What is Transportation Spend Management?
Table of Contents:
What is Transportation Spend Management?
Transportation spend can be among the most substantial investments an enterprise organization makes. These costs support efficiency and vital operations, but they can easily get out of control when not managed the right way. Transportation spend management is crucial to remaining competitive and safeguarding against marketplace volatility.
A recent blog post by Supply Chain Brain covered six trends in the supply chain for 2023. The first trend was “cost containment.” With inflation at a high, supply chains expect to be under pressure to control rising costs this year.
One of the largest drivers of supply chain costs is transportation.
Identifying ways to reduce transportation costs and increase transportation-related revenue is crucial to a successful enterprise.
Often referred to as transportation spend management (TSM), this data-driven approach to analyzing the performance of a logistics network is a complex component of the supply chain.
Read on to learn the building blocks of TSM and how working with a 3PL like Trax empowers companies to move toward transportation spend management maturity.
What are Transportation Costs in Logistics?
Logistics refers to all aspects related to handling, managing, and transporting goods. Warehousing and inventory costs, labor, equipment, supplies, and transport and distribution costs are all important factors to manage in the supply chain.
Focusing on transportation spend management, transportation costs generally fall under one of the following categories:
- Terminal Costs - These costs are related to loading, transshipment, and unloading. While loading and unloading at the start and the final destination are necessary, intermediate costs can often be avoided. Depending on the mode of transportation, terminal costs can vary greatly. For instance, road transportation is considered advantageous for short-distance deliveries due to the low terminal costs.
- Line-haul Costs - A direct function of the distance that a unit of freight is carried, line-haul costs typically include labor, fuel, and weight, but exclude transshipment costs. Like terminal costs, line-haul costs vary by mode of transport. In this case, maritime has a competitive edge for longer distances due to the cost function stabilizing as the distance increases. The specific point at which one mode of transportation becomes more efficient than another is the break-even distance.
- Capital Costs - Costs that apply to the specific physical assets involved in transportation are known as capital costs. This includes infrastructures, terminals, vehicles, and more. While purchasing a large asset is seen as a one-time event, because they depreciate over time, capital costs continuously arise for maintenance.
The categories mentioned above broadly describe the type of transportation cost incurred, but when it comes to specific costs, there are additional transportation spend terms to know.
Key Terms in Freight and Transportation Spend Management
To understand the factors impacting transportation and freight costs, companies must become familiar with key terms related to TSM, including different fees, documents, shopping options, and more. The following terms relate to freight and transportation spend for businesses of all sizes:
- Bill of lading (BOL) - A legal document issued by a carrier to a shipper, which serves as a title, receipt, and contract. The BOL includes details about the goods being carried and is a crucial part of freight auditing.
- Demurrage - A fee for using the cargo container within the terminal beyond the free time specified (typically 4-5 days). These fees should be avoided when focusing on transportation spend management.
- Detention fees - A fee for using the cargo container outside of the terminal or depot longer than the specified free period. High detention fees are a contributing factor to poor TSM.
- FTL vs. LTL - Full truckload and less-than-truckload are options for freight shipping depending on the size of a shipment, delivery timeline, freight classification, and other factors. Deciding between these two shipping methods is important for managing costs and is often a point of discussion when working with a 3PL.
- Transportation Management Systems (TMS) - Working with a reliable 3PL should come with advanced software to streamline transportation management operations. TMS and TSM complement each other by combining transportation analytics, rate management, routing optimization, freight audit and payment processes (FAP), and more.
With a solid background on the terms related to effective freight and transportation costs, supply chain executives can better investigate their company’s current state and determine realistic goals for better-managing transportation costs.
Factors Impacting Transportation Spend
Transportation costs can change drastically depending on several factors. First, the geography of the delivery route is directly related to the distance traveled, and therefore, affects costs. If a shipping route requires the carrier to go through a toll tunnel or over a toll bridge, these added costs must be accounted for when considering the accessibility of a target market.
The location of the supplier’s facilities - whether they are close to highways, airports, railroad stations, or other infrastructure - plays a major role in accessibility. Also, depending on supply and demand, transportation costs vary across locations.
Maritime and land transportation spend is a function of fuel costs. When fuel prices drop, it is cheaper to operate container ships and cargo trucks, which in turn results in savings that can be indirectly passed on to the customer. Likewise, when fuel costs rise, the additional expense needs to be addressed. By using advanced analytics with the right TMS, enterprises can provide more accurate forecasts to account for fuel costs as well as supply and demand.
One aspect that can be overlooked when managing transportation spend is the current labor market. As wages increase for truck drivers, this impacts transportation costs for carriers. Finding new drivers to fill positions is difficult due to the nature of the job and the shortage of workers.
Since truck drivers require a different class of driver's licenses, this also affects the time and money needed to onboard new drivers as more senior drivers retire. Understanding employee satisfaction and focusing on retention through a 3PL partnership is a way to face this issue head-on.
Government regulations related to maximum driving hours or specific workforce certifications required for drivers impact the transportation cost structure. By partnering with a logistics company that derives meaningful insights from existing data, enterprises can better understand how to comply with government regulations while working efficiently.
Other factors including the shipment size, mode of transportation, urgency of the delivery, and product class (economy vs. business) should also be investigated as a company strives to manage transportation costs.
How to Optimize Freight Spending
To optimize freight spending, companies must leverage technology, big data, and analytics by working with a reliable logistics partner. Technology that allows shippers to automate tedious administrative processes streamlines auditing and payment. Working with the right technology is a core component of ensuring data accuracy and quality in transportation spend management.
