• Miebach India

Levers for Managing Transport Cost

Transportation cost is a key cost component for supply chains. At 2-5% of revenue for most industries (12-15% for some industries e.g. Bulk) , a reduction in these costs can directly impact the bottom-line in a significant way. It is therefore very important to understand the levers impacting transportation costs.

What are these levers? Most of the levers can be classified under the following 4 heads: Usage of market truck capacity, Return load, Truck-turnaround time and economies of scale.

Let us look at these levers with some details and examples:

Usage of market truck capacity: If you are using market trucks, the transportation cost is governed by the supply and demand situation of the transport vehicles on various routes. E.g. the truck availability in Nagpur goes down during the orange season as lots of trucks are required to ship out oranges from Nagpur. This results in higher demand and limited supplies and hence higher cost of transportation out of Nagpur. A transport manager should be prepared to pay higher rates during these peaks to ensure that deliveries are reliable and happen in time. Alternatively they should have control mechanisms to ensure trucks are available during these period (contracted agreements, etc.)

So why should we use market trucks if it leads to high dependency? Simply because there is an existing capacity that someone has already paid for. It always costs more to invest in customized trucks as the investment is dedicated and there may not be many takers for the services. This would result in a higher investment risk and more premium service.(Read When should I use Market Trucks? for more detail)

Return Load: If you are sending trucks on a route where there is a good probability of finding return loads, chances are you will get lower rates. Higher return load ensures more billable kilometres for the commercial vehicle and hence the fixed costs could be amortized over higher distances, reducing the cost per km (lower freight rate). E.g. the freight rate for a car carrier for Hyundai would be higher for East as there is no return load as compared to North from where the car carrier can carry load from Maruti on the way back to South.

Companies have begun to see the importance of this and are striving to achieve closed-loop or more optimized routes for their transport providers. Alternatively, they contact transport companies who are already carrying reverse loads on the routes so that they can achieve a better price.

Truck turnaround time: Tuck turnaround time comprises of the loading time at the source, transit time and the unloading time at the destination and the time taken for the return trip. A reduced truck-around time means more loads per truck and therefore better return on the cost of asset. Therefore, the longer is the turnaround, higher the freight rates will be. So next time you make a truck wait for a day before it gets loaded and leaves your premises – remember, it is costing you more.

The impact of turnaround trip is higher in shorter distances – a 2 day delay in a 300 km trip could lead to a 20% freight increase, while a similar trip over a 1500 km trip will only mean 5% freight increase. It makes sense therefore to prioritize your shorter shipments.

Economies of Scale: Like in any other domain, consolidation offers a significant benefit here too. If the transportation on various routes from one facility is awarded to multiple transporters, it results in each transporter providing for the additional buffer to manage the peaks for his business (and therefore charging you more for it). On the other hand if the total business is managed by one or two transporters it results in aggregation of peaks and hence reduced overall buffer of transportation capacity to manage the peaks. This results in better utilization of the trucks and hence lower freight rates. This also leads to better truck utilizations, long-term relationships and better efficiencies as transporters learn your processes.

The key theme running behind all these levers is maximizing asset utilization, even if the asset belongs to the transporter. Remember, you are paying for his asset.

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