Transportation is at the heart of modern civilisation. Towns and cities worldwide rely on various modes of transportation to transport people and cargo from place to place. Managing transportation efficiently is critical to reducing staff shortages across industries, ensuring a sufficient supply of goods, and reducing congestion levels in both public and private modes of transportation.
Transportation management is an umbrella term to describe the management and optimisation of transportation systems and everything these involve. Transportation management covers the management of staff and skills within the transportation industry, scheduling timetables and rotas, and assessing and maintaining vehicles and engines.
Transportation spend management is a specific field of transportation management that’s concerned with the management of the costs involved in managing large transportation networks and infrastructure. Today, we’re going to focus on freight transportation spend management: what it is, why it’s important, and how it works.
What is freight transportation spend management?
Transportation spend management is the optimisation and management of the costs involved in large transportation projects and networks. Freight, air, and other types of high-speed transportation can be a cost-effective way to transport goods and people from one location to another, but without proper management, these costs can easily spiral out of control.
Spend management is all about monitoring the various costs associated with transportation and taking steps to reduce these costs where possible without impacting the quality and reliability of the transport service.
Managing the costs of transportation can also have positive knock-on effects in other sectors and industries. For example, one of the biggest factors driving up the cost of manufactured foods is transportation. Managing transportation spending effectively is one of the easiest ways to bring down the price of goods and offer savings to stakeholders and customers.
Transportation spend management (TSM) professionals usually take a data-driven approach to manage the costs of transportation. Contemporary TSM software can help transportation management professionals to analyse and assess the costs of various aspects of a transportation system and highlight optimal logistical choices to bring costs down and increase efficiency.
What are the biggest costs of transportation?
Understanding why transportation spend management is important requires an understanding of where the costs of transportation usually lie. Transportation management usually focuses only on the costs of transportation and not on those of logistics, warehousing, storage, and distribution. The most significant costs in transportation usually fall into one of the following three categories:
Terminal costs refer to those costs incurred during loading, transhipment, and unloading. These costs occur at transportation terminals and vary depending on the mode of transportation. For shorter-distance journeys, road transportation is often favoured because of the lower terminal costs involved.
Line-haul costs include those costs incurred during the actual transportation process, which means they’re usually correlated with the distance travelled. Some examples of line-haul costs include staff wages and fuel costs. As in the case of terminal costs, line-haul costs can vary greatly between different modes of transport. Maritime shipping, for example, is usually the most cost-effective way to transport goods over a long distance because of the impact of line-haul costs.
Capital costs are those costs that apply to specific tangible assets that are necessary for the transportation of goods and people. For example, the cost of roads, rails, vehicles and vehicle parts are all capital costs. Capital costs arise when purchasing a new asset or spending money on the upkeep and maintenance of existing assets.
Each of these categories includes general costs that occur within most forms of freight transportation as well as mode-specific costs that are only incurred by particular modes of transport. Some examples of specific costs include demurrage, which is the fee that is paid when using a cargo container in a terminal outside of a specified free period, and the costs of implementing and using professional Transportation Management Systems (TMS).
What factors impact transportation spending?
In order to minimise transportation spending, transportation spend management professionals must be aware of the ways in which the costs of transportation can be brought down without impacting the speed, reliability, or safety of the freight transportation service provided.
Understanding the environmental and situational factors that impact the cost of transportation is key to keeping costs low. Some of the most significant factors affecting transportation spending are:
Both the distance of the shipping route and the geographical and urban features involved in the route can impact the cost of travel. For example, when travelling by road, hills and slopes might add to the cost of fuel required while toll bridges incur additional costs to pass.
Destination: Consider the specific location of the destination point. Is it easily accessible via road, airport, or railway station, or will you incur additional costs to transport goods to the exact destination?
Fuel costs rise and fall over time, and this can have a significant impact on the final cost of transportation and may affect whether it’s more cost-effective to transport goods via road, rail, or sea. When fuel costs are low, transportation firms can either choose to increase their profit margin or pass these savings on to their customers.
The cost of labour makes up a significant portion of total transportation costs, and this in turn is affected by the condition of labour markets in transportation and logistics. Transportation firms may find it harder to replace staff if there is a labour shortage, and rising wages mean that the cost of labour can also increase.
For many transportation companies, hiring young and inexperienced workers and training them in-house may prove to be more cost-effective than sourcing experienced drivers and crew. However, the cost of training and onboarding new staff should also be factored into the total cost of labour.
Local government regulations can impact the cost of transportation by creating restrictions on how a transportation business may operate. For example, restrictions on the maximum number of driving hours that drivers can undertake may increase labour costs by forcing firms to hire more workers.
