What are the best practices for measuring transportation costs?

1 Define your transportation cost components

To measure your transportation costs, the first step is to define the components you’ll include in your calculation. Depending on your business model and shipping strategy, you may need to consider freight costs, fuel surcharges, accessorial charges, customs duties and taxes, insurance costs, and internal costs such as labor and software. Freight costs refer to the amount you pay to carriers or brokers for transporting goods. Fuel surcharges are additional fees that carriers charge to compensate for fuel price fluctuations. Accessorial charges are extra fees for services not part of standard transportation, such as loading or unloading. Customs duties and taxes are charges you pay to the authorities for importing or exporting goods across borders. Insurance costs refer to premiums paid to cover the risk of loss or damage during transportation. Internal costs are expenses incurred within your organization for managing transportation activities.

2 Choose your transportation cost metrics

The next step to measure your transportation costs is to choose the metrics that best reflect your transportation performance and goals. You can use many metrics, but some of the most common ones are transportation cost per unit, which shows how efficiently you are using your resources; transportation cost as a percentage of sales, which indicates how much of your revenue is spent on transportation; transportation cost as a percentage of COGS, which reveals how much of your production cost is attributed to transportation; and transportation service level, which measures how well you are meeting customer expectations and the reliability of your transportation network.

3 Collect and analyze your transportation data

The third step to measure your transportation costs is to collect and analyze your transportation data. To do this, you should have a reliable and accurate system for capturing and storing your transportation data, such as an ERP, TMS, or BI tool. Additionally, you will need to have a consistent and standardized process for reporting and reviewing your transportation data, such as a dashboard, scorecard, or KPI report. With these in place, you can use your data to monitor your transportation costs and identify any trends, patterns, or anomalies. You can also benchmark your costs against industry standards, competitors, or historical performance. Furthermore, you can evaluate your costs against your budget, forecast, or targets. Finally, you can identify cost drivers and opportunities for improvement.

4 Implement and track your transportation cost reduction initiatives

The final step to measure your transportation costs is to implement and track your transportation cost reduction initiatives. Based on your data analysis, you will need to develop and execute action plans to reduce your transportation costs and improve your inventory management KPIs. To do this, you may need to negotiate better rates and terms with carriers or brokers, consolidate shipments or optimize routes to reduce freight and fuel costs, reduce accessorial charges by improving loading, unloading, or packaging processes, minimize customs duties and taxes by leveraging free trade agreements or duty drawback programs, lower insurance costs by reducing claims or increasing deductibles, and streamline internal costs by automating, outsourcing, or centralizing transportation functions. It is essential to track the progress and results of these initiatives in order to measure their impact on your transportation costs.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?