Have you looked at the P&L recently and noticed freight making a greater impact than in previous years? When you reach out to those who manage freight in your company, what sort of responses do you get?
For years, the easy explanation to rising LTL freight cost was "Fuel has gone up!" And while relevant, not sure that's the best answer today. Matter of fact, we may need to consider what questions we are asking and confirm our freight team has all the tools needed to provide a more meaningful response.
Between complicated tariffs from carriers and hidden margins from freight brokers and 3PLs, it's not unusual for a freight manager to rely on trust and faith to keep rates in check. While it may be relatively easy to recognize a shift in a flat minimum charge or pallet rate, would your freight team recognize a 5% shift in base rates from a carrier? Or how about a 1% shift in margin from a broker?
This is why it is critical to equip your team with the knowledge and tools to not only manage freight, but also manage accountability.
Freight as a percent of sales or maybe purchased goods for inbound, is always a good financial metric to view big picture. Operationally, Cost per Pound is generally the most accepted KPI. It's a simple calculation of dollars divided by total weight.
While Cost per Pound generally takes the confusion of carrier tariffs and discounts out of the mix, there are a few key factors that influence this number. Just because your cost per pound increases, doesn't mean your favorite carrier is trying to pull one over on you.
The factors below all influence freight costs and should be measured along side your cost per pound metric to determine the true influences of increased cost, unrelated to rates.
1 - Average weight will will impact this metric for obvious reasons. Weight goes up, cost goes down and vice versa.
2 - Average distance traveled. As your shipments travel further, longer line haul cost, more expensive.
3- Average Class changes. Higher class, higher cost.
4 - Accessorial Charges and fees will certainly increase cost per pound.
With solid trend reporting, the freight manager has tools to respond to the question, "why are our freight rates going up?" Answer might be, "they aren't! It's that new customer in California! Our average distance traveled increased 15% last month!"
Is your team able to decipher between an increase in rates and a meaningful change in your business that caused your freight cost to rise?
Marc Wojnowich, Promoter of Shipping Smarter | Recon Logistics
