Note: Today’s post is part of our “Editor’s Choice” series where we highlight recent posts published by our sponsors that provide supply chain insights and advice. Today’s article comes from Emerge, and looks at how to create full truckload budgets in a volatile market.
One of the more difficult activities that logistics executives have to engage in is the creation of transportation budgets. Whether it’s for ocean freight, air, rail or truck, the fundamental issue with budgeting is that folks are called upon to assign accurate costs to transportation services that will be provided in the future. And with most budgets covering a twelve-month period, it’s no wonder that most of them not only start out flawed, but they get worse as the year progresses.
In the case of FTL shipping, there are many reasons why budgets are inaccurate, but the most obvious is that markets change during the year and as time goes by, the likelihood of variances between budgeted and actual costs increases. While this is a true statement, it is the contention of this blog that there are other factors that can result in destine budgets to inaccuracy. From this point forward, we’ll highlight what those factors are and then offer remedies for how to mitigate them.
The Underlying Reasons Behind FTL Budget Inaccuracies
Although it’s important to acknowledge that shippers bring varying levels of sophistication to the FTL budgeting process, for many companies it comes down to a bare bone, two-part exercise. First, budget teams do their best to estimate what the volume of loads will be during the upcoming period. From there the company runs an RFP, the lane-specific results of which are multiplied by projected loads to determine what the “bottom line” budget figure will be.
There are many issues with this process, but the core challenge is that most of the factors that render a budget inaccurate are outside of the preparer’s control. First, anyone that’s done a FTL budget knows how difficult it is to gain access to a shipper’s forecasted purchasing and/or sales data that’s needed to generate volume estimates. Absent that data, logisticians resort to increasing last year’s load volumes by a random percentage and then hope for the best.
Even in scenarios where budget planners have access to purchasing and/or sales forecast data that in turn is used to estimate load volumes, the unreliability of forecasts sets the budget up for problems from the get-go. Bearing in mind that sales forecasting is essentially a prediction of future outcomes, and every company knows that forecasts will be off, it’s difficult for logisticians to create a reliable FTL budget because the underlying prognostications are flawed.
In addition to unavailable or inaccurate forecasts for product sales, the second factor that’s outside of a planner’s control is how FTL rates actually behave throughout the year. Stated already, as time goes by, conditions change and costs can go up or down. Particularly relevant in volatile markets, there’s no way that a shipper can conduct a once-per-year bid event and then expect a budget to stand the test of rate fluctuations.
To read the full article, click HERE.