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.
How Companies Use Sales & Operations Planning to Improve Forecast Accuracy
The good news is that companies know that sales forecasts will be off and that there will be variances between predicted and actual sales. They also know that in addition to the trouble inaccurate forecasts create for areas like material and production planning, there is a trickle-down effect that impacts departments that include transportation. To summarize, bogus forecasts that are used to calculate FTL volumes are wrong from the outset and as such, the rate quotes presented in an RFP response are based on load counts that won’t pan out. Through a relatively new innovation known as “Sales & Operations Planning” (S&OP), companies battle inaccurate sales forecasts by constantly comparing projected sales with actual revenues, and then making supply chain adjustments based on what they learn. For example, if a company sees that sales of Product A are higher than forecasted, they’ll decide if they should increase production. Conversely, if Product B is behind in revenues, they may decide to reduce orders for raw materials and manufacture less of that item.
Compared to the more static approach of creating a single forecast at the beginning of the year and sticking to it regardless of actual product sales, S&OP is a more flexible exercise where item-level adjustments are made and forecasts are revised. Native to this ongoing process is the dynamic where forecast periods become shorter and more sensitive to actual demand, thus improving the likelihood of greater budget accuracy as the year unfolds.
Integral to the success of the S&OP process is the involvement of departments that include sales, purchasing, accounting, manufacturing and transportation. In this type of multi-functional setting, data on actual vs. budgeted sales is shared immediately, decisions on how to adjust to variances are made collaboratively and everyone can see how those decisions will impact their area of responsibility.
In the case of FTL transportation, logistics professionals can harness their involvement in the S&OP process to the benefit of their daily operations, as well as for budgeting. With that said, if logistics executives continue to take the “same old, same old” approach to their work when estimating load volumes and conducting single-event RFPs that cover an entire year, the advantages of S&OP will be reduced to the point of irrelevance.
Ideally, transportation executives will augment the benefits of S&OP by applying its principles to their own department, too. When this approach is adopted, FTL volume projections improve, paper rates and tender rejections go down, and variations between budgeted and actual FTL costs will be minimized. In support of this statement, below are some FTL-specific tactics that shippers can use to achieve their operational, service and budget goals.
Applying the Principles of S&OP to Transportation Budgeting
The fundamental principle behind S&OP comes down to comparing budgeted with actual outcomes, and then making adjustments based on revealed facts. Applicable to any environment where operations are guided by a forecast and a budget, FTL transportation is particularly well suited for S&OP techniques because of the relationship between forecasts and FTL volumes, and the lack of market sensitivity that is a consequence of a yearly RFP event.
Especially true in a volatile FTL market, one strategic change that a shipper should consider is shortening the budget period to six, or perhaps even three months. Based on the maxim that it’s better to forecast and budget for short time frames as opposed to a full year, this fundamental shortening of the planning horizon enhances demand sensing and facilitates the comparison of contracted FTL rates with what’s going on in the spot market.
Consistent with the above, the second thing a shipper should do is to stop conducting yearly FTL bids and switch to multiple RFPs per year using the Emerge Freight Procurement Platform. When shippers can combine compressed budget periods with the sensitivity to market rates gained with shorter-term RFPs, the accuracy of load projections increases, RFP submissions are based on real volumes and the pricing offers that shippers receive reflect market conditions.
Upon aligning budget and FTL bid periods (i.e. they cover the same time frame), shippers gain even greater budget accuracy by using the Emerge Benchmarking tool. Particularly helpful in volatile markets, the Freight Procurement Platform enables comparisons between contracted rates and lane-specific benchmark pricing to make sure that even the shortest of bid periods are in line with fluctuating market numbers.
Finally, in situations where lanes are so volatile that rates fluctuate dramatically during a shortened budget/bid period, Emerge offers a spot rate tool, too. Apart from using the Platform to run multiple RFPs and to monitor rates through benchmarking, shippers can keep budgets on track by contracting for spot rates in situations where market conditions require such decisions. The epitome of flexibility, spot pricing on the Emerge Freight Procurement Platform is the ultimate stopgap to avoid FTL budget variations.
In the final analysis, transportation budgets have historically been off the mark for reasons that are well known to logistics professionals. For FTL shippers, a mixture of flawed sales forecasts that distort projected load volumes, lengthy contract periods that are bereft of rate sensitivity and volatile freight markets have conspired to doom transportation budgets long before the first load ever gets moved.
The good news is that FTL budgets not only benefit indirectly from traditional Sales & Operations planning techniques, but those same tactics can be applied to the shipping function itself. There are also technology solutions available in the market that help supply chain managers develop budgets that better meet today’s needs.