The size of the shipment that you’re making will obviously affect the cost of transporting goods. Larger shipments require more fuel and larger vehicles, although it’s also more efficient to ship more goods at once than to undertake smaller shipments.
Mode of transportation:
The mode of transportation that you use for transporting goods will affect the cost of transportation. For example, cargo ships cost more to prepare and crew than HGVs, but the total costs of this mode of transportation are usually lower over longer distances than road transport. Modern TMS software should be able to help you to evaluate which modes of transport are most cost-effective for different routes.
If you’re transporting goods urgently, this may increase the total costs of transportation because you will have to make choices sacrificing efficiency or cost-effectiveness in favour of speed. For example, goods that require urgent delivery may be more likely to incur toll fees, overtime wages, and other additional expenses.
Each of these factors should be considered when trying to optimise shipping costs and manage transportation spending in the freight transportation sector.
Optimising freight transportation spending
Contemporary transportation firms utilise big data analytics and AI technology to optimise freight transportation spending. TMS software can automate the collection and analysis of data required to optimise freight spending and reduce the time sink and labour costs of performing this analysis. TMS software makes it easier for TSM professionals to identify optimal decisions and weigh the costs of different variables.
The role of TMS software in freight spending management
Transportation management systems software is growing in popularity among transportation managers and logistics teams. Not only does TMS software simplify the decision-making process for transportation managers, but it also increases transparency in an industry where visibility matters.
Freight spend visibility refers to the promotion of visible data at each stage of the supply chain. When freight transportation outfits are audited, it’s important that they have access to real-time transportation data including full costing breakdowns and spending analysis. Not only does this transparency make the process of auditing easier, but it also ensures that relevant data is accessible across the business which allows companies to operate with agility and flexibility.
Using TMS software to manage freight transportation costs effectively can also have positive impacts company-wide. TMS software can bring the total costs of transportation down, optimise logistics across other departments and improve the service that an organisation offers to customers. Improving efficiency within one sector means that organisations can offer more value to customers and stay competitive in tough markets.
Monitoring transportation spending via KPIs
Monitoring key performance indicators (KPIs) is one of the most effective ways to track transportation spending and measure spending in relation to targets. Tracking your KPIs can help you to measure success and judge how effectively your transportation spending management team is optimising transportation spending. Examples of important transportation spend KPIs include:
Freight costs per unit shipped:
This KPI is essentially the cost of shipping each individual unit. You can calculate it by dividing the total freight costs by the number of units shipped. This will help you to understand how cost-effective your transportation system is and how to price individual units for customers.
The total time it takes for a unit to ship from your warehouse to its destination reflects the value of the service that you offer to your customers and likely impacts how satisfied your customers are.
Freight bill accuracy:
The accuracy of your freight bills can be calculated by dividing the total number of accurate freight bills by the total number of bills in a single period. Aiming for a high freight bill accuracy aids transparency and data analysis.
Freight costs to sales:
Calculating the freight costs as a percentage of total sales can help you to understand the difference between inbound and outbound freight costs and work out your ROI.
Truck turnaround time:
The truck turnaround time is basically the length of time that your trucks, cargo ships, and other vehicles take to unload and reload between jobs. Reducing the TAT is an effective way to increase efficiency and reduce transportation costs.
Many transportation management systems can track these KPIs for you. This makes it easier to define and track your performance in relation to your goals.
The future of freight transportation spend management
Contemporary transportation departments are beginning to realise the importance of effective transportation management. By reducing costs in freight transportation, organisations can pass these savings onto customers or use them to improve their bottom line. Modern TMS software suites make it easier to optimise transportation spending without compromising on the quality of the service provided.
It’s likely that, over the coming years, more and more businesses will embrace the benefits that TMS software and other automated technologies offer. Tracking technology is already helping transport management teams to monitor fleets more closely while they’re in transit, and even insurance firms are employing smart technology to offer more competitive premiums to transportation firms with excellent safety records.
Economic uncertainty also brings uncertainty to the labour market, and this can impact the way transportation and other crucial services are managed. While interest rates and fuel prices remain high, transportation managers will stay vigilant against the possibility of economic recession and the challenges that this could bring. Investing in reliable, satisfied employees now, while the labour market is healthy, is one way to protect your firm from future uncertainties.
As is the case in many industries, perhaps one of the biggest challenges that freight transportation spend managers face is staying competitive in a market that’s becoming increasingly automated. Customers are attracted to low prices, but in an environment where technology makes it easy to operate in the most cost-effective way, transportation firms that can offer excellent value while also differentiating themselves on the basis of speed, reliability and support might just take the lead.