, property, and fuel. Non-market charges include products that are traded outside of a market, such as air and injuries. While these may not be monetary expenses, they hold value for your business.
Perceived and Actual Costs
As you can probably tell through its name, perceived costs are a rough estimation. In terms of perceived vehicle cost, a motorist would make a cost estimate based upon travel time, gas, parking fees, and the stress of driving. But, it is crucial to keep in mind that this is merely an estimate, and the actual cost could be much higher. Perceived costs often underestimate infrequent costs such as insurance, maintenance and repairs, and depreciation per mile, all of which contribute to cost.
Price is also often referred to as the perceived-internal-variable cost, and it is the upfront cost that a consumer pays to receive an item.
How to Reduce Transportation Costs
Now that you have a better understanding of what transportation costs consist of, it's time to reduce them. When companies find strategies to minimize transportation costs, they can significantly reduce their overall logistical spending, adding up to significant savings. We will discuss some best practices to decreasing transportation costs so that you may benefit from these savings.
Use Fewer Carriers
The utilization of transportation carriers is a necessary but significant cost. While having multiple transporters can give businesses options during times of high demand, it can seriously drain your funds. Instead, logistics managers should designate time to search for two or three reliable carriers that meet their company's needs at a reasonable price. Limiting contracts to a select few carriers increases their usage, often resulting in exclusive deals due to larger order volumes. This tactic will help your organization lower average carrier costs while building stronger partnerships with the carriers you utilize.
But, it is important to note that limiting carriers can create a codependence. This could negatively impact delivery schedules should one of your carriers become overbooked or delays with another business. As a result, it’s best practice to have backup carriers on-call that can pick up routes as needed.
Another excellent strategy for reducing transportation costs is by consolidating shipments. Companies that utilize carriers for final deliveries must be careful of how they price their services. Typically, these costs are negotiated based on route distance and order weight, in addition to other factors. As a result, many companies reduce their spending on this by consolidating orders into one shipment. While this increases the size and weight of the order, the flat rate is ultimately lower than the sum of several small orders. Additionally, consolidating orders allows carriers to avoid multiple trips, saving time and money for both parties involved.
This tactic requires logistics managers to avoid sending less than truckload shipments and transition to truckload orders. While this may not be as feasible for time-sensitive orders, managers should use this strategy when possible to reduce transportation spending.
Switch to Single Sourcing
For purposes of guaranteeing transportation, many organizations carry contracts with multiple carriers at a given time. While this can be beneficial, some organizations find that they receive the lowest prices when only using one transportation company. This usually occurs when an individual vendor can provide all of the necessary materials for a product line.
It is standard for most transportation work to be found through a bidding process, which results in the submission of a request for quotation (RFQ). RFQ's provide a detailed outline of what a company requires from a carrier, including order size, routes, and other applicable specifications. Interested carriers will then respond to the business with their ideal compensation to then be negotiated. For companies looking to employ a single sourcing technique, it is vital that you carefully evaluate the bidder's credentials. Ensure that a carrier has a sound reputation, qualifications to handle requests, and good financial standing. Without properly vetting your carrier, you could risk delayed shipments due to a restrictive contract with an inadequate carrier.
When businesses make the decision to lower their transportation costs, they can dedicate more capital to other pressing logistical needs within the organization. In addition to saving money, reducing your transportation costs will promote profit margins, allowing your business to offer more attractive prices to consumers. This will help your company attract new consumers while maintaining customer satisfaction with returning buyers. Reducing your transportation costs is about so much more than cost savings. In reevaluating how you spend on transportation, you can optimize operations and equip yourself with a more economical and efficient source of transport.
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