Data should be complete and accurate to reduce costs and promote better decision-making. This includes looking at data by channel, SKU, carbon emissions, and accessorials, among other dimensions which can help fill in any pre-existing gaps. Ultimately, making data-driven decisions in the supply chain comes down to adopting the appropriate transportation management software.
TMS and Freight Spend Visibility
Not only do companies need to capture accurate data, but they also need to analyze as much as possible to promote end-to-end visibility into the entire supply chain lifecycle.
During freight auditing, it is imperative to normalize and analyze the data to find ways to improve operations. Ideally, a company should have access to real-time data for reporting and spend analysis.
In addition, the data that is collected and analyzed should be centralized to ensure accessibility and boost business intelligence, allowing companies to be more agile in their operations.
Proper data management is the key to freight spend visibility.
Additional Benefits of Transportation Spend Management
Managing transportation costs has a ripple effect on the rest of the business. In addition to lowering the company’s total transportation costs, having a solid system in place leads to optimized logistics, improved customer satisfaction, and a shift from reactive problem-solving to proactive problem identification.
Transportation Spend KPIs
As companies begin working on transportation spend management maturity, they’ll need to establish key performance indicators (KPIs) to measure success. Of course, depending on the business, the overarching goals and KPIs will vary.
For the most part, the core concepts guiding transportation management systems include improving efficiency and accuracy. While there is room for fine-tuning performance measures, the list below captures some of the most common KPIs used for transportation spend benchmarking:
- Freight Costs per Unit Shipped - Total freight shipping costs divided by the number of units shipped over a specific time period. This KPI measures the cost-effectiveness of the business’s transportation system.
- Freight costs as a percentage of total sales - Divide the outbound freight costs by the net sales to isolate inbound and outbound freight costs and understand the company’s return on investment (ROI).
- Delivery times - How quickly an order arrives in full can be used in addition to customer feedback to measure satisfaction. Another way to look at this is to compare the expected shipping time with the actual delivery time.
- Freight bill accuracy - Divide the number of accurate freight bills by the total number of bills in the period. This is a direct measure of FAP and auditing procedures.
- Truck turnaround time (TAT) - Assess the time between when a truck enters a facility to pick up or deliver goods and when it exits the facility. Minimizing this time allows trucks to spend more time on the road and is a measure of loading and unloading efficiency.
In addition to the core KPIs mentioned above, other metrics are used to understand the value of a TMS in place. Examples include TMS cost per unit, TMS cost vs. cost avoidance, and the percentage of TMS use compared to all shipments managed.
Trends for Transportation Spend Management in 2023
Entering the new year, companies should be looking out for trends in the supply chain, and specifically, transportation spend management. Among the top concerns for supply chains is the rising interest rates following the global pandemic.
As the interest rates increase during times when inflation is high, there is always the possibility of an economic recession. A recession would mean volatility in the labor market, which finally stabilized after the pandemic. Therefore, supply chain executives should prepare for a recession by paying fair wages to their drivers and ensuring employee satisfaction.
As the supply chain market softens, carriers struggle to compete for business. Shippers can
negotiate lower rates and carriers will have no choice but to follow suit. However, promoting customer loyalty and satisfaction can combat this effect, allowing carriers with a good reputation to thrive in the market.
Going beyond basic data analytics and focusing on AI and machine learning for transportation spend management will become commonplace this year. Employing software capable of building algorithms for route optimization, load consolidation, and other scenarios offer data-driven companies a competitive edge in the market.
From completing behavior analyses of vendors and customers to supporting real-time tracking, predictive big data analytics is a priority for effective transportation spend management at all levels of the supply chain.
The Journey to Transportation Spend Management Maturity
Achieving transportation spend management is a process that cannot be rushed. Companies must gain a full understanding of their data, business goals, and current performance to move from a more reactive mode of spend management to a proactive approach.
By partnering with Trax, enterprises gain the ability to go beyond even proactive TSM by continuously optimizing the system and acting as a leader in the market. However, it’s important to meet a company where it is starting on its journey to TSM maturity, which is why working with a reliable 3PL with a proven track record is beneficial.
For instance, if a small company is still in a reactive stage of invoice processing and payment automation, the goal is to empower its leadership to adopt a more efficient TMS that can combine data sources, correct inaccuracies as they come up, and prevent future problems from occurring. These steps are necessary before moving forward to optimize the process. If the software isn’t in place and running effectively, there is no baseline to compare to and no way of knowing how the company is performing. Once that baseline is established, they’ll move on to minimizing accrual variance, establish budgeting and forecasting capabilities, and manage all carrier rates centrally.
Ultimately, when a company has gotten to the point of optimizing its TMS, they continue to work towards complete transportation spend management maturity by reducing and even eliminating unnecessary charges, automating RFx events, and building predictive models that can enhance the company as a whole.
The Trax Product Suite and Spend Management Maturity
Trax offers a suite of products ranging from all stages of transportation spend management maturity. From freight audit and payment software to premium products like the rate manager, and advisory services for developing a solid strategy, the Trax system empowers supply chain leaders to move up the ladder of transportation spend management maturity.
Contact Trax today to optimize your transportation management system, cut costs, and advance your company’s market leadership.
Trax is the global leader in Transportation Spend Management solutions. We partner with the most global and complex brands to drive meaningful optimizations and savings through industry-leading technology solutions and world-class advisory services. With the largest global footprint spanning North America, Latin America, Asia, and Europe, we enable our clients to have greater control over their transportation performance and spend. Our focus is on your success.